Communication from the Commission to the European Parliament and the Council - Packaged retail investment products {SEC(2009) 556} {SEC(2009) 557}
Date: 2009-04-30
Institutions: European Commission
Subjects: bank deposit, domestic market, financial market, investment company, life assurance, retail trade, securities, trade information, trade policy

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 30.4.2009 
COM(2009) 204 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 

PACKAGED RETAIL INVESTMENT PRODUCTS 

{SEC(2009) 556} 
{SEC(2009) 557} 

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COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 

PACKAGED RETAIL INVESTMENT PRODUCTS 

(Text with EEA Relevance) 

1. 

INTRODUCTION  

'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. 

A  substantial  body  of  Community  law  already  exists  to  protect  investors.  However,  legal 
requirements on product transparency, sales and advice differ according to the legal form of 
the product and the distribution channel. This situation does not provide a coherent basis for 
the  protection  of  the  retail  investor  or  for  the  balanced  development  of  the  market  for 
packaged  retail  investment  products.  The  level  of  protection  afforded  to  the  retail  investor 
should not vary according to the legal form of these products. 

This Communication marks the conclusion of work that began following an ECOFIN Council 
request  to  look  at  these  issues  in  May  2007.  The  work  has  included  a  call  for  evidence  in 
October  2007,  a  Feedback  Statement  in  March  2008,  a  technical  workshop  with  industry 
representatives in May 2008, and a high-level Open Hearing in July 2008. 

This  Communication  explains  the  steps  the  European  Commission  will  take  to  bring  the 
European  legislative  framework  for  mandatory  disclosures  and  sales  practices  for  packaged 
retail  investment  products  into  line  with  market  reality.  The  objective  is  to  introduce  a 
horizontal  approach  that  will  provide  a  coherent  basis  for  the  regulation  of  mandatory 
disclosures  and  selling  practices  at  European  level,  irrespective  of  how  the  product  is 
packaged or sold. 

This work aims to ensure that markets for packaged retail investment products are driven by 
greater transparency, better explanation of proposed investments, and product sales which are 
aligned with investor interests. It will provide a market in which regulatory arbitrage does not 
drive savings towards particular products.  

This work will help to start rebuilding investor confidence in packaged investment products – 
which has been severely dented by the financial crisis. Assets invested in the most common 
packaged retail investment products have declined from €10 
trillion at end-2007 to estimates 
of  around  €8  trillion  at  end  2008  under  the  influe nce  of  asset  write-downs  and  investor 
withdrawals. In view of this, the present Communication forms part of the reform measures to 
address  the  shortcomings  in  regulation  laid  bare  by  the  financial  crisis  published  by  the 
European Commission in its Communication ahead of the Spring European Council. 

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What are packaged retail investment products? 

Retail investment in the financial markets is currently largely channelled through 'packaged' 
retail  investment  products.  These  products  can  take  a  variety  of  legal  forms  which  provide 
broadly comparable functions for retail investors: 

•  They  offer  exposure  to  underlying  financial  assets,  but  in  packaged  forms  which  modify 

that exposure compared with direct holdings; 

•  Their  primary  function  is  capital  accumulation,  although  some  may  provide  capital 

protection; 

•  They are generally designed with the mid- to long-term retail market in mind; and 

•  They are marketed directly to retail investors, although may also be sold to sophisticated 

investors. 

Many retail investors look across all the relevant product families when identifying suitable 
investment options. This opportunity is increasingly facilitated by banks and other distribution 
systems  which  sell  a  wide  range  of  investment  products.  Box  1  describes  the  main  product 
families that fall under this heading. These product families differ in their tax treatment and 
form of investment proposition. The appropriate choice of product for any given investor will 
depend  critically  on  his  or  her  profile,  varying  by  financial  situation  and  investment  needs, 
family circumstances, age, tax profile and risk appetite.  

The list below is not exhaustive. New investment products are constantly emerging. These are 
not  the  only  investment  products  suitable  for  the  retail  market.  The  description  and  list 
nonetheless  serve  as  a  starting  point  for  identifying  packaged  retail  investment  products  for 
the purposes of this initiative.  

