The European Parliament yesterday published a set of draft proposals for new capital markets legislation, apparently aimed at facilitating retail investment within the European Union (EU).
The proposals were outlined in a press release under the heading “Deal on new measures to boost citizens’ investments in financial markets”.
However, most of the suggested changes would appear to place new regulatory burdens on EU financial services businesses, in the name of consumer protection, rather than actually incentivising retail activity. Indeed, they might do the opposite.
With respect to trading platforms specifically, new rules regarding financial influences (finfluencers) and inducements from third parties could restrict widespread marketing strategies currently used by brokers.
Firms will be required to have written agreements with finfluencers who promote their products or services, as well as their contact details. They will also need to have “control over their activities”, which sounds vaguely sinister.
Lead MEP Stéphanie Yon-Courtin said: “Consumers will be better protected against new risks emerging from online advice practices, such as financial influencers: no more getting rich from risky new financial products without accountability.”
A new “inducement test” would require investment and insurance companies to act in the best interests of clients, with no conflicts of interest, and enable clients to distinguish inducements from other fees.
Inducements which enhance service quality – for example, research, tools, or training – would pass the test.
The bloc is also looking to further beef up the key information document (KID) for packaged retail and insurance-based investment products (PRIIPs), paperwork the UK government announced it planned to scrap three years ago, to much relief.
The new and “improved” KID would be tasked with providing “meaningful, forward-looking performance scenarios based on realistic data and plausible assumptions”.
In addition, the plans include new Europe-wide suitability rules, similar to those already mandated by the FCA in the UK.
Financial and insurance advisers would be required to ensure that the financial or insurance products and services they provide are suitable for their clients’ needs.
“Suitability must be assessed using proportionate and necessary information about the client, including their knowledge and experience, financial situation, ability to bear full or partial losses, investment needs and objectives, and risk tolerance,” the proposals stated.
All in all, while these new rules could – in theory – help coddle retail investors, we are left scratching our heads over the question of how they will encourage their participation in capital markets, which is their stated intention.
Yon-Courtin said: “This agreement moves savings and investment union from theory to reality.”
She also argued the proposals “bridge the gap between protecting consumers and helping businesses”, but it seems the latter part of that assertion will remain a mystery for now.
The plans will need to be approved by both Parliament and Council before coming into force.
