EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 30.4.2009 
SEC(2009) 557 
COMMISSION STAFF WORKING DOCUMENT 
Accompanying the 
 
COMMUNICATION FROM THE CO MMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 
 
PACKAGED RETAIL INVESTMENT PRODUCTS  
  
EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT REPORT  
 
   
{COM(2009) 204 final} 
{SEC(2009) 556} 
 
EN 2   EN  
EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT REPORT  
'Packaged retail investment products' provide retail investors with ea sy access to financial 
markets. The regulatory framework for these products must provide a robust and coherent 
foundation for effective and responsible retail in vestment. The financial crisis has provided a 
stark reminder of the importance of transparency in financial products and of the potential 
costs of irresponsible selling. A collapse in i nvestor confidence has underlined the urgency of 
ensuring the right regulatory framew ork is in place, so that the rebuilding of confidence can 
occur on a sound basis. 
Throughout the European Union, a range of 'pack aged' investment products are marketed to 
retail investors, offering the pr ospect of financial returns over the medium to long term, based 
on a combination of exposures to financial markets. These products include: 
• investment funds; 
• structured securities; 
• unit-linked life insurance policies; and  
• structured term deposits.  
The overall market for these products is very significant, estimated at up to €10 trillion by the 
end of 2007, though the amount invested has falle n under impact of the financial crisis.  
These products take distinct legal forms but pr ovide comparable economic functions for retail 
investors. In a well-functioning market, competition between families of packaged retail investment product can promote an efficient al location of resources, by creating incentives for 
producers to develop and sell products that  provide a good match for the profiles of 
prospective investors. 
The markets for these products are however  characterised by steep asymmetries in 
information between product originators and dist ributors on the one hand and retail investors 
on the other, and principle-agent conflicts for those selling to retail investors. These market 
failures give rise to investor detriment at the micro-level, wh en products are mis-sold or mis-
bought. At the macro-level there is the potential  for investors to migrate away from the 
investment markets, with serious implications for those markets and the ability of individuals 
to provide for their financial futures. 
Regulation has been put in place at European and national level to mitigate these failings. 
There are two central planks which are common across this regulation: ensuring investors get 
effective pre-contract ual product information
, and ensuring sales processes are fair . Such 
regulation at the European level has evolved on a largely sectoral basis. Applicable rules vary 
according to the legal form of the product an d the legal status of  the person selling the 
 
EN 3   EN product. In some sectors and for some products , there are no applicable rules at European 
level. 
Effectively, there is a 'regulatory patchwork' at  European level for different packaged retail 
investment products and the channels through which they are distributed. 
This has already provoked widespread concern over the coherence of Community law. There 
are significant differences in the level of investor protection between industry sectors, as well 
as an 'unlevel playing field' for the originat ors and distributors of these products. In some 
Member States, supervisory authorities have, where permitted by Community law, acted to enhance investor protection and to  level the playing field where they perceive that European 
requirements fall short.  
However, these responses have been necessa rily limited in their geographical scope and 
uncoordinated, leading to further divergence in ru les and, at least in principle, an additional 
barrier to the development of a single market in these products. 
In this Impact Assessment, two questions are co nsidered: does this regulatory patchwork pose 
genuine risks of investor detrim ent and market distortion? If s o, is a European level response 
necessary and what genera l form should it take? 
Procedural Issues 
The Commission's work on packaged retail invest ment products has its roots in an ECOFIN 
Council request in May 2007 for the Commission to  examine the coherence of disclosure and 
distribution regimes in EU law applying to di fferent types of retail investment product. 
We have consulted extensively with stakeholders, including a written call for evidence in 
October 2007, followed by a Feedback Statemen t in March 2008, a tech nical workshop with 
industry representatives in May 2008, and a hi gh-level Open Hearing in July 2008, which 
brought together over 300 senior  representatives from indus try, consumer associations, 
national regulators and the Europ ean institutions to discuss the development of the market and 
potential risks to retail investors. 
To the extent that it is decided that action at  the European level is needed, further impact 
assessment work would then be required to iden tify the specific measures necessary and the 
costs and benefits of these. 
The impact of the general problem and the case for action at the European level 
How has the general problem identified above manifested itself concretely? What are the 
costs to the EU economy and soci ety, and who incurs these costs? 
The absence of a coherent approach to disclo sure and intermediary regulation at EU level 
translates into three problems: 
• First, that the level of investor protection embodied in EU rules is not sufficiently high for 
all
 the products concerned. 
• Second, that differences in EU rules distort competition in the market in favour of 'less 
regulated' products. Differences in EU rule s may create incentives for 'regulatory 
arbitrage', thereby amplifyi ng the risks of investor de triment described above. 
 
