Commission staff working document accompanying the Communication from the Commission to the European Parliament and the Council - Packaged retail investment products - Impact assessment {COM(2009) 204} {SEC(2009) 557}
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) 556 

COMMISSION STAFF WORKING DOCUMENT 

Accompanying the 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT AND THE COUNCIL 

PACKAGED RETAIL INVESTMENT PRODUCTS  

IMPACT ASSESSMENT  

{COM(2009) 204} 
{SEC(2009) 557} 

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TABLE OF CONTENTS 

1. 

2. 

3. 

3.1. 

3.2. 

Introduction .................................................................................................................. 6 

Procedural Issues.......................................................................................................... 7 

Problem definition........................................................................................................ 8 

Market context and problem drivers ............................................................................ 8 

Problem description ................................................................................................... 11 

3.2.1.  Risks of investor detriment ........................................................................................ 12 

3.2.1.1.  Inadequate pre-contractual product disclosures and marketing rules ........................ 13 

3.2.1.2.  Inadequate care or professionalism in the selling process ......................................... 17 

3.2.2.  Competitive distortions resulting from an 'unlevel playing field' between product 

types and distribution channels .................................................................................. 18 

3.2.3.  Divergent national responses: impact on single market............................................. 20 

3.3. 

How would the problem evolve without further action? ........................................... 22 

4. 

5. 

5.1. 

5.2. 

Subsidiarity and Legal Basis...................................................................................... 23 

Objectives................................................................................................................... 23 

A high and consistent level of investor protection..................................................... 24 

A level playing field for the originators and distributors of packaged retail 
investment products ................................................................................................... 25 

5.3. 

Increased efficiency in cross-border business............................................................ 25 

6. 

Options ....................................................................................................................... 26 

6.1. 

Pre-contractual product disclosures ........................................................................... 26 

6.1.1. 

Identification of options ............................................................................................. 26 

6.1.2.  Analysis of costs and benefits .................................................................................... 28 

6.2. 

Selling practices ......................................................................................................... 31 

6.2.1. 

Identification of options ............................................................................................. 31 

6.2.2.  Analysis of costs and benefits .................................................................................... 32 

6.3. 

Comparison of high-level assessment of options....................................................... 33 

6.3.1.  Pre-contractual information ....................................................................................... 33 

6.3.2.  Selling practices ......................................................................................................... 34 

6.3.3. 

Identifying the preferred options................................................................................ 34 

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7. 

7.1. 

7.2. 

7.3. 

7.4. 

7.5. 

7.6. 

8. 

Impacts on various stakeholders' groups, employment, SMEs, environment and third 
countries ..................................................................................................................... 35 

Stakeholders ............................................................................................................... 35 

Employment ............................................................................................................... 36 

SMEs .......................................................................................................................... 36 

Environment and third countries................................................................................ 37 

Administrative burden................................................................................................ 37 

Monitoring and evaluation ......................................................................................... 38 

Conclusions ................................................................................................................ 39 

ANNEX 1................................................................................................................................. 40 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

7.1. 

7.2. 

7.3. 

7.4. 

7.5. 

List of Acronyms........................................................................................................ 40 

Problem tree ............................................................................................................... 41 

What are packaged 'retail investment products'? ....................................................... 42 

How big is the market for packaged retail investment products? .............................. 43 

How are packaged retail investment products distributed?........................................ 43 

Member State approaches to the regulation of retail investment products. ............... 45 

European disclosure and distribution rules for retail investment products ................ 47 

Pre-contractual product disclosures ........................................................................... 47 

Conduct of business rules........................................................................................... 49 

Conflicts of interest and inducement rules................................................................. 50 

Marketing and advertising rules................................................................................. 52 

E-Commerce Directive and Distance Marketing of Financial Services Directive .... 54 

ANNEX 2................................................................................................................................. 56 

1. 

Detailed analysis of high-level options for Pre-contractual Disclosures ................... 56 

1.1. 

Analysis of options..................................................................................................... 56 

1.1.1.  Commission sponsored self-regulation ...................................................................... 56 

1.1.2.  Mandate to Level 3 committees to promote supervisory convergence...................... 58 

1.1.3.  Commission Recommendation to implement principles through national regulation60 

1.1.4.  EU-level legislative action ......................................................................................... 62 

2. 

Detailed analysis of high-level options for Selling Processes ................................... 64 

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2.1. 

Analysis of options..................................................................................................... 64 

2.1.1.  Commission sponsored self regulation ...................................................................... 64 

2.1.2.  Mandate to Level 3 committees to promote supervisory convergence...................... 66 

2.1.3.  Commission Recommendation to implement principles through national regulation67 

2.1.4.  EU-level legislative action ......................................................................................... 68 

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1. 

INTRODUCTION 

The  financial  crisis  has  provided  a  stark  reminder  of  the  importance  of  transparency  in  financial 
products  and  of  responsible  selling  in  institutional  and  retail  sectors.  Investors  naturally  carry  some 
market risk when making investments, so that exposure to weak or negative returns in adverse market 
conditions, while clearly detrimental to the investor, is a natural corollary of the investors' acceptance 
of market risk. This risk is, effectively, the price that needs to be paid to gain the potential for greater 
performance. The financial crisis, however, has underlined the extent to which the scale and nature of 
the risk taken on by investors may not be as evident to them as it should be. There has been a collapse 
in  investor  confidence  in  financial  products  and  the  markets  more  generally,  and  this  can  in  part  be 
linked  to  misplaced  investor  expectations,  for  instance  where  products  have  unexpectedly 
underperformed or where guaranteed products have, for various reasons, failed to protect capital. As a 
result, transparent products that are clearly explained and fairly sold to investors have a vital role to 
play  in  restoring  investor  confidence  and  promoting  effective  retail  engagement  with  the  financial 
markets. 

Throughout the European Union, a range of 'packaged' investment products are actively marketed to 
retail investors. These products offer the prospect of financial returns over the medium to long term, 
based on a combination of exposures to financial markets. Up to €10 trillion were invested by the end 
of  2007  through  different  types  of  retail  investment  product,  such  as  investment  funds,  structured 
securities, unit-linked life insurance policies and structured term deposits. These products take distinct 
legal  forms  but  perform  comparable  economic  functions  for  retail  investors.  In  a  well-functioning 
market, competition between families of retail investment product offers the prospect of an efficient 
allocation of resources, by creating incentives for producers to capture market share by developing and 
selling products that provide a good match for the profiles of prospective investors. 

The  markets  for  these  products  are  however  characterised  by  certain  failings,  notably  steep 
asymmetries  in  information  between  product  originators  and  distributors  on  the  one  hand  and  end 
clients  on  the  other,  and  principle-agent  issues  resulting  in  conflicts  of  interest  for  distributors. 
Unchecked,  these  market  failures  may  give  rise  to  investor  detriment,  for  example,  as  a  result  of 
product mis-selling or simply through poor decision-making due to insufficient information about the 
key features of the products on offer. 

Public authorities have sought to mitigate these failings: by promoting financial education; through the 
regulation of products and the institutions that originate and distribute them; through requirements on 
the  provision  of  product  information;  and  by  regulating  the  process  by  which  products  are  sold  or 
advised  upon.  Rules  have  been  developed  which  seek  to  ensure  that  prospective  clients  receive 
product  information  pre-contractually  so  as  to  enable  effective  decision-making;  and  that  the 
distributors and originators of investment products conduct their business fairly and objectively and do 
not put their interests before those of the client. 

However, the rules on product disclosure and selling practices that have evolved at the European level 
have done so on a largely sectoral basis. Consequently, the applicable rules vary according to the legal 
form of the product and the legal status of the intermediary selling the product. In some sectors and for 
some products, there are no applicable rules at European level.  

These variations and gaps have provoked widespread concern that approaches in Community law are 
not coherent and that, despite remedial action taken at national level in some Member States, they may 
result in significant differences in the level of investor protection between industry sectors, as well as 
an  'unlevel  playing  field'  for  originators  and distributors.  The  question  therefore  arises  over  whether 
European action is justifiable, and over the form that it should adopt. 

Drawing on the results of an extensive process of consultation, this Impact Assessment is an important 
step  in  determining  whether  there  is  substance  to  these  concerns  and,  if  so,  in  setting  out  the  broad 
lines of a policy response to the problems identified. It is envisaged that this policy orientation would 
be communicated in the form of a Communication. If it is concluded that a European-level response is 

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justified,  further  impact  assessment  work  would  then  be  required  to  identify  specific  measures 
embodying an optimal trade-off between the costs and benefits of intervention. 

2. 

PROCEDURAL ISSUES 

The genesis of this Impact Assessment lies in a request from the ECOFIN Council in May 2007 for the 
European  Commission  to  examine  the  coherence  of  disclosure  and  distribution  regimes  in  EU  law 
applying to different types of retail investment product. 

In response to this request, the European Commission has consulted extensively with stakeholders. A 
written call for evidence was launched in October 2007, which attracted 80 responses from national 
regulators, consumer associations and the originators and distributors of all of the products concerned. 
The results of this consultation were published in a Feedback Statement in March 2008. A technical 
workshop was held with industry representatives in May 2008. This provided a forum for an exchange 
of  views  between  industry  experts  on  the  risks  to  investor  protection  and  the  adequacy  of  existing 
European  regulatory  provisions.  There  followed  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.  Records  of  this  consultation,  which respected  the  Commission's  minimum  standards 
on public consultation, are available on the European Commission website.1,2,3 

Table 1: Preparatory Steps 

Major steps / inputs 
ECOFIN request 
Launch of Call for Evidence 
Publication of Feedback Statement on Call for Evidence  March 2008 
Industry Workshop 
Open Hearing 
Presentation of IA report to the IAB 

Timing 
May 2007 
October 2007 

May 2008 
July 2008 
December 2008 

These formal events have been supplemented by a series of discussions with consumer representatives 
(FIN-USE, Financial Services Consumer Group), regulators (Financial Services Committee, European 
Securities  Committee,  European  Insurance  and  Occupational  Pensions  Committee)  and  industry 
representatives.  The  consultation  process  revealed  a  variety  of  stakeholder  views  on  the  issues 
discussed in this impact assessment. The opinions and evidence received have informed the analysis 
that follows. 

An Inter-service Impact Assessment Steering Group, chaired by DG Internal Market and Services, was 
established  in  October  2008,  involving  representatives  from  DG  Competition,  DG  Economic  and 
Financial Affairs, the Secretariat General, the Legal Service and DG Health and Consumer Protection. 
The Group met on 10 October, 27 October and 11 November 2008.  

On  20  November  2008,  a  draft  Impact  Assessment  was  submitted  to  the  Impact  Assessment  Board, 
which issued its opinion on 19 December 2008. The recommendations of the Board led to changes in 
the  draft  Impact  Assessment.  In  particular,  the  statement  of  objectives  and  the  link  between  this 
initiative and the response to the financial crisis has been clarified; the case for European-level action 
further  elaborated;  the  discussion  of  the  link  between  the  evidence  cited  and  weaknesses  in  EU  law 
was expanded (although quantification of aggregate investor detriment was not possible on the basis of 
the  available  data);  and  the  statement  of  policy  options  and  the  assessment  of  their  relative 
effectiveness  and  efficiency  was  clarified,  including  to  confirm  that  the  options  are  not  mutually 
exclusive. 

1 
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3 

See: http://ec.europa.eu/internal_market/finances/docs/cross-sector/feedback_statement_srips.pdf. 
See: http://ec.europa.eu/internal_market/finances/docs/cross-sector/minutes_workshop_en.pdf. 
See: http://ec.europa.eu/internal_market/finances/docs/cross-sector/hearing-record_en.pdf. 

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3. 

PROBLEM DEFINITION 

The following sections should be read in conjunction with the 'problem tree' in Annex 1. 

3.1. 

Market context and problem drivers 

Comparable packaged retail investment products are originated in different industry sectors… 

There  are  a  wide  variety of  packaged investment  products  available  to  retail  investors,  originated  in 
different  financial  sectors.  The  term  'retail  investor'  is  here  taken  to  mean  a  non-sophisticated,  non-
institutional investor. The primary focus is the individual or household - the population of the EU can 
therefore  be  considered  as  potential  investors  in  this  type  of  product  –  although  the  policy  issues 
discussed may also be relevant to SMEs and municipalities. 
The principal families of packaged retail investment product are described in the box below.4 

These  definitions  should  not  be  taken  to  be  exhaustive.  Further  work  will  be  necessary  to  better  refine  the 
definition of the products covered. 