Box 1: Families of Packaged Retail Investment Products 

The product descriptions that follow are indicative only; in most cases, there are currently no 
widely-accepted legal definitions of the product families in question.  

•  Investment  (or  mutual)  funds.  Investment  funds  are  a  form  of  collective  investment 
vehicle that invest the pooled funds of a large number of investors for a fee. Funds raise 
money by selling 'units' of the fund to investors. In the EU, investment funds can be either 
UCITS ('Undertakings for Collective Investment in Transferable Securities', as harmonised 
by  the  UCITS  Directive),  or  nationally  regulated  funds  (non-harmonised  funds  or  non-
UCITS).  

•  Investments packaged as life insurance policies. In unit-linked life insurance policies a 
portion of the premium is used to purchase life cover (the sum assured) with the balance 
invested in a fund such as a UCITS. The return on the policy is linked to the performance 
of the funds. As opposed to traditional life insurance products, unit-linked policies usually 
do not guarantee the payment of a determined financial amount in particular in the case of 
death / survival, but instead an amount which is a multiple of the market value of one or 
several units. Therefore, by definition, the policy holder bears the investment risk.  

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•  Retail  structured  securities.  Structured  securities  are  derived  from  or  based  on  a  single 
security,  a  basket  of  securities,  an  index,  a  commodity,  a  debt  issue  and/or  a  foreign 
currency. Normally in a structured security an investment bank promises to make, at a pre-
determined time, a payout based on a pre-determined formula. The majority of structured 
securities  offer  full  protection  of  the  principal  invested  at  the  end  of  their  term,  whereas 
others  offer  leveraged  returns  but  limited  or  no  protection  of  the  principal.  They  may  be 
sold to investors as, inter alia, certificates, structured notes (bonds) or warrants. 

•  Structured term deposits. Structured term deposits offer a combination of a term deposit 
with  an  embedded  option  or  an  interest  rate  structure.  They  are  designed  to  achieve  a 
specific  payoff  profile,  which  they  achieve  through  transactions  in  derivatives  such  as 
interest rate and currency options.  

A  variety  of  financial  institutions  are  involved  in  the  process  of  manufacturing  and  selling 
these  products  to  retail  investors,  spread  across  multiple  sectors  of  the  financial  services 
industry.  Fund  managers,  insurance  companies  and  commercial  and  investment  banks 
structure and manage these products. They distribute them to retail investors either directly, or 
via  a  network  of  financial  intermediaries,  including  brokers,  insurance  intermediaries  and 
independent financial advisers.  

Risks to retail investors 

investment  products  can  yield 
In  a  well-functioning  market,  competition  between 
considerable  benefits  for  retail  investors  and  the  economy  at  large.  Competitive  forces  can 
sharpen  incentives  to  deliver  products  that  respond  to  changing  market  conditions  and  the 
evolving needs of investors.  

The  packaging  of  investment  products  can  also  provide  specific  benefits,  for  instance  by 
offering  retail  investors  with  opportunities  for  spreading  risk  or  targeting  specific  risk  and 
reward outcomes, or by providing access to professional investment management expertise, in 
ways that would be impractical or costly through direct investments.  

However, there is a sharp asymmetry in information and expertise between the manufacturers 
and  distributors  of  products  and  retail  investors,  and  the  latter  typically  exhibit  a  relatively 
low  level  of  financial  sophistication.  The  act  of  'packaging'  investments  can  increase  this 
asymmetry, for instance by adding complexity that makes key investment characteristics less 
transparent and introducing additional layers of cost which may not be readily apparent.  

In  view  of  this,  consumers  must  rely  on  a  combination  of  product  information  supplied  by 
product  manufacturers  with  services  such  as  advice  provided  by  distributors  and  financial 
advisers. 

incomplete  disclosures  can 

Unclear  or 
inappropriate  or 
misunderstood products. Similarly, if selling processes and financial advice are not focussed 
on  the  needs  of  the  client,  unsuitable  products  may  be  sold.  This  may  be  more  prevalent 
where  the  interests  of  sellers  and  buyers  are  not  aligned,  for  instance,  where  product 
originators provide financial incentives to distributors or advisors to sell their products. 

the  selection  of 

increase 

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These  risks  of  investor  detriment,  whether  in  the  form  of  direct  financial  losses  or  the 
opportunity  costs  of  inappropriate  investments,  could  undermine  consumer  confidence  in 
packaged retail investment products. 

