Latest EU Retail investor developments

1. PRIIPs latest

Monday was meant to be the day the European Commission (EC) declared whether they would formally endorse the draft RTS to amend the PRIIPS Key Investor Information document supplied 3 months ago by their collective Supervisory Authorities [ESAs].

However, at the time of writing, there is still no formal EC indication of what their PRIIPS intention and approach will be.

There has been recent widespread (informal) market speculation that the revised KID RTS is to be endorsed without amendment, with the possibility of limited modifications to level 1 legislation (UCITS and PRIIPS regimes) to enable a limited delay (reportedly 6 months) beyond the legal application period (i.e. currently 31 December 2021). However, as before, this remains conjecture.

Moreover, the European Parliament and Council remain positioned to voice their subsequent opinions about the PRIIPS RTS in due course. In the meantime, most fund associations continue to campaign for a full twelve-month exemption period (until Jan 2023) to make available sufficient implementation time ahead of the envisaged “massive operational undertaking” across the entire industry.

Regardless, one clear certainty is the pending de-alignment of the UK-PRIIPS regime (with a UK-UCITS exemption of up to 5-years) on the same day the finalised PRIIPS RTS becomes legally valid throughout the EEA.

2. EC: consults on strategic Retail investor roadmap

While keeping tight-lipped on PRIIPS matters, the EC has recently declared their launch of an initial roadmap for an EU retail investment strategy.

Part of their Capital Markets Union action plan, this initiative seeks to enable an increase in consumer capital markets investment to channel more capital to private sector firms in order to assist the economic recovery from the COVID-19 pandemic.

Citing assorted Investor protection rules currently across the financial industry (e.g. UCITS / MiFID II directives and the PRIIPs regulation), the EC note the following challenges:

• Differing legislation rules (e.g. investment advice and portfolio management) are making it more difficult for consumers to make decisions that correspond to their need;
• Investor categories: a possible need for further differentiation (given concerns related to the general level of consumer understanding);
• Inducements: advice provided by intermediaries may be biased towards products with higher rewards for intermediaries;
• Digital innovation: now in need of an impact assessment (given increasing prevalence in the retail investment market).

The EC will “assess the entire retail investor journey and will put the investor at the heart of EU policies in the spirit of “an economy that works for the people”. Their strategy will focus on “ensuring a coherent regulatory framework to empower consumers to take financial decisions and benefit from the internal market. That can only be achieved at EU level, in close cooperation with Member States”.

The EC’s initial roadmap is open for comments until 18 May 2021.

In due course, they will launch a subsequent online 3 month open public consultation related to this initiative. Meantime, they continue their evidence-based study of retail investor disclosure practices (with results to made available in the autumn), alongside research into retail product distribution systems and the digitalisation of retail product marketing and selling.

3. ESG-MiFID: ‘fund exclusions looming’

“Integrating sustainability risks in the product is not the same as looking at sustainability factors or taking sustainability into account, seriously. We expect retail clients to expect a sustainable fund to have 50-100% Taxonomy alignment, whereas we know most UCITS funds for retail investors will be around 2-5%.”
– European Sustainable Investment Forum (Eurosif)

The Sustainable Finance Disclosure regulation (SFDR) was legally applied at basic level (i.e. level 1) on 10 March 2021. You may recall our subsequent observation of Morningstar’s initial findings that over 75% of European fund assets are currently held in “article 6” SFDR products (i.e. those which do not integrate any kind of sustainability into the investment process – including continued holdings in tobacco companies and fossil fuel producers).

For the remainder of 2021, this leaves less than 25% classed officially as the ‘sustainable investment universe’, comprising both “article 8” products (i.e. funds with cited environmental and / or social characteristics) and “article 9” products (i.e. those with sustainable investment as a primary objective).

Last week, we highlighted the recently adopted delegated acts (DAs) to align the legal application of the new SFDR and Taxonomy regulation with established legal regimes (including AIFMD, UCITS and MiFID II). The obligation to (somehow) readily incorporate bespoke investor sustainability preferences into fund firms’ ESG product governance due process remains the subject of interim guesswork and asset manager anxiety.

Accordingly, FT Ignites now report an increasing number of experts predicting that funds not ranked as SFDR art.8 or art. 9 products will face a clear risk of automatic exclusion by EEA distributors. This includes one legal firm concluding the MiFID II DA now officially means that “greenwashing does not work” and as a consequence any fund firms operating in the retail investor sector who have “not taken SFDR seriously” will be left to contemplate profoundly serious interim challenges.