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.  

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.  

The  precise  nature  of  the  investment  proposition,  the  legal  structure  and  the  tax  treatment  of  the 
products  differ,  both  between  product  families  and  across  Member  States.  However,  they  share  the 
same core functionality – namely providing retail investors with the prospect of capital accumulation 
over the medium to long term – and compete for the same retail savings. 

We distinguish 'packaged' products from investments in single equities or (unstructured) bonds. Some 
of the policy issues described in this paper also apply to these latter categories; however, the process 
of  packaging  investments  adds  an  additional  layer  of  complexity  and  cost  that  may  make  the  key 
characteristics of the investment less transparent to the end investor. 

As Chart 1 indicates, around €10 trillion were estimated to be invested through these product families 
by year end 2007, which is equivalent to around 80% of EU GDP. Precise data are not available for all 

4 

See  Annex  1  for  further  description  of  the  product  scope  of  this  work.  In  the  absence  of  a  widely-
accepted  legal  definition  of  'retail  investment  products',  the  product  scope  is  defined  in  terms  of  the 
common  characteristics  of  these  product  types.  Defining  the  precise  boundaries  of  these  product 
families  could  form  part  of  the  follow-up  to  the  Communication.  The  list  of  product  families  that 
exhibit these characteristics is not exhaustive; ultimately, any measures would need to take account of 
the possibility that new retail investment products will emerge over time. 

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the products and such this chart is intended to be indicative only; note that 2008 has seen significant 
net outflows in relation to most packaged retail investment products, in some cases these have been 
substantial.5  

Chart 1: Estimate of capital invested through packaged retail investment products (€ trillion)  

Investment Funds (Assets under Management)

Unit-linked life investments

Capital in retail structured securities

Deposits held by households

9

8

7

6

5

4

3

2

1

0

end 2002

end 2003

end 2004

end 2005

end 2006

end 2007

Source EFAMA, CEA, retailstructuredproducts.com and ECB 

… and are sold through similar distribution channels… 

Packaged retail investment products are distributed both by their originators, be they fund managers, 
banks  or  insurance  companies,  and  by  a  variety  of  intermediaries.  The  predominant  model  of  retail 
distribution varies significantly between Member States.6 However, a feature of many of these models, 
including  the  'bancassurance'  model  of  financial  distribution  prevalent  in  many  Member  States,  and 
the independent financial adviser model in the UK, is that different product types are available from 
the  same  distributors.  This  convergence  of  product  availability  across  a  variety  of  different  sales 
channels  allows  prospective  investors  or  indeed  intermediaries  to  consider  and  compare  products 
belonging to different product families when contemplating an investment. This opportunity to 'look 
across' multiple product families is likely to lead retail investors to actively compare product offerings. 
In addition, it is likely to foster the expectation that the level of investor protection embodied by each 
product type is equivalent. 

… yet are subject to different disclosure and distribution rules at European level. 

Retail  investment  markets  are  characterised  by  a  steep  asymmetry  of  information  and  expertise 
between  the  originators  and  distributors  of  investment  products,  on  the  one  hand,  and  the  retail 
investor, on the other. The latter typically exhibit a low level of financial sophistication and hence are 
ill-equipped  to  assess  the  relative  merits  of  the  investment  propositions  on  offer.  Pre-contractual 
product disclosures and in particular financial advice from intermediaries thus play an influential role 
in  the  decision-making  process.  The  distribution  of  packaged  retail  investment  products  is  also 
however  subject  to  potential  conflicts  of  interest  between  originators,  distributors  and  investors.  For 

5 

6 

Due  to  data  limitations,  figures  for  unit-linked  life  insurance  and  deposits  are  likely  to  overestimate 
capital  invested  in  the  specific  products  under  consideration.  There  are  also  instances  of  double-
counting. While these product types are designed and marketed primarily to retail investors, the figures 
include capital invested by institutional investors, which can be a significant proportion. See Annex 1 
for further discussion of the data. 
See Annex 1 for more information on the channels employed for the sale of retail investment products. 

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example,  payments  by  product  originators  to  distributors,  for  instance  in  the  form  of  commission 
payments, create a potential for a divergence of interest between sellers and buyers of packaged retail 
investment products. 

Regulation  has  sought  to  mitigate  these  market  failures  and  hence  to  limit  investor  detriment.  One 
regulatory approach is to target the product itself, by limiting the access of retail investors to certain 
product types or directly regulating the characteristics of the products (known as 'product regulation'). 
While  this  is  one  of  the  approaches  adopted  in  the  UCITS  Directive,  it  is  not  a  widely  employed 
regulatory  technique.  The  practical  challenges  associated  with  harmonising  product  features  for  all 
product  types  would  be  immense  and  the  net  market  outcomes  deleterious,  particularly  through  the 
impact  of  such  restrictions  on  product  competition,  diversity  and  innovation.  This  approach  is  not 
considered to be within the scope of this investigation. 

Regulation in this sector more commonly focuses on the sales process, that is, the interface between 
the investor and the originator and/or intermediary. To mitigate risks to investors, regulation focuses 
on  ensuring  that  investors  are  adequately  informed  about  the  characteristics  of  the  product  and  are 
treated fairly by product distributors. Two types of regulation are particularly relevant in this context: 

•  Rules on the form and content of pre-contractual product disclosures and marketing materials; and 

•  Rules  governing  the  conduct  of  business  of  product  distributors  and  the  avoidance,  management 
and disclosure of conflicts of interest in the sales or advice process. Collectively, these provisions 
can be referred to as selling rules.7  

The focus in this impact assessment is on regulation in these two key areas.  

For  most  product  types,  a  substantial  body  of  law  already  exists  at  European  and  national  level  to 
ensure that investors are informed of the characteristics of their investments and are treated fairly and 
professionally by distributors. 

However, Community law in this area has been developed on a largely sectoral basis. As a result, the 
rules governing disclosure and selling practices vary according to the sector in which the product is 
originated and in which the intermediary operates. There are overlaps - for example, the application of 
MiFID to the sale of both funds and structured securities - but by and large the products and their sales 
are subject to distinct regulatory provisions. There is no single, coherent approach at European level to 
disclosure and selling rules for packaged retail investment products. The following table illustrates this 
'regulatory patchwork'. 

Table  2:  Disclosure  rules  and  intermediary  regulation  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 

7 

In the event that these controls fail and investor detriment results, national authorities may have acted to 
mitigate  the  impact  on  retail  investors  through  guarantee  or  redress  schemes  of  various  types.  For 
example,  financial  ombudsmen  provide  a  means  of  redress  for  investors  mistreated  by  financial 
intermediaries.  Guarantee  schemes  exist  in  the  insurance,  banking  and  investment  sectors  to  provide 
cover  in  the  event  of  the  insolvency  of  a  product  provider.  In  the  insurance  sector  the  situation  is 
this  subject:  see 
diverse,  and 
http://ec.europa.eu/internal_market/insurance/guarantee_en.htm. The focus of this work, however, is on 
the ex ante controls in place rather than ex post guarantee and redress mechanisms. 

is  currently  conducting  a  consultation  on 

the  Commission 

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

Simplified 
Prospectus of 
UCITS Directive  

MiFID9 

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

MiFID  

CLD 

Prospectus 
Directive8 

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

No rules at EU 
level 

Insurance 
Mediation 
Directive10 for 
some product 
disclosure 
requirements 

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 

Insurance 
Mediation 
Directive 

MiFID 

No rules at EU 
level 

E-commerce Directive or Distance Marketing of Financial Services Directive 

A brief description of the relevant provisions of these instruments is provided in Annex 1. 

3.2. 

Problem description  

The preceding discussion has identified three key features of the market for packaged retail investment 
products: 

•  Retail investment products are originated in different industry sectors but often targeted to satisfy 

similar retail investment needs; 

•  A  wide  range  of  different  products  are  made  available  to  retail  investors  through  similar 

distribution channels; and 

•  European rules on disclosure and selling differ according to the legal status of the product and the 
channel through which it is distributed; for some products and sectors, there are no applicable rules. 

The regulatory patchwork results in considerable regulatory complexity. Different types of product are 
subject to different disclosure obligations at European level. Similarly, different types of intermediary 
are subject to different obligations with respect to the conduct of their business and the management of 
conflicts  of  interest.  When  the  same  intermediary  offers  products  from  different  industry  sectors, 
different  rules  will  apply.  For  certain  products  and  intermediaries,  there  are  no  applicable  rules  at 
European level. 

Variation in the form and content of rules is not a problem per se. Differences in sectoral approaches 
may be justified by the distinct characteristics of the products and intermediaries in those sectors, with 
regard  for  example  to  risks  taken  by  the  originating  and  distributing  institutions;  the  risks  faced  by 
consumers  purchasing  the  products;  or  the  manner  in  which  products  are  sold.  However,  the 
emergence  of  comparable  products  governed  by  significantly  different  regimes  and  the  growing 

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Directive  2003/71/EC  of  the  European  Parliament  and  of  the  Council  of  4  November  2003  on  the 
prospectus  to  be  published  when  securities  are  offered  to  the  public  or  admitted  to  trading  and 
amending Directive 2001/34/EC. 
Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in 
financial  instruments  amending  Council  Directives  85/611/EEC  and  93/6/EEC  and  Directive 
2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC. 
Directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance 
mediation. 

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convergence of product availability within distribution channels serve to weaken these distinctions and 
hence the logic of a differentiated approach. 

In particular, the 'regulatory patchwork' at European level poses two key regulatory concerns: 

•  The  first  is  that  it  creates  or  amplifies  risks  of  investor  detriment  in  the  sectors  concerned.  For 
example,  deficient  or  absent  rules  on  pre-contractual  product  disclosure  may  result  in  a  lack  of 
transparency on the costs, risks or expected performance of a particular product. As a consequence, 
investors  would  be  unable  to  compare  competing  products  or  understand  the  products  they  are 
considering  buying.  Similarly,  missing  or  ineffective  rules  on  selling  disciplines  or  conflict  of 
interest management would amplify risks of mis-selling. 

•  The second, related, concern is that differences in the level of investor protection between sectors 
create an unlevel playing field with respect to disclosure and selling rules for product originators 
and  distributors.  This  may  distort  the  market  in  favour  of  products  subject  to  weaker  regulation, 
thereby exacerbating the risks of investor detriment described above. 

These concerns are significant enough to have provoked responses from national regulators in several 
Member  States.  However,  uncoordinated  action  of  this  type  presents  a  third  barrier  to  the  efficient 
operation of the retail investment market. 

•  Divergent  national  regulatory  approaches,  triggered  by  deficiencies  in  European  rules,  may 
increase the cost of selling investment products in multiple national markets, or on a cross-border 
basis. While differences in disclosure and selling rules are unlikely to be the most important barrier 
to cross-border trade, they may nevertheless act as a brake on the development of a single market in 
these products. 

3.2.1.  Risks of investor detriment 

Packaged  retail  investment  products  normally  expose  the  investor  to  a  degree  of  investment  risk. 
Depending on  market  movements, an investment  may deliver a positive or negative return, with the 
range of possible outcomes determined partly by the features of the product (for example, downside 
risk  may  be  eliminated  by  the  existence  of  a  robust  capital  guarantee,  at  the  expense  of  reduced 
potential for gains). By contrast, the risk of investor detriment refers to the risk of product mis-selling 
and/or ill-informed investment decisions resulting from investors being either inadequately informed 
of the key characteristics of the product they are offered, or being otherwise mistreated by originators 
or distributors in the sales process. 

If  risks  of  investor  detriment  crystallise,  the  impact  could  take  the  form  of  financial  losses  for 
investors,  or  where  there  is  no  absolute  loss,  the  opportunity  cost  of  selecting  an  investment  with  a 
different risk-reward profile to that which was intended or expected. Opportunity cost can be difficult 
to  pin  down;  often  it  can  only  become  clear  over  the  longer  duration  that  a  product  has  failed  to 
perform  in  the  manner  expected.  Detriment  can  also  be  crystallised  indirectly  –  for  instance,  a  poor 
understanding of the performance structure of an investment may lead to an investor significantly mis-
timing their entry and exit into the market , for example because they did not expect the investment to 
exhibit short term volatility. 

A systematic pattern of product mis-selling or inadequate disclosure of product features may result in 
retail  investors  losing  confidence  in  the  products  and  in  the  institutions  originating  and  distributing 
them.  Impaired  reputations  can  result  in  a  loss  of  business  and  a  reduction  in  revenues  and  profits. 
This  impact  may  be  felt  unevenly  across  the  market,  i.e.  the  originators  and  distributors  of  certain 
products may gain while those selling products in which investor confidence has been lost will suffer. 