Regulating product disclosures and the sale of packaged retail investment products 

In view of these potential risks to retail investors, regulation has been introduced at European 
and Member State level.  

This is achieved in some cases through regulation of the products themselves, for example by 
limiting  the  access  of  retail  investors  to  certain  product  types  or  by  restricting  the  assets  in 
which retail investment managers invest. While successful in certain sectors, this approach is 
difficult to implement effectively in the face of financial innovation.  

Regulators have therefore more typically focused on enabling better investor decision making, 
by concentrating on rules in two areas: 

•  the form and content of key investor disclosures and associated marketing materials that 
are provided to investors before they make an investment decision. Increasing importance 
is  attached  to  summary  disclosures  which  describe  the  key  features  of  the  investment 
proposition  (costs,  expected  risk-reward  etc)  and  which  are  targeted  at  meeting  the 
information needs of retail investors; 

•  the  conduct  of  business  of  product  distributors  and  the  avoidance,  management  and 

disclosure of conflicts of interest in the sales or advice process (selling rules). 

Such  rules  do  not  guarantee  good  investment  decisions.  Neither  can  they  protect  against 
adverse  investment  outcomes,  given  the  market  risk  integral  to  most  investment  products. 
However they can minimise the risk of investors experiencing adverse outcomes about which 
they were not forewarned. 

An essential complement to these rules is the ongoing drive to improve the level of financial 
education  among  retail  investors  in the  European  Union,  as  a  means  of  equipping  the  least 
sophisticated investors for financial decision-making. However, financial education is not an 
alternative to clear responsibilities for investment product originators and intermediaries. 

2. 

IS THE EUROPEAN LEGAL FRAMEWORK FIT FOR PURPOSE? 

Community law contains many disparate provisions touching on the institutions originating, 
distributing and selling packaged retail investment products. 

Regulation  of  mandatory  disclosures  and  selling  practices  at  European  level  is  achieved 
through a combination of sectoral directives in the securities, insurance and fund sectors; and 
cross-cutting  legislation  targeting  particular  sales  channels  or  commercial  practices.  Most 
sectoral directives contain provisions on disclosure which are supplemented when relevant by 
the provisions of cross-cutting legislation. The regulation of sales and advice is dominated by 
two major pieces of legislation, Markets in Financial Instruments Directive (MiFID) and the 
Insurance Mediation Directive (IMD). These directives contain rules, inter alia, on conduct of 
business at the point of sale, and the management and disclosure of conflicts of interest. 

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As Table 1 illustrates, the result is a highly fragmented 'regulatory patchwork' in Community 
law. Packaged retail investment products are subject to different rules on product disclosure 
and selling practices, depending on the legal form they take or the channel through which they 
are  sold.  Moreover,  some  products  and  distribution  channels  are  not  currently  addressed  by 
Community law. 

Table  1:  Disclosure  and  selling  rules  in  Community  law  for  packaged  retail  investment 
products 

UCITS  

Non-harmonised 
investment funds 

Unit-linked 
life insurance 
policies 

Structured 
securities and 
closed-end funds 

Structured 
term deposits 

Rules on 
product 
information 
applying to 
manufacture
rs, issuers or 
intermediari
es  

Simplified 
Prospectus of 
UCITS Directive  

MiFID 

(high-level product 
disclosure 
requirements apply 
to MiFID 
intermediaries 
when selling 
financial 
instruments) 

MiFID  

Consolidated 
Life Directive 

Prospectus 
Directive 

(high-level product 
disclosure 
requirements apply 
to MiFID 
intermediaries 
when selling 
financial 
instruments) 

IMD for some 
product 
disclosure 
requirements 

No rules at EU 
level1 

MiFID  

(high-level product 
disclosure 
requirements apply 
to MiFID 
intermediaries when 
selling financial 
instruments) 

E-commerce Directive or Distance Marketing of Financial Services Directive 

MiFID 

Selling rules 

UCITS Directive  

MiFID 

IMD 

MiFID 

No rules at EU 
level 

E-commerce Directive or Distance Marketing of Financial Services Directive 

Is the 'regulatory patchwork' a source of concern? 

