EIOPA Technical Advice on Certain Aspects of Retail Investor Protection

Since the report covers more than 100 pages, we have summarised below the most important aspects for you. In essence, the final Advice does not diverge from the consultation document to a significant degree. Differences are mostly in the sections regarding investor engagement (around online marketing) and assessment of impacts of complexity of products.

Key takeaways

• Investor engagement with disclosures. EIOPA looks at addressing duplications between S2 and PRIIPs KID disclosure requirements, developing an IDD ‘annual statement’, the central role of behavioural science and the need for simplification of information given to consumers.
• Benefits of digital disclosures. EIOPA highlights benefits of layering, argues for a shift to a digital-by-default approach and looks at possible IDD amendments to address online marketing.
• Risks and opportunities of digital tools. EIOPA sees room for further development (under the appropriate regulatory framework); identifies insufficient disclosure, information asymmetry, and misuse of data; and calls on the Commission to keep in mind differences between national markets and to explore the sharing of all public disclosure information with third parties (e.g. with FinTech companies to develop comparisons and robo-advice).
• Conflicts of interest. EIOPA highlights the presence of important differences in the treatment of inducements under the IDD and MiFID II; does not see a single solution to addressing the risk of inducements having a negative impact on value for money; seeks power to further explore this at Level 3; and suggests amending the IDD to include a definition of ‘independent advice’.
• Affordable and efficient sales process. EIOPA would like more clarity around different assessments in advised/non-advised sales; in the absence of streamlined assessment, demand-side initiatives can be imagined, though these are only complementary to the sound conduct of business regulation.
• Assessing impacts of complexity. More coherence between frameworks is needed. EIOPA calls for clearer notion of objectives when assessing product complexity – POG requirements could be amended at Level 1 and the Commission could empower EIOPA to adopt further clarifications.

Addressing and enhancing investor engagement with disclosures and drawing out the benefits of digital disclosures

• Address duplications between S2 and PRIIPs KID disclosure requirements by disapplying non-personalised S2 pre-contractual disclosures. These should be transferred to the IDD.
• Develop an ‘annual statement’ in the IDD, which would include information on paid premiums, past performance, current value of savings and adjusted individualised projections.
• Layered approach: high-level information at Level 1; more detail, incl. consumer testing and impact assessment at Level 2.
• Shift towards consumer-focused disclosures that build on digital solutions.
• Behavioural science should be the basis for disclosure design, Level 1 legislation and firms’ insights to make documents more effective.
• Consumer information has to be simpler: understandable, crucially shorter, and visual. As a minimum, documents should be clear and correct, not misleading, and recognisable as such, be provided early enough, and be easy to find and accessible.
• Disclosures should be designed as a comprehensive solution from the perspective of the consumer – replacing existing documents, not just adding to them. This is one of the areas where digital disclosures can excel.
• EIOPA sees benefit in moving from paper-by-default to digital-by-default.
• Undertakings should keep copies of all versions of digital disclosures.
• Definition of ‘marketing communications’ should be amended in the IDD to include online advertising. IDD should be further amended to include a clarification of NCA powers, with possible extension of power of intervention to EIOPA, together with an optional mandate for EIOPA to develop guidelines on marketing communications.

Assessing the risks and opportunities presented by new digital tools and channels

• Digital tools can provide benefits such as use of layering and customised information and disclosure features.
• There is room for the market for digital tools and platforms to develop (e.g. in distribution, especially with regard to MOPs), but only under the appropriate regulatory framework.
• Risks to be aware of: insufficient disclosure, information asymmetry and misuse of data. Nature of IBIPs could make it more difficult to compare products. To future-proof the framework, the Commission should address the impact of choice architecture and choice environment on consumer decision-making.
• The Commission has to be aware of national market specificities (e.g. mandatory advice option, complexity of certain products in some markets).
• The Commission should further explore provision of all public disclosure information in a dedicated space for third parties, such as FinTech companies (for purposes of comparison and development of robo-advice)

Tackling damaging conflicts of interest in the sales process

• EIOPA highlights to the Commission that distribution markets differ across the EU and that the predominant model remains commission-based distribution.
• There are important differences in the treatment of inducements under MiFID II and IDD, particularly regarding disclosure and language on restrictions. Nonetheless, there is little evidence of material differences in outcome in application of the quality enhancement criterion as opposed to the no detrimental impact criterion.
• More needs to be done to tackle conflicts of interest arising throughout an IBIP’s lifecycle and the risk of inducements materially impacting value for money.
• EIOPA does not see one all-encompassing solution and seeks a Level 2 empowerment to develop Level 3 measures to promote supervisory convergence in this regard.
• IDD should be amended to formalise the concept of ‘independent advice’, though the notion of an ‘independent advisor’ might not fit in all national markets.

Promoting an affordable and efficient sales process

• Provide more clarity on the scope of different assessments used in advised and non-advised sales contexts (suitability and appropriateness assessment and demands-and-needs test).
• Simplifying and streamlining advice (as opposed to creating a new concept of streamlined advice) carries risks that are difficult to mitigate.
• Further supervisory convergence is needed to ensure that the same rules apply in the online and offline context and that the focus is on good consumer outcomes and avoiding this becoming a compliance exercise.
• To make advice more affordable, other demand-side initiatives can be considered: potential access to personalised financial guidance and financial education. These are only complementary to the effective conduct of business regulation. Boundaries between financial guidance and regulated advice need to be clear.

Assessing the impact of complexity in the retail investment product market

• Because of different regulatory frameworks applicable to product complexity, it is difficult to identify measures to promote simpler and cost-efficient IBIPs. More coherence is needed.
• Origins of current framework are linked to the securities market, which leads to undesired outcomes such as excessive use of the comprehension alert. Risk mitigation techniques or mechanisms to determine maturity or surrender value of pay-out are complex but helpful.
• EIOPA calls for a clearer notion of objectives when considering product complexity and cost-efficiency. At Level 1, POG requirements should be modified to include assessment of risk to target market of misunderstanding the main features, costs, and risks of the product.
• The Commission should empower EIOPA to develop criteria for product complexity that are easier to implement (possible Technical Advice on targeted amendment of the POG Delegated Regulation to integrate cost-efficiency and product complexity – not as new requirements, but as clarifications).

#social#