However,  there  is  also  a  risk  of  contagion.  It  is  plausible  that  a  loss  of  faith  in  particular  products 
could  have  knock-on  effects  on  the  whole  investment  market.  In  the  current  environment,  adverse 
market conditions have triggered a flow of retail savings away from investment products and towards 
basic savings accounts or cash balances. Such effects could be accentuated if investor confidence were 
impaired not only by market developments but by losses that might not have been reliably foreseen on 

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the  basis  of  information  disclosed  or  advice  given.  Investor  detriment  in  one  sector  may  not  simply 
lead to a redistribution of savings between sectors, but rather a reduction in the propensity to make use 
of  any  type  of  packaged  retail  investment  product.  To  the  extent  this  implies  that  productive 
investment opportunities are foregone, such a development may impact negatively on the efficiency of 
resource allocation and may compromise the ability of individuals to make financial provision for later 
life. This is a potentially significant issue at time when public pension systems are under strain. 

The Call for Evidence and subsequent discussions with stakeholders, including national regulators, has 
produced a significant body of evidence and expert opinion to use as an initial basis for assessing these 
issues. Despite this, the risks of investor detriment – and their associated impacts – remain intrinsically 
difficult to quantity, particularly when ineffective disclosures or inadequate selling practices result in 
poor investment decisions of which the opportunity cost is high, but measurable financial losses are 
not incurred. Such incidents are best observed by those closest to the respective markets. In assessing 
these  risks,  we  must  therefore  rely  to  a  large  extent  on  the  expert  opinion  of  consumers,  national 
regulators and market practitioners. 

The  evidence  that  follows  is  sub-divided  into  two  sections:  examples  and  perceptions  of  risks 
crystallising  as  a  result  of  ineffective  pre-contractual  product  disclosures  and  misleading  marketing 
material; and risks associated with inadequate regulation of selling processes. The examples included 
have  been  selected  solely  to  illustrate  the  risks  most  frequently  identified;  they  are  by  no  means 
exhaustive or intended to provide a comprehensive overview of the evidence. 

3.2.1.1.  Inadequate pre-contractual product disclosures and marketing rules 

The evidence points to four types of problem with existing pre-contractual disclosures.  

•  The first is that the content of disclosures may provide a misleading or partial account of a products 
features, such as its costs; the range of possible returns; associated risks; limits to capital guarantees 
provided;  or  any  restrictions  that  apply  (notably  on  when  an  investor  may  be  able  to  take  their 
money out). The investor would not then be in a position to take an informed decision. A lack of 
balanced  or  transparent  information  may  result  in  investors  giving  undue  weight  to  the  elements 
that  are  disclosed  more  prominently,  such  as  tax  benefits,  capital  protection  or  estimates  of  the 
maximum possible return. 

•  Secondly, inconsistent disclosure practices may also prevent the effective comparison of alternative 
investment  propositions  by  retail  investors,  particularly  relevant  as  charging  models  can  be  very 
different. 

•  Thirdly, even if the relevant 'key' information is provided, it may not be presented in such a way 
that  it  can  actually  be  used  by  non-sophisticated,  retail  investors  to  understand  the  product  or 
compare it with others. 

•  Fourthly,  and  relatedly,  there  is  an  abundance  of  research  to  suggest  that  retail  consumers  suffer 
from 'information overload'. If disclosures are excessively long and drafted using technical jargon 
instead  of  using  simple,  understandable  language,  retail  investors  may  be  deterred  from  using 
them.11 

An  additional,  related,  problem  is  that  of  misleading  marketing  materials.  Unfair,  unbalanced  or 
otherwise  misleading  marketing  material  may  induce  an  investor  to  select  a  product  that  is  a  poor 
match  for  his/her  investment  profile.  Misleading  advertising  may  also  result  in  the  investor  paying 
insufficient attention to the content of more detailed product disclosures. 

These  problems  are  common  to  disclosures  in  all  markets  and  have  important  implications  for  rule-
making  at  national  and  European  level  (there  have  been  some  steps  at  both  national  and  European 
level  to  tackle  them).  The  focus  here  is  on  the  extent  to  which  current  disclosure  obligations  in 

11 

For example, see National Consumer Council, Warning: Too Much Information Can Harm. 

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Community law might be failing to adequately mitigate these problems or contribute to them. Here we 
present some illustrative examples of the evidence of such failures, on a product-by-product basis.12 

Unit-linked life insurance policies 

Many responses to the Call for Evidence on unit-linked life insurance policies highlighted deficiencies 
with  regard  to  the  disclosure  of  likely  performance  and  of  the  costs  associated  with  this  type  of 
investment. 

The response from the insurance supervisors in CEIOPS highlighted the disclosure of 'chain costs' as a particular 
problem (the use of insurance 'wrappers' entails the addition of costs both at the level of the insurance company 
and the originator of the underlying investment). 

More  broadly,  the  Dutch  AFM  and  other  regulators  have  reported  that  differences  in  regulation  between  life 
insurance  products  and  mutual  funds  have  caused  significant  problems.  They  argue  that  transparency  of  costs 
and inducements is not achieved in the insurance sector solely on the basis of EU requirements, so to the extent 
that the EU requirements set the standard of disclosures, prospective investors are unable to weigh these factors 
up against other features that might be highlighted, such as the tax advantages of the product. This is considered 
to  have  resulted  in  the  sale  of  insurance  products  even  where  mutual  fund  investments  offering  similar  asset 
exposures with lower charges might have offered better risk-adjusted performance. 

A  recent  example  of  such  a  potential  distortion  in  sales  is  the  alleged  misselling  of  equity-linked  insurance 
products  in  the  Netherlands,  which  resulted  in  a  class  action  lawsuit.  The  complaint  was  that  there  was 
insufficient  disclosure  of  the  costs  associated  with  those  policies,  leading  to  investment  returns  that  were 
significantly  lower  than  investors  had  been  led  to  expect  and  penalties  on  early  withdrawal  that  were  not 
expected.  Following  intervention  by  the  Dutch  Insurance  Ombudsman  and  its  replacement,  the  Financial 
Services Ombudsman, out of court settlements were reached with certain distributors of such products.13 

There are other examples. For instance, a Belgian consumer association has warned that rules for advertising on 
unit-linked life insurance in Belgium do not specify how information on past returns should be presented so as to 
avoid misleading prospective investors.14 The association encountered an insurance company advertising a unit-
linked life contract by referring to the return achieved in 2006, without mentioning the return earned in 2007, 
which was considerably weaker. The same association is currently suing an insurance company for misleading 
advertising. In particular, the company is considered to have given undue prominence in its marketing material 
to the return on only one of the funds underlying the insurance policy (the best performing fund), rather than the 
basket of funds in which client's assets were invested. 

The management and / or disclosure of potential conflicts of interest is addressed in Section 3.2.1.2. 

Investment funds 

Consultation on possible amendments to the UCITS Directive revealed that most respondents felt that 
the Simplified Prospectus (a shorter summary document required for all UCITS since 2005) had failed 
to provide key information in a form that was easily understood by the average retail investor. This 
finding triggered the ongoing work on developing Key Investor Information. Respondents to the Call 
for Evidence reported similar problems for non-harmonised funds and closed-ended funds. 

In France, the Final Court of Appeal recently sanctioned a commercial bank over failure of compliance with the 
combination of rules on product disclosure and marketing communications. The Court found that the firm did 

12 

13 

14 

Evidence drawn from responses to the Call for Evidence and the records of the Industry Workshop and 
Open Hearing is not individually referenced. 
See http://www.kifid.nl/uploads/2008-03-04-
Recommendation_of_the_Financial_Services_Ombudsman.pdf 
See http://www.test-achats.be/map/src/522123.htm. 

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14 

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not mention in its advertisement the downside risk that a formula (structured) fund presented.15 Problems with 
formula funds were also noted elsewhere in the French market.  

In Belgium, a consumer association recently criticised an advertising campaign for a structured fund distributed 
by a Belgian commercial bank.16 It is claimed that adverts placed undue emphasis on a guaranteed rate of return, 
without a clear indication that this return would only be achieved on half of the capital invested. 

The Dutch AFM have reported that the mandatory information provided in the prospectus for closed-ended real 
estate  funds  is  not well-tailored  to  this  type  of  investment,  which  is growing  in popularity  in  the  Netherlands. 
The result is that investors cannot understand the expected return, the costs and most importantly the level and 
nature of the risks involved in these investments. 

In  Germany,  a  number  of  legal  proceedings  have  highlighted  problems  of  mis-selling,  unfair  marketing,  and 
misleading or inaccurate product information with respect to closed-ended funds. 

In the United Kingdom, the FSA have recently published an assessment of the standards of disclosure documents 
across  the  whole  range  of  retail  investment  products,  which  found  many  to  be  inadequate  and  unlikely  to  be 
understandable for their target audience.17 

Retail structured securities 

Many  stakeholders  have  argued  that  structured  product  disclosures  do  not  adequately  describe  the 
costs associated with the product or the likely range of performance outcomes. Prospectuses produced 
in accordance with the Prospectus Directive – including the summary prospectus - were not considered 
to  be  effective  disclosures  for  structured  securities,  since  they  focus  on  the  issuer  rather  than  the 
product and are both lengthy and technical. 

The European Securities Markets Expert Group, in their review of the functioning of the Prospectus Directive, 
found  that  '"[...]  from  the  point  of  view  of  the  investors,  the  Prospectus  Directive  has  failed  to  produce  an 
effective means of communication. For example, the average length of prospectuses has increased dramatically 
due to the requirement for additional information. The length and complexity of prospectuses make them more a 
sort of 'liability shield' for the persons involved in the preparation (issuers, intermediaries, auditors, law firms 
and competent authorities), effective ex post in minimizing the risk of potential litigation, rather than a document 
to  be  used  ex  ante  by  an  investor  when  making  investment  decisions."  They  added  that  "many  investors  have 
difficulties  in  understanding  the  technical  language  and  the  complex  structure  of  information  as  well  as 
analyzing the importance of various types of information. As a consequence, most retail investors rely only on 
the marketing material prepared in connection with a public offering. The summary is often a simple “cut and 
paste”  exercise  of  various  parts  of  the  prospectus  without  any  attempt  to  simplify  the  language  of  such  parts 
(often very technical) as required by the Prospectus Directive."18 

Obligations  in  the  Prospectus  Directive  are  supplemented  by  additional  disclosure  requirements  on 
intermediaries in MiFID, which relate primarily to the services provided by the intermediary but also 
to  the  financial  instruments  they  may  be  selling.  However,  many  stakeholders  argued  that  these 
provisions are subject to inconsistent implementation in Member States and do not go far enough in 
ensuring that the relevant items are clearly disclosed. 

In a cross-country survey, Deloitte found that 'material differences exist between investment funds and structured 
notes  in  the  nature  and  level  of  detail  of  information  disclosed  to  the  investors  …  this  is  clearly  the  case  for 
characteristics, risks and costs. These differences make it difficult or even impossible for investors to compare in 
detail all characteristics of the products. The differences also result in a different quality of information given to 
investors.' 

15 
16 
17 
18 

See Arrêt n° 740 du 24 juin 2008 06-21.798 Cour de cassation - Chambre commerciale. 
See http://www.test-achats.be/map/src/522123.htm. 
See http://www.fsa.gov.uk/pubs/other/key_features.pdf. 
See http://ec.europa.eu/internal_market/securities/docs/esme/05092007_report_en.pdf. 

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The  Dutch  AFM  published  an  analysis  of  developments  on  the  market  for  structured  products  in  May  2007, 
arguing that many are difficult for retail investors to understand. These developments constituted grounds for an 
'exploratory analysis of structured products',19 which concluded that …' the information provided to investors is 
not as it should be. Prospectuses do not focus sufficiently on the information that consumers need to make well-
considered  investment  decisions.  In  addition,  the  legal  entity  chosen  for  the  products  means  that  financial 
information leaflets are not obligatory … The AFM feels investors may select an unsuitable product, which will 
jeopardise the proper operation of the market and, if investors are disappointed in their choices, the confidence 
in the market'. 

In another example of the issues being raised, the Czech National Bank has expressed concerns in relation to an 
index-linked bond, the yield of which is based on a specific underlying asset (for example the performance of an 
index or an exchange rate). The product was sold as a 'guaranteed bond', while it in fact presented a significantly 
higher risk than standard guaranteed bonds. 