The European regulatory framework that we have inherited lacks coherence and relevance to 
the  contemporary  retail  investment  marketplace.  Inconsistencies  and  gaps  in  sectoral 
provisions reduce confidence that the level of investor protection is sufficiently high across all 
products. 

There  are  many  examples  of  effective,  consumer-focused  disclosures  and  sales  centred  on 
consumer  needs  which  deliver  suitable  recommendations.  Despite  this  there  are  many 
episodes  of  loss  due  to  flawed  product  design  and  disclosure  or  sub-standard  selling. 
Unsuitable  products  continue  to  be  mis-sold.  Products  continue  to  be  bought  by  retail 
investors who do not have a good understanding of their features. 

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Further  analysis  will  be  needed  to  ascertain  the  precise  application  of  requirements  depending  on  the 
form of the structured product, as it is possible that in some circumstances existing requirements might 
apply.  

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The scope of investor losses is difficult to quantify, partly because it will often take the form 
of  an  opportunity  cost.  The  Impact  Assessment  summarises  a  body  of  evidence  and  expert 
opinion  from  stakeholders  such  as  consumers  and  consumer  representatives,  national 
regulators and market practitioners. This supports the view that regulatory failures are leading 
to important investor detriment.  

Problems with EU rules on key investor disclosures  

There are significant inconsistencies in the form and content of the summary disclosures for 
broadly comparable products. There is no consistent approach to providing key information to 
retail investors on final costs, product risks and rewards, and the conditions attached to capital 
guarantees.  

In some cases, consumers are faced with information which is too technical, badly presented 
or difficult to understand, creating an 'information overload'. In other cases, existing sectoral 
disclosure  obligations  do  not  work  well  for  packaged  retail  investment  products,  as  in  the 
insurance sector where mandatory disclosure requirements are designed for the entire universe 
of  insurance  products,  not  those  with  investment  functionality.  In  yet  other  cases  European 
rules  are  entirely  absent,  as  with  structured  term  deposits.  These  inconsistencies  act  as  a 
barrier to the effective comparison of the characteristics of different product types and hence 
to the quality of investor decision-making. 

The experience of the financial crisis has underscored the importance of effective disclosures 
in these areas. It has raised serious questions about investor understanding of the potential for 
downside risks and counterparty risks inherent in some product guarantees. 

It is precisely because of these issues that the European Commission has proposed to replace 
the  Simplified  Prospectus  currently  required  for  UCITS  with  a  shorter,  clearer,  and  more 
investor-focused mandatory disclosure, the 'Key Investor Information' (KII) document. KII is 
being  developed  with  strong  stakeholder  involvement  and  has  included  rigorous  testing  of 
disclosure designs with retail investors. This work represents the benchmark for the process of 
developing improved mandatory disclosures for the whole of the retail packaged investment 
product market. 

Weaknesses in the regulation of selling practices 

European  provisions  on  selling  practices  seek  to  ensure  both  that  distributors  act 
professionally and fairly and focus on the needs of the investor when selling or advising on 
products; and that conflicts of interest are avoided, effectively managed and/or disclosed. This 
is crucial. A recent survey of investment advisors finds that 72% of respondents believe that 
the ways in which sales commissions are structured can influence the products which are sold 
to the investor.2  

However  there  are  some  differences  in  the  disciplines  applied  by  the  two  major  pieces  of 
Community law in this area, MiFID and the IMD. With regard to conflicts of interest, MiFID 
has  introduced  a  sophisticated  regime  for  the  avoidance,  management  and  disclosure  of 

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CFA  Institute  European  Union  Member  Poll  on  Executive  Compensation  and  Retail  Investment 
Products, January 2009. 

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conflicts of interest and includes detailed provisions concerning the payment of inducements 
to  intermediaries.  By  contrast,  the  IMD  does  not  include  comparable  conflict  of  interest  or 
inducement  rules.  It  requires  intermediaries  to  tell  the  customer  whether  they  are  giving 
advice based upon a fair analysis (using a sufficiently large number of insurance contracts) or 
whether they have contractual obligations with one or more insurers.  