EN 4   EN • Thirdly, that divergent national approaches to  disclosure and distri bution resulting from 
uncoordinated Member State responses to ga ps and inconsistencies in Community law 
increase barriers to cross-border trade and th e development of a single market in packaged 
retail investment products, with concomitant  impacts on the efficiency and size of the 
market. 
Investor detriment can occur at both micro and macro levels. At the micro level, investors can 
lose money or make investments with faulty ex pectations as to likely returns; at the macro 
level there can be an erosion of confidence in retail investment market s. Regulatory arbitrage 
between product types can accentuate th ese impacts whilst undermining market 
competitiveness; given the additional impact of continued barriers to cross-border trade, an 
overall consequence would be increased ine fficiency in the allo cation of resources. 
Expert opinion and anecdotal evidence from stakeholders support the view that these 
problems are in practice actually  causing investor detriment, an d to a lesser extent market 
distortions and reduced cross-border trade.  Recurrent mis-selling and mis-buying across 
different jurisdictions indicates that ri sks are crystallising for investors.  
Unilateral efforts of some Member States to a ddress these risks through local regulations are a 
strong indicator of the strength and importance of these problems. Some Member States have 
also acted to reduce the poten tial for regulatory arbitrage be tween different distribution 
channels and types of product. Such unilateral action at the Member State is unlikely however 
to have much impact on the prospects for cros s-border trade or overall standards of investor 
protection, given its limited geogra phical reach. Stakeholders have also indicated that a lack 
of coordination leads to additional costs for ma rket operators distributing products in multiple 
Member States. The impact of interventions on  cross-border trade may however be of less 
immediate importance, given that other factors can limit the scope for such trade for certain 
products. 
Yet, even when the focus is placed solely on local markets, the regulatory patchwork at 
European level and the disparate positions at nati onal level that flow from it are still likely to 
contribute to investor detriment and regulator y arbitrage. This is because Member State 
actions are constrained to a greater or lesser extent by Community law. The differences in 
approach within Community law inevitably lead to complicated regulatory patchworks 
between products within national markets. For this reason, gaps in investor protection and the 
existence of an unlevel playing field are Europ ean problems just as much or even more than 
they are local market problems. 
The likely impact of taking no further action 
Taking no action at the European level to ad dress the above problems means that these 
problems would persist. This is not to say th at the regulatory environment would remain 
unchanged. It is reasonable to a ssume that some Member States may take further action, in 
particular in light of the financial crisis. This  may have a beneficial impact on the first two 
problems identified within the Member States  in question, though constraints imposed by 
Community law could limit the overall scale of the impact.  
Such action would also lead to further diverg ence of regulatory approaches across Member 
States, thereby potentially impeding market cross-border business a nd further complicating 
the legislative landscape. Also, it is unlikely that all Member States would take unilateral action, leaving some markets without adequate regulation. 
 
EN 5   EN It also likely that self-regulatory initiatives w ould continue to emerge without further stimulus 
from the EU. There is also ongoing parallel work at EU level which mitigate the problems in 
certain sectors. (These include  the review of the Prospectus  Directive, and possibly other 
sectoral directives; the development of Ke y Investor Information for UCITS; work on 
improving financial education, in conjunction with Member States; and reviews of DMFSD 
and IMD. To these initiatives can be added any wider work on improving financial services 
regulation that is likely following the financial crisis.) 
However, these initiatives could – without co ordination – increase inconsistencies at the 
European level, and gaps in regulation woul d remain. The problems identified above would 
not be effectively mitigated across all Member States and market segments. In short, responses to the challenges id entified in the Impact  Assessment need to be informed by a 
coherent overall approach. 
Objectives 
Flowing from the problem analysis, the policy options are assessed in relation to their 
capacity to deliver: 
• a high and consistent level of investor pr otection across all products and distribution 
channels, including those not cu rrently subject to EU disclo sure and distribution rules; 
investors should be able to make informed investment decisions and effectively compare 
different product offerings, whilst remaining confident in any investment advice they 
receive;  
• a level playing field for all types of packag ed retail investment pr oduct, including their 
distribution; and 
• a strengthened single market in p ackaged retail investment products. 
Option Analysis 
A range of options for EU leve l action are identified and compar ed to the benchmark of no 
further intervention. The analysis is by necessi ty high-level and largely qualitative. Further 
detailed and granular impact assessment work will be necessary to support any agreed legislative follow-up work. This will include gathering further evidence. 
Options are considered separately in relati on to the two key regulatory areas identified 
(mandatory disclosures and selling rules). Howe ver, there are synergies between the two areas 
-- it is likely that a package of options that combines measures on pre-contractual disclosures 
and selling practices would have greater bene fits than either examined in isolation.  
The options identified and an alysed in both areas are: 
• no policy change; 
• Commission promoted self-regulation; 
• Commission Recommendation offering guidan ce on common principles and approaches; 
• mandate to the Lamfalussy Committees to  promote supervisory convergence; and 
 