In  the  United  Kingdom,  the  FSA  has  fined  or  some  cases  banned  a  number  of  product  manufacturers  and 
intermediaries  in  relation  to  sales  and  marketing  of  certain  kinds of  complex  'high  income  products',  typically 
known as precipice bonds.20 The FSA had previously issued a series of warnings in relation to the products, such 
as an alert in December 1999 which urged consumers to consider carefully the level of risk they were willing to 
accept  before  investing  in  so-called  high  income  products;  the  FSA  reiterated  in  later  communications  that 
consumers should be cautious when investing in bonds that promise income but carry a high risk that investors 
may  not  receive  back  all,  or  any,  of  their  original  investment,  and  required  regulated  firms  to  improve  the 
information they provided to consumers..21  

Structured term deposits 

Many  responses  to  the  Call  for  Evidence  noted  that  there  were  no  European  rules  that  applied  to 
structured term deposits as a class of product. (In this area, no specific targeted examples of investor 
detriment  were  provided.)  The  Joint  Forum  reiterated  the  point,  and  noted  that  there  are  retail 
investment products (such as structured term deposits) that are not subject to disclosure regulation at 
EU  level.  Noting  that  similar  lacunae  existed  in  other  jurisdictions,  they  suggested  that  'this  is  [an 
issue] that governments should consider'.22 

There is evidence that some of same issues as are raised for other classes of PRIP apply. For instance, in Poland 
in  the  first  half  of  2008,  the  Polish  Financial  Supervision  Authority  (PFSA)  ordered  some  banks  to  withdraw 
advertisements  of  structured  term  deposits  due  to  the  violation  of  professional  standards  and  ethical  codes  in 
operation.  The  PFSA  was  concerned  that  these  placed  excessive  emphasis  on  a  product’s  benefits  for  the 
customer and deliberately omitted other important product characteristics, e.g. penalties for early withdrawal of 
funds. 

Summary 

The examples presented in this section do not in themselves constitute systematic evidence of market 
or regulatory failure with respect to product disclosure. Particular instances of investor detriment do 
not  necessarily  indicate  a  failure  in  the  European  regulatory  framework;  they  may  instead  relate  to 

19 
20 

21 

22 

http://www.afm.nl/corporate/default.ashx?DocumentId=9246. 
These  so-called  "precipice  bonds"  were  linked  to  derivatives  such  as  the  performance  of  an  index  or 
indices or baskets of stocks. They were often structured as offshore investment companies or offshore 
insurance  companies  and  so  are  not  regulated  by  the  FSA.  They  were  structured  to  deliver  a  high 
income without protection against loss of the initial capital invested; return of the original capital was 
linked to the performance of an index/indices or a basket of stocks. The risk of capital loss (particularly 
high given the income being taken) was often not clearly explained.  
See for example FSA/PN/122/2002 of 15/12/2002 'Precipice bond' investors may not get their money 
back, FSA warns". See also http://www.fsa.gov.uk/pubs/guidance/guidance7.pdf.  
Joint Forum, Customer Suitability in the retail sale of financial products and services, April 2008. 

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failures  in  the  transposition  or  enforcement  of  those  rules  in  the  Member  States.  However,  it  is 
apparent  that  the  examples  cited  cluster  around  areas  where  expert  opinion,  including  from  the 
regulatory  and  investor  communities,  indicates  that  the  disclosure  provisions  of  Community  law  are 
comparatively weak, or indeed absent, exposing less sophisticated investors in particular to potential 
detriment. This suggests that there is scope for considerable improvement in this area, across the full 
spectrum of packaged retail investment products. 

The recent experience of the financial crisis has further corroborated these conclusions. Investors have 
suffered from adverse conditions and have found, in some cases that products have not performed as 
might  reasonably have  been  expected.  A  particular  issue  affecting  a  number  of  sectors  has  been  the 
performance  of  products  sold  with  capital  guarantees.  The  default  of  counterparties  providing  such 
guarantees has exposed retail investors to the crystallisation of counterparty risks of which they were 
not fully aware. As the lessons are drawn from the crisis, the descriptions of the nature and conditions 
attached to guarantees are coming under increased scrutiny. 

3.2.1.2.  Inadequate care or professionalism in the selling process 

Risks of investor detriment may also arise from inadequacies in the regulation of the selling practices 
of product distributors. These inadequacies relate to two areas: 

•  Insufficient objectivity and professionalism in sales or advice results in the mis-selling of products 
that  are  a  poor  match  for  the  risk  profile  (or  other  characteristics  or  needs)  of  the  prospective 
investor. 

•  The financial incentives provided to distributors by the originators of particular products or other 
distributors  or  'packagers'  of  products  for  the  sale  of  their  products  may  result  in  a  conflict  of 
interest between the distributor and the prospective investor. In particular, differences in payment 
levels may lead a distributor to sell those products that generate the highest payments, rather than 
those best suited to the needs of the end investor. 

Feedback received in relation to gaps or inconsistencies in the regulation of intermediaries at European 
level consisted primarily of anecdotal evidence and comparison of legal provisions. It was frequently 
highlighted that given the short period of time that MiFID and IMD rules have been in force, it would 
be premature at this stage to draw firm conclusions about their impact and the residual risks to retail 
investors. 

However,  it  was  widely  accepted  that  there  are  marked  differences  in  conduct  of  business  rules 
between  sectors.23  For  example,  MiFID  contains  a  set  of  differentiated  selling  rules,  where  the 
requirements depend on the type of service being offered and the type of client being served. For retail 
investors, when providing investment advice or portfolio management services, MiFID intermediaries 
must perform a test of the suitability of any proposed investment. When providing other services, an 
'appropriateness'  test  may  be  required.  By  contrast,  in  the  insurance  sector,  the  IMD  requires  that 
insurance intermediaries provide advice on the basis of a fair analysis of a suitable range of contracts 
available on the market and to advise products that are 'adequate' for the needs of the consumer. There 
are no rules in place at European level for the distribution of structured deposit products. 

The Joint Forum also noted once again that there are retail investment products (such as structured term deposits) 
that are not subject to conduct of business regulation at EU level. Noting that similar lacunae existed in other 
jurisdictions, they suggested that 'this is [an issue] that governments should consider'. 

It  was  also  noted  that  there  are  gaps  in  the  application  of  distribution  rules  when  products  are  sold 
directly  by  originators  –  for  example,  fund  managers  or  insurance  companies  -  rather  than  by  an 
intermediary. No evidence was provided to link these gaps with instances of investor detriment but it 
is unclear why rigorous selling disciplines should not apply to the direct - as well as intermediated - 

23 

See Annex 1 for an outline of the relevant provisions of Community law. 

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distribution of packaged retail investment products (though of course the service provided may differ 
in other respects). 

With regard to conflicts of interest, MiFID has introduced a sophisticated regime for the avoidance, 
management and disclosure of conflicts of interest and detailed provisions concerning the payment of 
inducements to intermediaries; both regimes apply to the sale of funds and structured securities. The 
IMD,  by  contrast,  does  not  contain  comparable  conflict  of  interest  or  remuneration  disclosure  rules, 
although it does require intermediaries to tell the customer whether they are giving advice based upon 
a  fair  analysis  (for  instance,  by  comparing  the  features  of  a  sufficiently  large  range  of  insurance 
contracts) or whether they have contractual obligations with one or more insurers. 

The regulation of conflicts of interest in the insurance sector drew criticism in the Call for Evidence. 

CEIOPS' Members, through their combined response to the Call for Evidence, concluded that 'there is a gap in 
terms of the coverage of conflict of interest rules that should be addressed in the course of the revision of the 
IMD'. 

The Dutch AFM argued that the duty of care obligations in force in the insurance sector were not as robust as 
those found in other sectors. 

The  Joint  Forum  found  that  disclosures of conflicts  of  interest  (for  example,  ownership  structures of  the  sales 
agent, or remuneration to be received) are generally less rigorous for sales of insurance than for other products. 24 

Consultation  revealed  a  divergence  of  view  on  whether  these  differences  were  of  concern  from  an 
investor protection or competitive standpoint. We do not as yet have strong evidence of the extent to 
which such inconsistencies and gaps might have resulted in specific investor detriment or competitive 
distortions. As mentioned above, practical experience with this legislation remains limited and as such 
it  would  be  premature  to  draw  firm  conclusions  at  this  stage  on  whether  these  provisions  have 
successfully mitigated the risks associated with lax selling practices or conflicts of interest. 

There is nonetheless prima facie cause for concern over the regulatory patchwork in this area. Retail 
investment  business  is  typically  intermediated  rather  than  direct,  and  many  investors  rely  on  third 
parties when making investment decisions. Consequently, a failure to conduct business professionally 
or  to  effectively  manage  conflicts  of  interest  could  be  a  particularly  significant  cause  of  investor 
detriment. Inconsistencies in intermediary requirements between types of products might also distort 
competition, leading to further detriment by means of regulatory arbitrage effects. 

3.2.2.  Competitive  distortions  resulting  from  an  'unlevel  playing  field'  between  product 

types and distribution channels 

A  second  consequence  of  variations  in  disclosure  and  distribution  rules  at  European  level  between 
sectors is that certain originators/distributors may be placed at a competitive disadvantage with respect 
to market participants originating or distributing other product types. 

This 'unlevel playing field' may manifest itself in two ways.  

•  First, as a consequence of regulatory differences alone, originators/distributors in a particular sector 
may  face  higher  compliance  costs  (for  example  due  to  the  need  to  produce  additional  disclosure 
documents or to develop internal systems for the management and reporting of conflicts of interest) 
or otherwise more burdensome requirements than those in other sectors. This may affect both the 
cost of the product offered to the consumer  and the ease with which the sector can innovate and 
bring new products to market.  

•  Second,  as  described  in  the  previous  section,  differences  in  regulation  may  distort  consumer 
decision-making.  For  example,  weak  disclosure  standards  may  result  in  inadequate  disclosure  of 

24 

Joint Forum (2008), p.2 

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costs or risks, with the result that a product appears more attractive than a competing product for 
which these factors are more transparent. 

These  factors  may  in  turn  create  incentives  for  originators/distributors  to  package  products  in 
particular ways so as to avoid more burdensome regulation. A process of 'regulatory arbitrage' would 
thus be set in motion, working in favour of those products subject to less stringent regulation. If this 
were the case, the risks of investor detriment outlined in the previous section would be amplified. 

To what extent can we demonstrate that the purported unlevel playing field with respect to disclosure 
and  distribution  rules  at  European  level  has  given  rise  to  competitive  distortions?  At  the  aggregate 
level, there is limited evidence of shifts of savings between product families on a pan-European scale. 
Data  on  net  sales  indicate  that  the  proportion  of  net  sales  accounted  for  by  investment  funds  has 
remained roughly constant since 2002. However, there are tentative signs that that the structure of the 
market  is  changing.  Fund sales  remained  roughly constant  between  2005  and 2006,  whereas  growth 
was strong for both retail structured securities and unit-linked life insurance policies. This trend was 
most apparent in the German, Italian and Spanish markets. 

Chart 2: Net sales of packaged retail investment products (€ billion) 

EU 

Germany 

Investment funds Unit-linked life ins. Structured securities

Investment funds

Unit-linked life ins.

Structured securities

100

0

2002

2003

2004

2005

2006

2002

2003

2004

2005

2006

Italy 

Spain 

Investment funds

Unit-linked life ins.

Investment funds

Unit-linked life ins.

Structured securities

2002

2003

2004

2005

2006

Structured securities

100

0

2002

2003

2004

2005

2006

500

400

300

200

100

0

100

0

- 100

Sources: EFAMA - EVCA – AIMA, Eurohedge, CEA and www.structuredretailproducts.com. 

Sales  data  are  volatile  and  do  not  span  a  sufficiently  long  time  period  for  us  to  be  confident  that 
wholesale changes in market structure are taking place. Moreover, even if we could demonstrate that 
such  changes  were  occurring,  we  could  not  confidently  attribute  these  trends  to  differences  in 
disclosure  regimes  and  the  regulation  of  intermediaries.  Sales  patterns  are  affected  by  a  variety  of 
factors on the demand and supply side. Commercial decisions by product providers and evolution in 
consumer  preferences  are  likely  to  be  influential.  For  example,  capital  protected  products  –  such  as 
structured securities – are seen to gain in popularity during uncertain economic times. 