Practical  experience  with  both  MiFID  and  the  IMD  remains  limited.  Nevertheless,  the 
European Commission is concerned that inconsistencies in the standards of sales practice for 
retail packaged investment products in these two directives increase the potential for investor 
detriment and regulatory arbitrage. 

Some products and distribution channels are not covered by these directives. Direct sales by 
product manufacturers (for instance, fund managers or insurance companies) are not subject 
to the same disciplines as sales by intermediaries. In addition, there are no European rules on 
the distribution of structured term deposits, which are not financial instruments as defined by 
MiFID. These gaps generate an unlevel playing field. 

3. 

WILL CHANGES IN EUROPEAN LEGISLATION IMPROVE OUTCOMES? 

Are  these  weaknesses  the  result  of  legislative  inconsistencies  at  European  level  or  are  they 
due  to  other  causes  such  as  weak  enforcement?  Can  deficiencies  in  Community  law  be 
adequately compensated by action by Member States or the industries concerned? 

Some Member States have already responded to the inconsistencies and gaps in the European 
regulatory  framework  by  imposing  additional  requirements  on  mandatory  disclosures  and 
selling  practices  at  national  level.  Manufacturers  and  distributors  in  many  sectors  have  also 
acted  to  enhance  disclosure  documents  and  to  promote  responsible  selling  and  advice 
processes through codes of conduct and statements of best practice. 

However,  these  responses  are  necessarily  limited  in  their  geographical  scope.  They  cannot 
constitute  a  co-ordinated  or  systematic  response  to  the  deficiencies  of  the  European  legal 
framework.  National  regulators  are  impeded  in  their  attempts  to  bring  greater  coherence  by 
inconsistencies in Community law, in particular where the provisions of Community law do 
not  allow  for  additional  national  measures  to  be  adopted.  This  is  the  case  even  for  those 
products that are sold on a predominantly local basis. 

Moreover,  uncoordinated  national  responses  may  act  as  a  barrier  to  the  functioning  of  the 
single  market.  For  those  products  for  which  there  are  currently  no  formal  provisions 
harmonising  the  conditions  for  cross-border  distribution,  more  consistent  EU  rules  on 
disclosures  and  selling  practices  at  the  European  level  may  remove  some  impediments  to 
cross-border retail distribution. 

The  European  Commission  has  therefore  concluded  that  a  systematic  and  co-ordinated 
response to the risks associated with the fragmented regulatory framework for packaged retail 
investment products requires decisive action to be taken at European level. Greater coherence 
in  the  European  regulatory  environment  is  necessary  to  deliver  a  secure  and  sustainable 
regulatory environment throughout Europe, and to contribute to the smooth functioning of the 
single market. 

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4. 

WHAT DOES THE EUROPEAN COMMISSION PROPOSE? 

The European Commission believes that the existing sectoral patchwork must be replaced by 
a horizontal approach to both mandatory disclosures and selling practices. This approach 
will  promote  consistent  outcomes  regardless  of  the  legal  form  of  the  product  or  the 
distribution  channel  employed,  and  could  be  extended  to  continued  innovation  in  the  retail 
market.  

An approach based on the modification of existing sectoral legislation and the introduction of 
new legislation in sectors where it does not currently exist might appear to be less disruptive 
to  existing  requirements.  However,  it  would  be  less  effective  in  delivering  a  consistent  and 
coherent  approach  and  would  perpetuate  the  risk  of  incomplete  or  outdated  coverage 
necessitating further intervention at a later date. 

Horizontal  measures  would  not  exclude  the  scope  for  some  adaptation  of  regulatory 
requirements to reflect objective differences in product features. Horizontal measures, in the 
form of Lamfalussy legislation, could combine uniform principles and core requirements for 
all relevant products or actors, while allowing the detailed content and form of requirements 
to be adapted to the specificities of different products.  

What will a horizontal approach look like? 

The following section sets out the intended approach to developing horizontal rules both for 
the  production  of  key  disclosures  by  the  manufacturers  of  packaged  retail  investment 
products,  and  the  selling  of  these  products  by  intermediaries  or  any  other  distributor, 
including  the  product  originator.  Separate  legislative  initiatives  are  envisaged  for  the  two 
fields  of  action  –  principally  because  different  entities  are  involved  in  selling  and  product 
origination. These separate instruments would need to effectively dovetail with one another.  

