Transparent information for retail investors

The volume of the EU retail investment market in 2009 was an estimated €9 trillion – an average of roughly €44 000 per EU household.

Many private investors make use of investment products designed by banks or insurance companies instead of investing directly in shares, bonds or derivatives. Common ex­amples of such ‘packaged retail invest­ment products’ (PRIPs) are investment funds (Under­takings for Collective Investments in Trans­ferable Securities, UCITS), structured products and insurance contracts linked to investments.

A common feature of these products is that their return is not fixed, but depends on move­ments of financial markets. Each product offers investors a combination of potential gains and a risk of losses. Moreover, the costs asso­ci­ated with a product reduce its total return.

In times of economic and financial crises, consumers may be more hesitant to choose an investment product if they do not have good information about its risks. This lack of investor confidence can in turn lead to a critical lack of investment across the economy.

A key investor information document (KIID) has been mandatory since July 2011 only for investment funds (UCITS), under Directive 2009/65/EC. Disclosing information about other investment products is regulated by varying European and national rules which depend on the products’ legal construction and sales channel. As a con­se­quence, there is no ‘level playing field’ and it is difficult for consumers to compare products.

On 3 July 2012, the EC proposed a legislative package aimed at protecting retail investors. Besides revisions to the UCITS Directive and the Insurance Mediation Directive, the package includes a new regulation on Key Information Documents (KIDs) for PRIPs.

The proposed regulation would require producers of investment products to provide a short standardised document with key facts (KID) in clear language (type of investment, returns, risks, costs), so that retail inves­tors can understand and com­pare the opportunities, risks and costs of each product.

Operators who do not provide correct and up-to-date KIDs could be held liable for losses and face fines or the withdrawal of the product.

On 21 October 2013, Parliament’s Economic Affairs Com­mit­tee adopted a report which would broaden the regulation’s scope to more investment products, streng­then supervisory authorities, and intro­duce labels for the most complex products as well as an approval procedure for investment products. However, the Committee did not give the rap­porteur Pervenche Berès (S&D, France) a man­date to start negotiations with Council, which had agreed its position on 26 June 2013.

The European Economic and Social Committee welcomes the proposal, but would like to make it clearer and more enforceable. The European Central Bank suggested some changes to further strengthen consumer protection in cross-border disputes.

BEUC (representing European consumers) and investment professionals and users of financial services call for the scope to be widened to include pension products as well as shares and bonds. On the other hand, Insurance Europe wants to exclude pensions and certain life insurance products from the scope, and considers the format of the KID to be poorly matched to insurance products.