Producers  cannot  move  seamlessly  from  one  sector  to  another.  The  process  is  not  frictionless. 
Relevant  regulatory  authorisations  are  required,  for  example,  to  issue  securities  or  to  sell  insurance 
contracts.  The  infrastructure,  skills  and  expertise  for  supporting  active  fund  management  may  also 

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vary  greatly  from  that  required  to  originate  structured  securities.  Therefore,  even  if  differing  selling 
rules created an incentive for arbitrage, the response from the supply side may be limited. 

It is also important to recognise that disclosure and distribution rules are only one component of the 
'playing field' on which originators and distributors compete. Tax is another highly relevant factor. For 
reasons of public policy, it has been common for Member States to apply favourable tax treatment to 
particular product types. There is evidence that this exerts a powerful influence on savings flows. For 
example, the popularity of insurance-based products in France, even for the distribution of UCITS, can 
largely be attributed to the favourable tax treatment that these products enjoy. Similar arguments can 
be  made  in most  Member  States.  Responsibility  for  taxation policy  resides  with  Member  States  and 
hence options for levelling this element of the 'playing field' are not discussed further here. 

While it is difficult to draw firm conclusions about the importance of regulatory arbitrage, it remains 
clear that all of the product types described are used extensively by retail investors, which is in itself a 
case for ensuring that risks of investor detriment are effectively mitigated. Regulatory arbitrage, or the 
active migration of savings from one product to another, would amplify these risks, but the existence 
of widespread arbitrage is not a precondition for these risks to emerge. 

3.2.3.  Divergent national responses: impact on single market 

The  problems  flowing  from  the  European  regulatory  patchwork  for  packaged  retail  investment 
products  described  in  the  previous  section  have  been  widely  acknowledged  by  Member  States. 
Perhaps the clearest indication that national regulators consider differences in rules between sectors to 
be of real, rather than purely theoretical, significance is that many have supplemented European rules 
with additional requirements at national level. This has been done both to enhance the level of investor 
protection and to 'level the playing field' between alternative investment propositions. 

This  is  reflected  in  the  conclusions  of  a  comprehensive  survey  of  national  regulatory  views  on  the  issue 
conducted by the three 'Level 3 Committees' (3L3) in May 2007.25 The conclusions of this work confirmed that 
'differences between distribution [and disclosure] rules applicable to the different substitute products are widely 
acknowledged.  The  most  frequently  mentioned  differences  are  related  to  authorisation  and  market  access, 
approval  of  marketing  and  advertising  material,  and  scope  and  form  of  the  information  to  be  supplied  …The 
reasons for these differences can be found in the Directives themselves, which did not follow the trend toward 
increasing  similarity  between  the  financial  characteristics  of  substitute  products'.  In  response  to  this,  the  3L3 
found  that  '…  the  competent  authorities  representing  almost  half  of  the  Member  States  did  not  consider  these 
differences as a regulatory concern, because a large number of them supplemented the Directives with national 
rules aiming at bringing distribution rules closer.' 

The approaches taken at national level differ significantly between Member States. In some Member 
States,  the  provisions  of  MiFID  have  been  applied  to  business  that  does  not  fall  within  scope  at 
European level. Several Member States have also mandated additional disclosure documents, often in 
the form of a simplified information sheet; and some have applied a harmonised conduct of business 
regime  to  all  distributors  of  packaged  retail  investment  products.  Detailed  examples  of  national 
approaches can be found in Annex 1.26 

While  national  approaches  may  to  some  extent  constitute  an  effective  response  to  gaps  and 
weaknesses  in  Community  law  at  national  level,  their  effect  has  been  to  increase  the  divergence  in 

25 

26 

The  '3  Level  3  Committees'  are  the  Committee  of  European  Banking  Supervisors  (CEBS),  the 
Committee of European Securities Supervisors (CESR) and the Committee of European Insurance and 
Occupational Pension Supervisors (CEIOPS). 
In  other  cases,  the  concerns  of  national  regulators  have  been  translated  into  explicit  demands  for  the 
industries  concerned  to  deliver  the  necessary  improvements  through  self-regulatory  measures.  This  is 
the case in Germany, where self-regulation is already in place for retail structured securities in the form 
of a code of conduct. Issuers have voluntarily committed themselves to transparency and disclosure in 
various respects, notably with regard to product information. Codes have also been instituted in other 
sectors and Member States; and in some cases on a pan-European basis. 

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national rules even in areas in which European legislation applies. This is not necessarily problematic, 
in that the applicable European directives explicitly provide the flexibility for national authorities to 
fill gaps and to tailor European rules to the reality of domestic markets. However, divergent national 
approaches  to  disclosure  rules  and  the  regulation  of  intermediaries  would  increase  costs  for  market 
operators  distributing  products  in  multiple  Member  States  and  are  a  potential  source  of  legal 
uncertainty for originators/distributors and investors operating in multiple markets. 

To what extent are these barriers likely to be material? At present, the aggregate level of cross-border 
business in packaged retail investment products varies considerably between product types. At one end 
of  the  spectrum,  around  20%  of  UCITS  funds  are  sold  on  a  cross-border  basis  using  the  product 
passport  provided  by  the  UCITS  Directive.  Indeed,  growth  in  cross-border  net  sales  has  outpaced 
domestic sales in recent years.27 Cross-border trade in life insurance products and structured securities 
is much less developed. Data for unit-linked life insurance policies specifically are not available but 
for  life  insurance  more  broadly,  only  Luxembourg,  Irish  and  British  insurers  receive  a  significant 
proportion of life premia from abroad (91%, 36% and 10% of total premia respectively in 2005). Data 
are not available on the cross-border sales of retail structured securities; anecdotal evidence suggests 
that cross-border sales are negligible in the EU. 

These  patterns  are  consistent  with  trends  observed  in  markets  for  retail  financial  services  more 
broadly. Commission surveys suggest that only 1% of EU consumers currently buy financial services 
cross-border at a distance.28 Despite the growth of distribution channels that facilitate the cross-border 
sale of retail financial service provision (notably, the internet), consumers still prefer to buy products 
distributed through local branches, subsidiaries and intermediaries. To the extent that it occurs, access 
to  non-domestic  markets  is  typically  achieved  through  establishment  or  the  merger  of  service 
providers, rather than cross-border purchases from a foreign provider. 

Why has cross-border trade not grown  more rapidly  for packaged retail investment products? In the 
case of unit-linked life insurance products, different approaches to contract law and claims settlement, 
as  well  as  differences  in  taxation  systems  represent  a  significant  barrier.  It  is  less  clear  why  retail 
structured securities, which benefit from a passport under the Prospectus Directive, are not sold more 
extensively on a cross-border basis. The answers appear to lie both in differences in tax treatment and 
in  cultural  preferences,  in  particular  preferences  for  familiar,  nationally-branded  products  and 
originators/distributors. These factors help to explain not only the existence of barriers to cross-border 
trade but also why there are  marked differences in  the structure of national markets, in terms of the 
relative popularity of particular products and in the way in which they are sold. 

It  is  difficult  to  be  precise  about  the  role  that  regulatory  differences  play  in  the  continued 
fragmentation  of  markets  for  packaged  retail  investment  products.  However,  differences  in  national 
rules  on  disclosures  and  distribution  are  likely  to  result  in  additional  costs  for  market  operators 
distributing  products  in  multiple  Member  States.  For  example,  they  may  be  obliged  to  produce 
different  disclosure  documents  for  identical  products,  even  when  the  products  are  harmonised  at 
European  level  and  sold  under  a  European  passport.  Divergent  national  approaches  may  also  be  a 
source of legal uncertainty for both distributors and investors. There is some evidence that producers 
do perceive divergent regulatory provisions as a barrier to cross-border activity,29 although there is no 

27 

28 

29 

Note however that this figure is not adjusted for so-called 'roundtripping' – where for tax reasons a firm 
in one Member State may domicile funds in another, creating matching cross-border flows between the 
two  Member  States  without  any  authentic  cross-border  retail  business  being  conducted  from  the 
investor's perspective. 
http://ec.europa.eu/consumers/cons_int/fina_serv/cons_experiences/report_eurobarometer63-2_en.pdf, 
p.39. 
For example, from the review of the Distance Marketing of Financial Services Directive and feedback 
on the implementation of the UCITS Simplified Prospectus. 

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21 

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indication  that  cross-national  differences  in  regulation  affect  consumer  decision  making  between 
nationally- and internationally-sourced products.30 

It is important to note, however, that consistency in disclosure and distribution rules would not in itself 
create  the  conditions  for  products  to  be  offered  on  a  cross-border  basis  in  the  same  way  as  those 
products currently subject to a European passport. Differences in the regulation of products and their 
managers may also act as a significant barrier in this regard. Notwithstanding this important caveat, it 
is not unreasonable to assert that divergence in rules resulting from variegated national responses to 
the  regulatory  patchwork  at  European  level  is  not  conducive  to  the  further  development  of  cross-
border trade in these sectors. 

However,  it  is  important  to  recall  that,  even  in  predominantly  local  markets,  disclosure  rules  and 
regulation  of  intermediaries  in  many  sectors  flow  directly  from  the  implementation  of  Community 
law. Member State actions are constrained to a greater or lesser  extent by Community law, whether 
that  law  is  minimum  or  maximum  harmonising,  and  the  differences  in  approach  within  Community 
law (e.g. between MiFID, the Prospectus Directive, UCITS, the IMD and the CLD) inevitably lead to 
complicated  regulatory  patchworks  at  the  Member  State  level  reflecting  the  complexity  at  the 
European level. As a result, variations and gaps in effective standards at the local level are in part a 
consequence of the European patchwork itself, and cannot be seen as solely reactions to local market 
problems. This argues in favour of a European response to the problems identified as a  core part of 
addressing  local  market  problems,  irrespective  of  other  responses  at  local  level.  The  form  that  this 
European response might take is analysed in the options section below. 

3.3. 

How would the problem evolve without further action? 

Taking no action at the European level to address the above problems means that they would be likely 
to persist. It does not, however, imply that the regulatory environment would remain unchanged or that 
the problems themselves would remain static. Indeed, the financial crisis has exposed the weaknesses 
in  the  current  framework  and  is  likely  to  increase  the  impetus  for  action  at  national  and  European 
levels in order to rebuild investor confidence. 

It  is  reasonable  to  assume  that  some  Member  States  may  take  further  action.  This  may  have  a 
beneficial  impact  with  respect  to  investor  protection  and  the  level  playing  field  within  the  Member 
States in question. However, it 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,  while,  as  noted  above,  certain  inconsistencies  cannot  be  addressed 
effectively  at  Member  State  level  as  they  relate  to  inconsistencies  in  Community  law.  Also,  it  is 
unlikely that all Member States would take unilateral action, leaving some markets without adequate 
regulation. 

Some self-regulatory initiatives can also be expected to emerge without further stimulus from the EU. 
There is some evidence that the industry is acting to address some of the weaknesses identified above. 
For  example,  in  the  insurance  sector,  BIPAR  and  FECIF/AILO  have  recently  adopted  codes  of 
conduct that are relevant to some of the problems identified; and a taskforce dedicated to enhancing 
product disclosures has been created within the European Banking Federation. 

At EU level, in the absence of new initiatives, existing workstreams may contribute to mitigating the 
problems in certain sectors and for certain products. These include: 

•  Development of Key Investor Information for UCITS; 

•  Review of the Prospectus Directive, and possibly other sectoral directives; 

•  Work on improving financial education, in conjunction with Member States; 

30 

This would only be a factor when services are distributed cross-border. When services are provided by a 
foreign originator or distributor established in the same Member State as the consumer, this would not 
be an issue, since the 'host' rules would apply. 

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•  Reviews of DMD and IMD; and 

•  Ongoing work on Non-Harmonised Funds. 

More generally, the financial crisis has been the catalyst for a wider package of regulatory measures to 
enhance  the  stability  of  the  financial  system  and  to  rebuild  confidence  in  financial  institutions  and 
products, and there are likely to be continued developments in this area. While announced measures 
have  focused  largely  on  prudential  and  supervisory  issues,  these  will  impact  on  investor  protection, 
since investors share an interest in the stability of the institutions from which they purchase financial 
products. 

The  initiatives  described  above  would  not,  however,  alone  be  able  to  address  the  weaknesses  in  a 
coherent  and  systematic  manner.  A  comprehensive  process  of  upgrading  disclosures  is  currently 
envisaged  only  for  UCITS;  this  may  yield  insights  of  broader  application  but  will  focus  only  on 
harmonised funds. With regard to distribution, scheduled reviews of existing sectoral directives could 
be used to examine some of these issues; however, without a coherent organising framework it could 
not  be  guaranteed  that  a  level  playing field  and  consistently  high  level  of  investor  protection  would 
result. 

