Commission staff working document accompanying the Communication from the Commission 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}
Date: 2009-04-30
Institutions: European Commission
Subjects: bank deposit, domestic market, financial market, impact study, investment company, life assurance, retail trade, securities, trade information, trade policy

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 30.4.2009 
SEC(2009) 557 

COMMISSION STAFF WORKING DOCUMENT 

Accompanying the 

COMMUNICATION FROM THE COMMISSION 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} 

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EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT REPORT  

'Packaged  retail  investment  products'  provide  retail  investors  with  easy  access  to  financial 
markets.  The  regulatory  framework  for  these  products  must  provide  a  robust  and  coherent 
foundation for effective and responsible retail investment. 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 investor confidence has underlined the urgency of 
ensuring the right regulatory framework is in place, so that the rebuilding of confidence can 
occur on a sound basis. 

Throughout the European Union, a range of 'packaged' investment products are marketed to 
retail investors, offering the prospect 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 fallen under impact of the financial crisis.  

These products take distinct legal forms but provide comparable economic functions for retail 
investors.  In  a  well-functioning  market,  competition  between  families  of  packaged  retail 
investment product can promote an efficient allocation 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 distributors 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, when 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-contractual  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  and  the  legal  status  of  the  person  selling  the 

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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  originators  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  necessarily  limited  in  their  geographical  scope  and 
uncoordinated, leading to further divergence in rules 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 considered: does this regulatory patchwork pose 
genuine risks of investor detriment and market distortion? If so, is a European level response 
necessary and what general form should it take? 

Procedural Issues 

The Commission's work on packaged retail investment 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 different types of retail investment product. 

We  have  consulted  extensively  with  stakeholders,  including  a  written  call  for  evidence  in 
October 2007, followed by a Feedback Statement in March 2008, a technical workshop with 
industry  representatives  in  May  2008,  and  a  high-level  Open  Hearing  in  July  2008,  which 
brought  together  over  300  senior  representatives  from  industry,  consumer  associations, 
national regulators and the European 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 identify 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 society, and who incurs these costs? 

The  absence  of  a  coherent  approach  to  disclosure  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  rules  may  create  incentives  for  'regulatory 
arbitrage', thereby amplifying the risks of investor detriment described above. 

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•  Thirdly,  that  divergent  national  approaches  to  disclosure  and  distribution  resulting  from 
uncoordinated  Member  State  responses  to  gaps  and  inconsistencies  in  Community  law 
increase barriers to cross-border trade and the 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  expectations  as  to  likely  returns;  at  the  macro 
level there can be an erosion of confidence in retail investment markets. Regulatory arbitrage 
between  product 
impacts  whilst  undermining  market 
competitiveness;  given  the  additional  impact  of  continued  barriers  to  cross-border  trade,  an 
overall consequence would be increased inefficiency in the allocation of resources. 

types  can  accentuate 

these 

Expert  opinion  and  anecdotal  evidence  from  stakeholders  support  the  view  that  these 
problems  are  in  practice  actually  causing  investor  detriment,  and  to  a  lesser  extent  market 
distortions  and  reduced  cross-border  trade.  Recurrent  mis-selling  and  mis-buying  across 
different jurisdictions indicates that risks are crystallising for investors.  

Unilateral efforts of some Member States to address 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  potential  for  regulatory  arbitrage  between  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 cross-border trade or overall standards of investor 
protection, given its limited geographical reach. Stakeholders have also indicated that a lack 
of coordination leads to additional costs for market 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 national level that flow from it are still likely to 
contribute  to  investor  detriment  and  regulatory  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 European 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  address  the  above  problems  means  that  these 
problems  would  persist.  This  is  not  to  say  that  the  regulatory  environment  would  remain 
unchanged.  It  is  reasonable  to  assume  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  divergence  of  regulatory  approaches  across  Member 
States,  thereby  potentially  impeding  market  cross-border  business  and  further  complicating 
the  legislative  landscape.  Also,  it  is  unlikely  that  all  Member  States  would  take  unilateral 
action, leaving some markets without adequate regulation. 

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It also likely that self-regulatory initiatives would 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  Key  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  coordination  –  increase  inconsistencies  at  the 
European level, and gaps in regulation would remain. The problems identified above would 
not  be  effectively  mitigated  across  all  Member  States  and  market  segments.  In  short, 
responses  to  the  challenges  identified  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  protection  across  all  products  and  distribution 
channels,  including  those  not  currently  subject  to  EU  disclosure  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  packaged  retail  investment  product,  including  their 

distribution; and 

•  a strengthened single market in packaged retail investment products. 

Option Analysis 

A range of options for EU level action are identified and compared to the benchmark of no 
further  intervention.  The  analysis  is  by  necessity  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  relation  to  the  two  key  regulatory  areas  identified 
(mandatory disclosures and selling rules). However, 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 benefits than either examined in isolation.  

The options identified and analysed in both areas are: 

•  no policy change; 

•  Commission promoted self-regulation; 

•  Commission Recommendation offering guidance on common principles and approaches; 

•  mandate to the Lamfalussy Committees to promote supervisory convergence; and 

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•  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 this 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 impact, 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  industry  sectors  would  likely  remain,  due  to 
inconsistencies at the European level and weaknesses in coordination between actors within 
the industry and at the national level. While action 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 benefits are likely to vary significantly depending on 
the actual detail of follow-up action, so further impact assessment work is vital.  

On  the  cost  side,  changes  to  disclosure  activities  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 national 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  effective  engagement  with 
measures,  and  with  national  regulators  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  retail  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 level of investor protection and a level playing 
field for investment products across the EU. 

This impact assessment has reviewed the regulatory landscape for packaged retail investment 
products  at  European  level  and  has  outlined  clear  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  suggestive  examples  of  investor  detriment  and 
qualitative evidence from a range of stakeholders on the impact of gaps and inconsistencies in 
Community law.  

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While  some  Member  States  have  attempted  to  address  these  issues  within  their  own 
territories,  this  has  not  been  systematic  across  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 single market. Further, action at Member State 
level cannot wholly address regulatory inconsistencies at European level. 

Consumer  detriment,  distorted  competition  between  product  families  on  the  basis  of 
regulatory arbitrage, and, to a lesser extent, barriers to the development of the single market 
will remain as significant problems in the absence 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 across 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 optimal trade-off between costs and benefits. 

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