EN 6   EN • EU-level legislative action. 
The analysis underlines that options that do not include at least some element of legislative 
change at the European level would be incapable  of fully addressing irregularities at the 
European level, and that th is would limit benefits.  
The comparison of options shows that self-regulatory initiatives  are expected to achieve only 
marginal impact, whilst work through the Lamfalussy Committees or a Commission 
Recommendation could be expected to have greater positive effect. Legislative action promises the strongest positive im pact, partly because it could be binding and better ensure a 
more coherent and efficient overall approach . Also, without legislative action differences 
between Member States and between industr y sectors would like ly remain, due to 
inconsistencies at the European level and weaknesses in coordination between actors within the industry and at the national level. While ac tion that includes a legislative element would 
according to the analysis be most effective in delivering the identified objectives, the available options are not mutually exclusive. 
Assessing the absolute likely scale of benefits is  difficult at this stage. The impact assessment 
outlines the different mechanisms by which benefits can accrue and takes a qualitative view as to their relative weight. Incremental bene fits are likely to vary significantly depending on 
the actual detail of follow-up action, so fu rther impact assessment work is vital.  
On the cost side, changes to disclosure ac tivities or selling practices carry potentially 
significant compliance and administrative costs for firms; options are likely to vary in relation 
to their cost impact on other bodies such as na tional supervisors, the supervisors' committees 
and the Commission itself. A separate impact assessment on the follow-up measures will be 
carried out at a later stage, containing precise  measurement of administrative burden using the 
Standard Cost Model. 
It is likely that the benefits of  action would be greater where it is coordinated with other work, 
on financial education for investors, with the industry to ensure eff ective engagement with 
measures, and with national re gulators to ensure there is  effective and coordinated 
supervision.  
Conclusions 
A key challenge in the aftermath of the financial crisis will be to rebuild consumer confidence 
in financial markets. A high level of product transparency and of professionalism in the 
financial sector will be essential if this challenge is to be met. As such, it is imperative that the 
European regulatory framework for packaged re tail investments reflects the realities of 
modern financial markets and that a lack of  coherence resulting from  out-dated regulatory 
silos does not impede the delivery of a high le vel of investor protecti on and a level playing 
field for investment products across the EU. 
This impact assessment has reviewed the regulat ory landscape for packaged retail investment 
products at European level and has outlined cl ear differences in rules on pre-contractual 
disclosures and selling practices  between products and sectors. It has not been possible with 
available evidence to be precise as to the scale
 of problems arising from this fragmented 
regulatory framework. However there are sugges tive examples of investor detriment and 
qualitative evidence from a range of stakeholders  on the impact of gaps and inconsistencies in 
Community law.  
 
EN 7   EN While some Member States have attempted to address these issues within their own 
territories, this has not been systematic acro ss all Member States or co-ordinated between 
them, leading to further fragmentation of the regulatory framework, with potential impacts on 
cross-border service providers and hence the si ngle market. Further, action at Member State 
level cannot wholly addre ss regulatory inconsistenc ies at European level. 
Consumer detriment, distorted competition between product families on the basis of 
regulatory arbitrage, and, to a lesser extent, barr iers to the development of the single market 
will remain as significant problems in the absenc e of legislative action at the European level. 
A high-level analysis of options suggests that such action will incur material costs but would 
also drive benefits ac ross all these areas. 
On this basis, legislative action is recommended, in relation to both pre-contractual 
disclosures and selling practices.  
This Impact Assessment has evaluated the need  for legislative action to remedy identified 
deficiencies. It does not consider the precise form and content of any relevant measures. A 
thorough assessment of costs and benefits will require clear specification of the type of 
intervention under consideration, which will depend on follow up work to the forthcoming 
Communication. Considerable further work would be required to ensure a legislative response 
is effectively targeted and strikes an op timal trade-off between costs and benefits.