Key investor disclosures provided by product originators 

A horizontal approach in this area entails the development of a new instrument, replacing or 
integrating  relevant  provisions  of  existing  sectoral  rules  and  extending  them  to  products 
where no rules currently apply.  

The key elements of a horizontal packaged product instrument are described below. 

Box 2: Key investor disclosures 

Objective: 

•  The goal would be to achieve as great a degree of harmonisation and standardisation of key 
retail disclosures as possible to allow for comparison between products, though with some 
tailoring of detailed rules to the specificities of products. 

Scope 

•  The new horizontal instrument would be applicable to all manufacturers of packaged retail 
investment  products.  This  would  be  irrespective  of  whether  the  product  is  a  re-
manufactured form of another underlying product, as where product wrappers are in use. 

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•  Products that are in-scope would be those that fall within the definition of a packaged retail 

investment product, as provisionally outlined in Section 1. 

Principles on the basis of which the key investor disclosures will be designed  

•  Product  disclosures  should  be  fair,  clear  and  not  misleading.  They  should  be 
comprehensible  to  their  target  investors,  who  often  may  have  little  or  no  investment 
experience.  

•  They  should  contain  the  information  necessary  to  take  an  informed  investment  decision 
(e.g. covering performance and risks, charges, guarantees and how the product functions, 
for  instance  the  existence  of  fixed  maturity  dates).  To  the  greatest  extent  possible  they 
should  be  designed  in  a  standardised  fashion  that  promotes  comparisons  between  the 
products.  

•  They  should  be  presented  in  a  format  appropriate  for  a  retail  investor:  they  should  be  as 
short and simple (but contain all key information), and be extensively tested with investors 
to ensure they work as intended. 

•  The disclosures should be provided to the investor in a timely fashion so as to be capable 
of influencing the decision as to whether to buy an investment. All who sell packaged retail 
investment products should be required to provide the mandatory disclosure produced by 
the  product  manufacturer  to  the  investor.  This  obligation  would  apply  to  both 
intermediaries and manufacturers selling their own products; and irrespective of whether a 
service such as advice is offered in conjunction with effecting the sale. 

•  Any  associated  marketing  communications  should  be  fair,  clear  and  not  misleading,  and 
should  be  clearly  distinguished  from  the  mandatory  disclosures  while  being  fully 
consistent with them. 

The recent work on developing KII for UCITS provides a clear benchmark of the standard for 
mandatory disclosures that is being sought across other packaged retail investment products, 
though these disclosures would need to be adjusted to reflect the particular features and legal 
forms  of  other  products.  Other  work  by  the  Commission,  such  as  on  a  'Standard  European 
Consumer Credit Information Sheet' as foreseen in the Consumer Credit Directive, may also 
provide lessons on the value of standardised pre-contractual information for consumers. 

Selling of packaged retail investment products by intermediaries and other distributors  

The European Commission considers that the right approach is to apply the same legislative 
requirements  across  all  sales  of  packaged  retail  investment  products,  irrespective  of  the 
distribution channel employed. The MiFID provisions on conduct of business and conflicts of 
interest offer a clear benchmark for such requirements. The extension of these measures to all 
packaged retail investment products could be achieved by extending the scope of the relevant 
MiFID provisions so that they apply to all entities selling the relevant products. 

The key elements of a horizontal approach to selling practices will be as follows: 

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Box 3: A horizontal approach to the regulation of selling practices 

Scope  

•  Consistent  conduct  of  business,  inducements  and  conflict  of  interest  provisions,  with 
MiFID as the benchmark, would be applied to all those selling packaged retail investment 
products, irrespective of whether the entity is an intermediary or the product manufacturer 
themselves. Detailed requirements might need to take account of the service being offered 
(advice, transmission of orders). 

Principles 

•  Selling practices must be focused on the fair treatment of the investor.  

•  When an investor receives investment advice, the advisor should undertake the necessary 
steps to ensure products sold correspond to the profile and needs of the investor, and that 
the investor understands the nature of the service being provided by the advisor.  