Without further action, therefore, it is both highly likely that the problems would remain and moreover 
that  additional  uncoordinated  national  action  would  increase  the  complexity  of  the  regulatory 
framework, with attendant implications for the single market. 

4. 

SUBSIDIARITY AND LEGAL BASIS 

The  preceding  discussion  has  identified  a  strong  European  dimension  to  the  problems  identified. 
Differences  in  Community  law  can  distort  market  and  regulatory  outcomes  in  all  Member  States, 
irrespective  of  whether  products  are  distributed  on  a  cross-border  basis.  Differences  in  Community 
law  thus  represent  a  significant  barrier  to  the  implementation  of  a  consistent  approach  to  disclosure 
and  distribution  between  sectors  at  national  level.  For  those  products  sold  on  a  cross-border  basis, 
investor  protection  concerns  cannot  be  tackled  effectively  at  Member  State  level.  Uncoordinated 
national  responses  would  also  risk  encumbering  the  development  of  the  single  market  in  these 
products. 

The legal basis for action in this field is found in the following Treaty provisions. According to Article 
3  of  the  EC  Treaty,  an  internal  market  is  characterised  by  the  abolition  of  obstacles  to  the  free 
movement  of  goods,  persons,  services,  and  capital.  Article  14  further  states  that  the  internal  market 
shall  comprise  an  area  without  internal  frontiers  in  which  the  free  movement  of  goods,  persons, 
services and capital is ensured in accordance with the provisions of the Treaty. Any further action as a 
follow-up to the Communication is likely to be based on Art. 211 of the EC Treaty (if in the form of a 
Recommendation) or Article 95 of the EC Treaty (if in the form of legislation). 

5. 

OBJECTIVES 

The overarching objective of this work is to promote the efficient allocation of resources through: 

•  A high and consistent level of investor protection embodied in Community law; 

•  A level playing field for the originators and distributors of retail investment products; and 

•  Increased efficiency in cross-border business. 

The first and second of these should be seen in tandem at the heart of this work: the level playing field 
with respect to disclosure and distribution rules is to be achieved at a high level of investor protection. 
Given  the  predominantly  local  nature  of  certain  parts  of  the  retail  markets,  the  third  objective  is 

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subsidiary to the first two. It is, however, an important consideration for those products that are sold 
on a cross-border basis; and for those for which this could potentially be the case. 

5.1. 

A high and consistent level of investor protection  

General objective 

A consistently high level of investor protection across all packaged retail investment products is the 
key  objective,  thereby  creating  an  environment  in  which  retail  investors  are  provided  with  the 
information they need to take effective decisions and are treated fairly in the sales and advice process 
by product originators and distributors. 

This objective does not necessarily imply total uniformity in the information that should be provided 
or in the way in which products are sold. Differences in the relationship between the investor and the 
originator and the varying nature of the investment propositions imply a need for flexibility.  

However, to the greatest extent possible, an investor surveying the available options should be able to 
compare  the  key  characteristics  of  the  products  offered  -  which  is  a  matter  both  of  the  type  of 
information  that  is  provided  and  the  way  in  which  it  is  presented.  This  implies  seeking,  where 
relevant, common formats that allow for comparison of key characteristics and which are developed so 
as to take into account typical consumer behaviour. Investors should be able to be confident that the 
quality of service is comparable in each case. 

This  objective  must  be  qualified  by  the  observation  that  while  improvements  in  disclosure  and  the 
regulation  of  intermediaries  can  help  to  create  the  conditions  for  effective  decision-making  by  retail 
investors, they cannot eliminate the possibility of poor decision-making and hence investor detriment. 
In particular, the quality of investor decision making will depend greatly on the willingness and ability 
of  consumers  to  understand  and  process  the  information  and  advice  received.  Improvements  in 
financial education will thus be an essential complement to this work. 

Specific objectives 

To  lay  the  foundation  in  European  rules  on  pre-contractual  disclosure  and  the  regulation  of 
intermediaries for retail investors to make informed and appropriate investment decisions.  

To  achieve  this,  a  retail  investor  should  be  able  to  expect  a  consistently  high  level  of  product 
disclosure  and  fair  treatment  by  distributors  irrespective  of  the  product  type  they  select,  or  the 
distribution channel through which they obtain the product.  

The benchmark for this assessment can be expressed in the form of a set of core 'principles' that define 
outcomes  to  be  delivered  by  Community  law  and  applied  to  the  full  spectrum  of  packaged  retail 
investment products and distribution channels. The ideas embedded in these principles are not novel; 
they  are  drawn  from  widely  accepted  benchmarks  found  in  international  standards  and  in  European 
and national law. Further work will be required to fine-tune these principles as appropriate. 

Product  disclosures  should  be  fair,  clear  and  not  misleading,  even  for  less  experienced  retail 
investors.  

They  should  contain  all  information  necessary  to  take  an  informed  investment  decision  (such  as 
information  about  performance  and  risks,  charges,  guarantees  and  how  the  product  functions,  for 
instance fixed maturity dates). They should be presented in a format appropriate for a retail investor 
and how that investor is likely to use the information, and to the greatest extent possible they should 
be designed consistently across different products to allow for comparisons between the products.  

The format should be as short and simple as is possible, and tested with investors to ensure it works 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. 

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Any  associated  marketing  communications  should  be  fair,  clear  and  not  misleading,  and  should  be 
clearly distinguished from the mandatory disclosures and should indicate where such disclosures can 
be obtained (where relevant). They should not undermine mandatory disclosures. 

Selling practices should be focused on the fair treatment of the investor.  

When an investor receives investment advice, the advisor should undertake best efforts to ensure any 
products  sold  correspond  to  the  profile  and  the  needs  of  the  investor,  and  should  ensure  that  the 
investor  is  aware  of  the  nature  of  the  service  being  provided  by  the  advisor,  included  remuneration 
arrangements in relation to the service.  

If  a  product  is  sold  without  advice,  the  responsibility  of  the  intermediary  and  risks  for  the  investor 
should  be  made  clear  before  proceeding  with  the  provision  of  services.  Also  in  this  case,  some 
assessment concerning the adequacy of the product to investors' needs may be required. 

All  necessary  steps  should  be  taken  to  prevent  conflicts  of  interest  from  adversely  affecting  clients. 
Such conflicts should be avoided if possible and, if not possible, they should be identified, managed 
and, where appropriate, disclosed in a way investors can understand. Links between manufacturers and 
distributors in the form of ownership stakes should be disclosed to the end investor. Links in the form 
of  remuneration  for  product  sales  should  be  disclosed  and  should  be  assessed  in  the  perspective  of 
client interests. 

Manufacturers  should  provide  distributors  with  the  necessary  product  information  related  to  the 
product  and  distributors  should  clearly  understand  the  product  and  ensure  investors  receive  relevant 
product  information.  Manufacturers  also  would  bear  some  responsibility  in  relation  to  the  generic 
suitability of products which they distribute into the retail market. 

5.2. 

A level playing field for the originators and distributors of packaged retail investment 
products 

General objective 

The  second  objective  is  to  achieve  a  level  playing  field  for  all  types  of  packaged  retail  investment 
product  with  respect  to  disclosure  and  distribution  rules.  Consistency  in  these  requirements  would 
already help to ensure that competition between products takes place on a transparent and fair basis. 
This  will  help  to  ensure  that  markets  develop  on  the  basis  of  the  quality  of  the  products  and  their 
compatibility with consumer needs, not by a lack of transparency or of selling disciplines with respect 
to certain products. Product diversity is potentially beneficial for the retail investors and as such this 
objective does not imply a regulatory preference for one product type over another. 

As  discussed  earlier,  it  is  important  to  recognise  in  this  context  that  there  are  other  elements  of  the 
regulatory 'playing field' that impact on competition between products but which are not addressed in 
this analysis. For example, UCITS managers are subject to prescriptive product regulation that limits 
the range of financial assets in which they can invest, their use of borrowed funds, redeemability etc. 
These restrictions are not generally found in other sectors. Other non-regulatory factors, most notably 
features of domestic tax systems, will also impact on competition between product types. 

Specific objective 

More specifically, the objective is to achieve a coherent overall approach to disclosure and distribution 
provisions in Community law, thereby achieving a level playing field with respect to these rules. 

This objective must be seen in the context of the first objective: the level playing field should be set at 
a consistently high level of investor protection for all packaged retail investor protection. 

5.3. 

Increased efficiency in cross-border business 

General objective 

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Markets for retail investment products are largely segmented along national lines. Further integration 
of  these  markets  through an  increase  in  cross-border  trade  could  deliver  efficiency  benefits  for  both 
producers and consumers. In principle, a divergence in disclosure rules and distribution rules between 
Member  States  may  constitute  a  barrier  to  the  cross-border  provision  of  services.  The  objective  is 
therefore to remove obstacles to cross-border trade resulting from divergence in national approaches to 
disclosure and distribution regulation. 

Specific objective 

To promote more consistent national approaches to disclosure and distribution rules by ensuring that 
Community law provides a coherent approach to disclosure and distribution regulation. 

An  important  caveat  to  this  objective  is  that,  as  discussed  above  and  in  the  Green  Paper  on  Retail 
Financial  Services,  there  is  reason  to  believe  that  certain  legal  and  fiscal  barriers,  as  well  as 
behavioural  preference  for  products  provided  locally  (and  face-to-face),  represent  a  more  significant 
barrier  to  cross-border  trade  than  differences  in  disclosure  and  distribution  regulation.  Moreover, 
greater  harmonisation  of  disclosure  and  distribution  regulation  at  European  level  will  not  in  itself 
provide  cross-border  marketing  opportunities  equivalent  to  a  product  passport.  Other  differences  in 
approach, for example with respect to product regulation, would potentially remain. 

6. 

OPTIONS 

This section considers the efficiency and effectiveness of alternative policy options in the area of pre-
contractual  disclosures  and  selling  practices,  as  means  to  achieving  the  three  objectives  outlined 
above: 

•  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;  

•  a level playing field for all types of retail investment product, including their distribution; and 

•  a strengthened single market in packaged retail investment products. 

The multitude of factors involved means that the policy options analysed here cannot alone guarantee 
the three objectives above, although they can contribute to their achievement. In particular, while the 
analysis below treats options separately so as to clarify their incremental impact, in general terms the 
options should not be considered to be mutually exclusive – for instance, coordinated regulatory and 
supervisory action at the European and national levels could provide the framework for a consistent 
overall  approach,  to  be  accompanied  and  supported  by  self-regulatory  activity  (e.g.  developing  best 
practices for the use of plain language). 

In  the  following  analysis  we  address  pre-contractual  disclosures  and  selling  practices  separately. 
However,  we  think  it  likely  that  there  would  be  synergies  between  these  two  areas  –  a  package  of 
options relating to pre-contractual disclosures as well as selling practices might have greater benefits 
than either on its own.  

6.1. 

Pre-contractual product disclosures 

6.1.1. 

Identification of options 

Our  analysis  is  that  the  options  for  addressing  pre-contractual  product  disclosures  broadly  sit  on  a 
scale  from  a  base-line  of  no  change  to  the  highest  level  of  harmonisation  at  the  European  level.  To 
give  shape  to  the  analysis,  we  have  focused  on  the  following:  no  policy  change;  Commission-
promoted self-regulation; a mandate to the Level 3 committees to promote supervisory convergence; a 
Commission  recommendation  to  implement  principles  through  national  regulation;  or  EU-level 
legislative  action  to  harmonise  requirements  where  appropriate  across  products  and  channels.  As 

EN 

26 

   EN 

 
stated  these  options  are  not  mutually  exclusive,  the  first  notwithstanding,  and  may  be  effectively 
combined. An assessment of the exact nature of any future measures does not form part of this Impact 
Assessment;  any  specific  follow  up  actions  would  be  accompanied  by  a  separate  impact  assessment 
which might address the optimal combination of initiatives necessary for achieving the objectives. 

EN 

27 

   EN 

 
Table 3: Identification of options for pre-contractual product disclosures  

Option 

Description of option 

1. No policy 
change 

2. Commission 
sponsored self-
regulation 

3. Mandate to 
Level 3 
committees to 
promote 
supervisory 
convergence 

As described already in section 3.3., without policy action at EU level neither foreseeable 
policy  change  at  Member  State  level,  nor  parallel  pre-existing  or  foreseeable  EU  work 
flows would address the problems effectively. Any potential action at national level could 
further  aggravate  cross-border  inconsistencies,  while  existing  inconsistencies  at  EU  level 
would persist, undermining the effectiveness of action at national level.  

This  no  policy  change  scenario  is  used  as  the  baseline  for  the  assessment  of  other 
policy options. 

Under  this  option  market  sectors  involved  –  both  originators  and  distributors  –  would  be 
invited  to  develop  pre-contractual  disclosures  in  compliance  with  a  common  set  of 
principles. Market participants would be free to develop their own solutions, though with a 
steer  from  the  Commission.  No  legislative  changes would  be  made  at  European  level, so 
differences that can be traced to Community law would remain, while this option would not 
directly  tackle  differences  in  laws  between  Member  States  themselves,  where  they  have 
already acted to address the issues raised in this assessment.  

This  could  be  on  the  basis  that  the  Commission  would  review  the  approach  should 
outcomes turn out to be ineffective, so as to encourage market participant engagement. 

The committees of regulators could be invited to work together to identify 'best practices' in 
pre-contractual  disclosure  and  to  disseminate  these  to  all  Member  States.  Peer  pressure 
could be used to promote agreement on and respect for either high-level principles or more 
concrete  disclosure  solutions.  As  with option  2,  no  legislative  changes would be  made  at 
European level. 

4. Commission 
Recommendation 
to implement 
principles 
through national 
regulation 

A Recommendation could build upon relevant provisions (e.g. in MiFID, CLD and IMD) to 
guide Member State implementations of these, for instance to clarify what would constitute 
compliance with existing disclosure obligations. Member States could also be encouraged 
to  introduce  requirements  in  national  law  for  product  originators  to  develop  compliant 
disclosure documents. As with option 2, no legislative changes would be made at European 
level;  a  Recommendation  would  offer  the  Commission's  opinion  in  relation  to  existing 
Community legislation.  

5. EU-level 
legislative action 

EU-level  legislative  action  could  take  a  variety  of  forms,  running  from  a  more  limited 
removal of EU-level impediments to best practice and provision of a high-level framework 
of  common  principles,  to  detailed  requirements  setting  out  the  content  and  form  of 
harmonised pre-contractual disclosures across all relevant products.  

While  we  cannot  assess  the  most  appropriate  form  of  possible  legislative  action  at  this 
stage,  any  action  would  need  to  take  account  of  existing  provisions  in  EU  law,  both  in 
sectoral  and  cross-cutting  directives.  In  principle,  the  legislative  objectives  could  be 
achieved  either  by  a  new  stand-alone  legislative  instrument  or  by  adjustments  to  existing 
EU  legislation.  In  either  case,  the  legislation  could  be  embedded  in  the  Lamfalussy 
framework, with general principles established at Level 1 and detail added at Level 2.31  

6.1.2.  Analysis of costs and benefits 

Our detailed analysis of the options can be found in Annex 2, but we would like to make here a few 
general remarks on cost and benefit drivers.  

Costs 

31 

See:  http://ec.europa.eu/internal_market/finances/committees/index_en.htm#committee 
information on the Lamfalussy framework. 

for 

further 

EN 

28 

   EN 

 
                                                 
The  incremental  compliance  and  administrative  costs  of  designing  and  producing  new  disclosure 
documents are likely to be similar irrespective of the underlying mechanism by which change has been 
promoted,  so  likely  costs  could  be  very  similar  across  different  options,  at  least  in  so  far  as  those 
options effectively change industry behaviour.  

•  Our analysis focuses on incremental costs, i.e. those costs that firms or others would incur that can 
be solely (or proportionally) attributed to the impact of the policy options under analysis. These can 
be  divided  into  both  one-off  costs  of  changing  existing  documents  or  developing  new  ones,  and 
ongoing costs of maintaining the documents.  

•  Cost drivers  include the design of new documents and the establishment of systems and controls 
for ensuring compliance, including, where relevant, the preparation of figures, whether audited or 
not,  one-off  and  ongoing  production  and  distribution  costs,  incremental  costs  in  changing  other 
documentation and websites which might cross-refer to the documents, and training costs (which 
may largely be related to distribution channels). 

•  In  general  terms,  costs  can  be  analysed  in  terms  of  costs  for  the  parties  directly  affected  by 
changes, costs for regulators or supervisors and other similar bodies, and less direct costs – such as 
changes to the quantity, quality and variety of transactions, or to market efficiency. 

The  balance  between  these  cost  drivers  is  likely  to  vary  for  the  different  options  being  analysed, 
depending on the amount and nature of the change required for particular market segments. The costs 
will  also  vary  significantly  depending  on  whether  requirements  already  exist  within  a  particular 
Member  State  and  whether  the  new  requirements  entail  incremental  changes  to  pre-existing 
disclosures by firms or the creation of entirely new disclosures, e.g. for instruments hitherto outside 
the scope of requirements.  

•  The incremental benefit of changes for consumers in Member States that have already developed 
mandatory disclosure requirements aimed at addressing the issues in this paper is likely to be low, 
in  so  far  as  these  consumers  continue  to  shop  within  their  home  markets  and  in  so  far  as  the 
existing mandatory disclosure requirements are effective in protecting consumers.  

•  For  these  jurisdictions  with  pre-existing  disclosure  requirements,  a  high-level  principles-based 
approach  may  offer  relatively  lower  costs  (compared  to  more  detailed  and  strongly  standardised 
requirements),  particularly  where  the  pre-existing  requirements  are  already  consistent  with  the 
high-level  principles.  There  could  well  nonetheless  be  some  compliance  costs.  For  jurisdictions 
which  do  not  have  pre-existing  disclosure  requirements  there  would  likely  be  one-off  costs  for 
national regulators or other self-regulatory bodies interpreting these principles for firms, on top of 
the direct costs firms would face.  

•  More  detailed  and  strongly  standardised  requirements  might  reduce  some  costs  by  providing 
participants with ready-made solutions which do not require significant adaptation and compliance 
testing, though under this option all participants impacted would necessarily face costs of change.  

•  There  are  also  likely  to  be  varied  impacts  on  supervisory  costs,  for  instance  should  supervisors 
need  to  pre-authorise  or  otherwise  develop  an  enhanced  capability  for  monitoring  or  supervising 
the quality of pre-contractual disclosures or marketing material. 

Assessing the relative materiality of these different factors is difficult at this stage, given the range of 
variables  that  can  impact  costs  and  the  necessarily  high  level  of  the  current  analysis.  However, 
experience from past directives offers some very useful ex-post data on the likely maximum scale of 
costs  where  change  is  required  for  all  participants.  In  particular,  the  Prospectus  Directive  is  a  good 
starting point, as this directive primarily related to investor disclosures, introducing requirements on 
securities issuers to issue an investor prospectus. 

Recent work on the costs related to the Financial Services Action Plan (FSAP) identified the following 
one-off and ongoing costs for the Prospectus Directive: 

Table 4: Costs identified for Prospectus Directive, average absolute values and as % of operating 
expenses 

EN 

29 

   EN 

 
Banks and financial 
conglomerates 

Asset Managers 

Investment Banks 

One-off costs 

€200,000 

0.01% 

Ongoing Costs  

€88,000 

0.01% 

Source: Europe Economics32 

€71,000 

0.02% 

€250,000 

0.06% 

€46,000 

0.00% 

€38,000 

0.00% 

While  absolute  costs  for  the  markets  and  products  discussed  in  this  paper  could  be  greater  –  for 
instance,  given  the  relative  size  of  the  unit-linked  insurance  market  and  its  retail  exposure  (no 
insurance products were directly impacted by the Prospectus Directive) – it would seem plausible that 
costs  per  product  requiring  disclosure  would  be  consistent  with  these  figures.  Indeed  they  could  be 
lower – the costs per listing under the Prospectus Directive could well be higher than those per product 
under this assessment, since the Prospectus Directive costs include additional costs related to listing a 
security, such as auditing and professional fees.  

The  Simplified  Prospectus  for  UCITS  is  perhaps  a  useful  guide to  how  far  the  Prospectus  Directive 
costs can be taken as a proxy, since this document did not incur the additional costs associated with 
the  Prospectus  Directive.  If  figures  available  from  the  UK  are  an  indication,  the  costs  for  the 
Simplified  Prospectus  were  indeed  lower;  a  survey  of  UCITS  firms  reported  figures  ranging  from 
£1800 to £55000 per firm. (Smaller firms showed higher relative costs).33  

It is likely that some proportion of any additional costs for the industry will be passed onto consumers 
through product pricing. 

Benefits 

In analysing different policy options, we have had regard to likely benefit drivers. These can be split 
between micro and macro effects, though the two are linked. 

At  the  micro  level,  improvements  to  investor  decision  making  could  lead  to  an  increase  in  the 
proportion  of  'suitable'  transactions,  leading  directly  to  reduced  levels  of  investor  detriment.  This  in 
turn might lead to more macro effects, where reduced levels of complaints and improved trust in the 
industry might trigger an expansion in the market. At the micro level greater transparency might lead 
to greater prevalence of 'shopping around' behaviour where investors actively compare the features of 
competing offerings, which might lead to competitive pressure on product pricing at the macro level. 
Also,  improvements  to  the  consistency  of  pre-contractual  information  requirements  may  lead  to  an 
increase in cross-border business, potentially leading in turn to greater competition and economies of 
scale. 

The  scale  of  the  benefit  generated  by  these  drivers  can  be  expected  to  vary  according  to  the 
effectiveness  of  different  options.  In  general,  those  options  that  are  most  effective  at  improving  the 
quality  of  disclosures  have  the  greatest  change  of  effectively  delivering  benefits,  while  in  general 
terms, greater standardisation in approach is more likely to drive benefits linked to improvements in 
relation to the investors' ability to compare between different offerings, for instance in relation to their 
overall 'value for money'. 

Naturally,  the  incremental  benefit  for  consumers  in  Member  States  that  have  already  effectively 
developed  disclosure  regimes  aimed  at  addressing  the  issues  in  this  paper  is  likely  to  be  in  direct 

32 

33 

Study  undertaken  by  Europe  Economics  for  the  Commission  Services;  expected  to  be  finalized  and 
published in the end of 2008. Insert link to study once published. 
FSA: CP 04/18, http://www.fsa.gov.uk/pubs/cp/cp04_18.pdf, Annex 1 p.2. 

EN 

30 

   EN 

 
 
                                                 
proportion to the effectiveness of any new regime compared to the existing regime, in so far as these 
consumers continue to shop within their home markets. 

As  we  have  noted,  disclosures  themselves  are  only  one  link  in  a  longer  causal  chain,  with  final 
benefits  depending on  the practical  use  and  comprehension  of  such  disclosures  by  investors  and  the 
practical  achievement  of  an  adequate  standard  for  such  disclosures  across  different  jurisdictions  and 
markets. 

As we have stated, we do not consider it possible to provide concrete quantitative estimates of benefits 
at this stage of the policy development process.  

6.2. 

Selling practices 

6.2.1. 

Identification of options 

In the area of selling practices, our focus is on ensuring investors are treated fairly by those selling to 
them – this relates not only to the management of conflict of interests, but also the conduct of sales 
business  more  generally,  including  requirements  governing  the  provision  of  advice  services.  Policy 
options here follow the broad outlines of those for pre-contractual information.  

Table 5: Options for addressing deficiencies in selling practices 

Option 

Description of option 

No policy change  As described already in section 3.3., without policy action at EU level neither foreseeable 
policy  change  at  Member  State  level,  nor  parallel  pre-existing  or  foreseeable  EU  work 
flows would address the problems effectively. Any potential action at national level further 
aggravating cross-border inconsistencies, while existing inconsistencies at EU level would 
persist, undermining the effectiveness of action at national level.  

This no policy change scenario is used as the baseline for the assessment of the other 
policy options. 

Commission 
sponsored self-
regulation 

Under  this  option,  the  Commission  would  promote  self-regulatory  measures  within  the 
industry, to seek greater consistency in firms' practices across sectors and across different 
Member States (though divergent national and EU rules would, without further change, still 
create inconsistencies that firms would not be able to overcome). 

Mandate to Level 
3 committees to 
promote 
supervisory 
convergence 

The committees of regulators could be invited to work together to identify and coordinate 
Member  State  approaches  to  improving  conduct  of  business  and  conflict  of  interest 
management  across  the  sales  processes  for  different  investment  products.  Peer  pressure 
could be used to promote agreement on and use of either common high-level principles or 
more concrete disclosure solutions.  