•  If a product is sold without such advice, the limits to the service provided and risks for the 
investor must be clearly communicated. An assessment of the adequacy of the product for 
the investors' needs may still be required in some circumstances. 

•  For  both  advised  and  non-advised  sales,  conflicts  of  interest  must  not  adversely  affect 
investors.  They  should  be  avoided  where  possible,  or  be  identified,  managed  and 
disclosed in a way that investors can understand.  

•  For  both  advised  and  non-advised  sales,  investors  must  receive  clear  and  effective 
disclosures of remuneration arrangements and all charges, commissions or fees paid, in a 
form they can use.  

•  Those assessing the suitability of products must fully understand those products and their 

features.  

What are the key challenges in delivering a horizontal approach? 

While the general concept of packaged retail investment products is relatively clear, a general 
definition will be needed which is sufficiently precise to avoid legal uncertainty and arbitrage. 
This general definition will need to be supplemented by clear designation of the products that 
fall within scope. The European Commission recognises the challenge that this represents. 

The  European  Commission  does  not,  however,  consider  these  definitional  problems  to  be 
insurmountable.  In  the  follow-up  to  this  Communication,  a  generic  definition  will  be 
developed and supplemented by a 'white list' of products that fall within or without the scope. 

A second key challenge will be the articulation of the new instrument(s) with existing sectoral 
legislation. New horizontal measures must effectively repeal and replace all relevant existing 
measures so as to avoid imposing overlapping requirements. 

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There  will  also  be  significant  challenges  in  developing  detailed  disclosure  proposals,  for 
instance  for  consistent  disclosure  of  product  charges,  risks  and  potential  rewards  where  the 
underlying  products  can  vary  significantly  in  how  they  work.  Experience  with  the 
development  of  improved  disclosure  for  UCITS  has  shown  that  this  entails  considerable 
detailed technical work and testing of proposals with investors.  

The  framing  of  better  regulations  is  by  itself  not  a  sufficient  condition  for  achieving  the 
outcomes identified here. Effective cooperation between national supervisory authorities and 
their consistent and effective supervision of the requirements will be vital. A strong focus on 
investors'  needs  by  the  industry,  and  improvements  in  the  financial  capability  of  retail 
investors will also be necessary to build on the improvements in the regulations. 

5. 

CONCLUSION 

In  the  wake  of  the  financial  crisis  the  foundations  for  future  investor  re-engagement  with 
packaged retail investment products will need to be laid: people will continue to need to save 
and  invest,  and  they  will  continue  to  need  well-managed,  secure  products  which  they  can 
understand and which are effectively disclosed and fairly sold to them. 

The  European  Commission  recognises  that  packaged  retail  investment  products  serve  a 
significant  function  both  in  providing  a  range  of  effective  investment  vehicles  for  the  retail 
markets,  and  in  promoting  efficient  capital  markets.  In  this  context,  product  manufacturers 
and intermediaries have vital roles in building effective and efficient retail markets, helping 
match potential investors with investments that serve their needs. Product manufacturers and 
intermediaries naturally need to be remunerated for these roles.  

that  a  sustainable  and  satisfactory  regulatory 
The  European  Commission  believes 
environment  for  the  sale  and  disclosures  of  packaged  retail  investment  products  cannot  be 
established unless the deep seated differences flowing from European legislation are tackled. 
There  are  significant  challenges  in  developing  this  approach,  including  for  supervisors  in 
enforcing and the industry in incorporating new requirements. Great care will have to be taken 
to  minimise  cost  impacts.  A  horizontal  cross-cutting  approach  will  also  imply  a  need  for 
considerable additional coordination and dialogue between existing sectoral supervisors so as 
to ensure consistent interpretation and effective engagement with their respective industries.  

Next steps 

The European Commission will now begin working on detailed proposals for delivering the 
legislative approach outlined in this Communication. This will involve: 

•  Gathering  technical  input  to  assist  preparation  of  these  measures  from  committees  of 

Member State authorities, technical committees and other stakeholder groupings; 

•  Launch  of  studies  to  inform  the  preparation  of  legislative  measures  and  further  impact 

assessment; 

•  Publication, by end 2009, of a first outline of the possible form and content of the measures 

described above. This document will be the object of stakeholder consultation.  

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