Commission 
Recommendation 
to implement 
principles 
through national 
regulation 

A  Recommendation  would  coordinate  the  implementation  and  interpretation  of  existing 
European  rules,  to  promote  greater  convergence  across  Member  States  and  less  disparity 
across  products  and  distribution  channels.  A  Recommendation  would  offer 
the 
Commission's  opinion  in  relation  to  existing  Community  legislation,  and  could  also 
recommend  the  extension  of  some  rules  to  yet  unregulated  areas  or  promote  the 
development of rules or standards in those fields along the same line.  

EU-level 
legislative action 

Under this option, legislative action at the European level would be taken. The exact form 
of  European  level  direct  action  can  only  emerge  during  follow  up  work  to  the 
Communication.  

This  option  could  take  a  variety  of  forms  with  varying  degrees  of  impact  on  regulatory 
landscape  (for  instance,  varying  in  the  degree  of  harmonisation  and  the  vehicle  used  for 
that  harmonisation:  e.g.  adjusting  existing  sectoral  legislation  to  achieve  consistent 
outcomes,  or  introducing  a  wholly  new  regime  for  sales  of  packaged  retail  investment 

EN 

31 

   EN 

 
products). 

6.2.2.  Analysis of costs and benefits 

As before, our detailed analysis of the options can be found in Annex 2, but we would like to make a 
few general remarks relevant across all of the options, but focused on the costs of legislative change.  

Costs 

The costs for the different options for addressing selling processes (conflicts of interest and conduct of 
business issues) are likely to vary significantly, depending on the extent to which firms make changes 
to their sales processes. Changes to selling processes can be costly for firms. Key cost drivers include 
the  production  and  dissemination  of  any  disclosures  required  (for  instance  of  remuneration 
arrangements, commission or intermediary status), the introduction of new procedures and associated 
systems, controls and training, or changes to the length of the sales process, which might potentially 
reduce  sales  volumes  per  man  hour.  Some  costs  are  likely  to  scale  according  to  the  extent  of 
incremental change while others are likely to be largely fixed.  

There  can  also  be  significant  indirect  costs  through  the  impact  of  change  on  market  efficiency,  for 
instance through changes to the variety and type of products that are available in the retail market. 

The  different  options  we  have  identified  will  clearly  generate  varying  degrees  of  disruption  and 
change for the industry and markets. These changes are likely to impact particular sectors more than 
others, depending on the extent to which a sector is already subject to substantive investor protection 
measures which are consistent with any proposed changes. Since in this paper we do not address the 
detail  of  specific  options  and  so  cannot  provide  concrete  quantitative  estimates  that  are  tuned  to  the 
particular changes envisaged, we are limited to indicating the likely magnitude of costs for the most 
costly option – legislative change to ensure selling practices are consistent for the products identified 
in this paper, assuming the effective introduction of a new regime with all of the compliance, systems 
and controls, disclosure, training and other costs this would entail. 

The figures under the FSAP relating to MiFID are a good starting point to assessing the incremental 
costs  of  changes,  since  that  directive  encompassed  all  of  the  key  elements  that  a  legislative 
intervention might be expected to cover. This table outlines a recent estimate of these costs: 

Table  6:  Costs  identified  for  MiFID  within  FSAP,  average  absolute  values  and  as  %  of  operating 
expenses 

Banks and financial 
conglomerates 

Asset Managers 

Investment Banks 

One-off Costs 

€8,118,000 

€195,000 

€5,060,000 

0.47% 

0.52% 

0.52% 

Large 

Small 

€25,000,000 

€200,000 

0.50% 

0.86% 

Ongoing Costs 

€1,239,000 

€794,000 

€734,000 

0.10% 

0.28% 

0.08% 

Source: Europe Economics 

EN 

32 

   EN 

 
 
These figures are likely however to overstate the impact of potential legislative changes. This is for a 
number of reasons:  

•  Figures for the introduction of a new regime may be misleading, as changes would most likely be 
only incremental for many firms already subject to MiFID requirements when conducting MiFID 
business. For these firms the introduction of consistent requirements across products could simply 
entail broadening the scope of practices that have already been supported. The same could be said 
for firms subject to the IMD, where any changes might also be incremental in nature.  

•  Even  for  firms  that  are  currently  entirely  outside  the  scope  of  MiFID  (or  the  IMD),  figures  for 
MiFID are likely to be an overstatement. This is because legislative action envisaged by this paper 
only relates to part of MiFID. MiFID covers a wide range of conduct of business activities, such as 
transaction  reporting  or  best  execution  policies,  so  as  to  provide  a  basis  for  a  general  regime, 
whereas the focus of this paper is squarely on specific requirements relating to the sales of certain 
types of products to retail clients. 

An  additional  factor  that  should  be  taken  into  account  is  that  MiFID  firms  might  be  significantly 
different  as  a  population  from  other  populations  caught  by  options  in  this  paper,  such  as  insurance 
intermediaries. The impact of such variations may be reduced where investors are exposed to different 
kinds  of  product  through  the  same  sales  channels,  as  those  sales  channels  would  likely  already  by 
subject to MiFID. Also, increased consistency in regulatory requirements across different products and 
channels could reduce compliance costs for distributors. 

We consider that greater granularity as to the extent by which these figures might overstate costs is not 
necessary for the purposes of this paper. A more detailed impact assessment addressing these points 
would be needed to support detailed legislative proposals. 

Benefits 

In analysing different policy options, we have however had regard to likely benefit drivers, at the both 
the micro and the macro level.  

At the micro level, improvements to selling practices could lead to an increase in 'suitable' purchases 
and reduction in cases of 'mis-selling', thereby directly reducing investor detriment, leading in turn to 
macro  level  benefits  with  reduced  levels  of  complaints,  improved  confidence  in  the  industry  and 
possibly  overall  market  growth.  Improved  selling  practices  could  also  lead  at  the  macro  level  to 
greater  competition  between  offerings,  which  in  turn  might  lead  to  competitive  pressure  on  product 
pricing and indirect consumer benefits. 

Also, improvements to the consistency in the regulation of selling practices could lead to an increase 
in  firms  providing  services  cross-border  or  marketing  products  cross-border,  driving  further  market 
efficiency and competitiveness benefits. 

As we have stated, we do not consider it possible to provide concrete estimates of benefits at this stage 
of the policy development process.  

6.3. 

Comparison of high-level assessment of options 

In this section we summarise the more detailed analyse of options in Annex 2. 

6.3.1.  Pre-contractual information 

Objectives  

Consumer 
protection 

Policy option  

EFFECTIVENESS 

Level playing field  Single Market 

EFFICIENCY  

No policy change 

n.a. 

n.a. 

n.a. 

n.a. 

EN 

33 

   EN 

 
 
 
Self-regulatory 
initiatives 

Mandate to Level 3 
committees 

Commission 
recommendation 

(--) 

(+) 

(+) 

(--) 

(+) 

(+) 

(-) 

(+) 

(+) 

(≈) 

(+) 

(+) 

EU legislative action 

(++) 

(++) 

(+(+)) 

(++) 

Magnitude of impact as  compared with the baseline scenario:  ++ strongly  positive; + positive; – – 
strongly negative; – negative; ≈ marginal; ? uncertain; n.a. not applicable 

6.3.2. 

Selling practices 

EFFECTIVENESS 

Objectives  

Consumer 
protection 

Level playing field  Single Market 

EFFICIENCY  

Policy option 

No policy change 

Self-regulatory 
initiatives 

Mandate to Level 3 
committees  

Commission 
recommendation  

n.a. 

(--) 

(+) 

(+) 

n.a. 

(--) 

(+) 

(+) 

n.a. 

(-) 

(+) 

(+) 

n.a. 

(-) 

(+) 

(+) 

EU legislative action 

(++) 

(++) 

(++) 

(++) 

Magnitude of impact as  compared with the baseline scenario:  ++ strongly  positive; + positive; – – 
strongly negative; – negative; ≈ marginal; ? uncertain; n.a. not applicable 

6.3.3. 

Identifying the preferred options 

To summarise, for both the areas of pre-contractual disclosures and selling practices, we conclude that 
non-legislative  options  (the  encouragement  of  self-regulatory  initiatives,  action  through  the  3L3 
committees,  or  a  recommendation  from  the  Commission  aimed  at  establishing  common  principles) 
could  all  have  some  positive  impact  on  consumer  protection,  level  playing  field  and  single  market 
outcomes, (though this might be particularly marginal for self-regulatory initiatives on their own).  

However, all of these non-legislative options, since they can only indirectly address issues caused by 
fragmentary  and  inconsistent  legislation  at  the  EU  level,  are  subject  to  a  significant  limit  on  their 
likely  effectiveness.  This  is  particularly  clear  in  relation  to  level-playing  field  and  single  market 
outcomes, but we also consider it is also the case in relation to consumer protection. This is not only 
due  to  the  extent  to  which  legislative  inconsistencies  can  impede  the  development  best  practice,  but 
also, and importantly, because non-binding and non-legislative approaches are in general less likely to 

EN 

34 

   EN 

 
 
deliver a consistent focus on improving outcomes across all market sectors and national jurisdictions 
than binding ones.  

Hence, we conclude that EU legislative action offers greater effectiveness against all three outcomes.  

In regards efficiency, we consider the greater effectiveness of the EU legislative option to better offset 
costs  than  the  other  approaches.  The  analysis  is  that  these  other  approaches  could  all  engender 
significant costs for certain firms and industry segments whilst not necessarily delivering the benefits 
of overall consistency or coherence. Incremental changes in the future could also be more necessary. 

As can be seen, this assessment is by necessity high-level and qualitative in nature. Accordingly, the 
results  for  options  relating  to  pre-contractual  disclosures  and  selling  practices  are  very  similar,  with 
similar  assessments  of  the  advantages  on  the  balance  of  costs  and  benefits  for  an  approach 
incorporating  EU  legislative  action  in  both  areas.  We  expect  that  an  analysis  of  concrete  legislative 
proposals at an increased level of granularity will offer greater differentiation than is possible at this 
stage. 

We  conclude  therefore  in  favour  of  an  overall  approach  which  includes  EU  legislative  action. 
Inconsistencies,  gaps  and  weaknesses  in  EU  legislation  will  otherwise  act  as  barriers  to  achieving 
consumer protection, level playing field and single market benefits, whilst non-binding activity could 
still generate significant costs. 

The following section will look at other impacts of  an overall approach that includes EU legislative 
action. 

7. 

IMPACTS  ON  VARIOUS  STAKEHOLDERS'  GROUPS,  EMPLOYMENT,  SMES,  ENVIRONMENT 
AND THIRD COUNTRIES 

7.1. 

Stakeholders 

The following table lays out the expected net effect of the preferred proposals on various stakeholders: 
consumers, industry (originators and distributors of products), and national regulators. 

Table 7: Impacts on Stakeholders 

Stakeholder 

Issue 

Pre-contractual 
disclosure 

Consumers 
(retail 
investors) 

+ 
(↑ investor 
protection, ↑ 
confidence in 
market) 

Originators 

Distributors 

National 
regulators 

+ 
(↑ investor 
protection , ↑ 
market activity, ↑ 
certainty and 
consistency 
offsetting ↑ costs) 

+ / - 
(↑ market conduct 
and relation with 
investors, may be 
≈ where effective 
pre-existing 
requirements 
already in place, 
may be ↑ 
supervisory costs) 

+ 
(↑ investor 
protection, ↑ 
market activity, 
possibly ↓costs 
where originators 
do not deliver 
adequate 
disclosures 
currently, while 
consistency in 
product 
documentation 
potentially leads to 
↓ costs) 

Selling practices 

+ 
(↑ investor 
protection, ↑ 

+ 
(↑ investor 
protection, ↑ 

+ 
(↑ investor 
protection, ↑ 

+ / - 
(↑ market conduct 
and relation with 

EN 

35 

   EN 

 
confidence in 
market) 

market activity, ↑ 
legal certainty and 
consistency in 
handling different 
distributors, 
possibly ↓costs) 

investors, may be 
≈ where effective 
pre-existing 
requirements 
already in place, 
may be ↑ 
supervisory costs) 

market confidence, 
offsetting ↑ costs, 
while greater 
consistency in 
requirements may 
lead to ↓ costs for 
distributors who 
are currently 
subject to different 
regimes for 
different products) 

Legend:  +  overall  positive  effect,  -  overall  negative  effect,  +/-  overall  mixed  effect,  ≈  effect  not 
significant, ↓ decrease, ↑increase 

7.2. 

Employment 

It is not possible to draw sound conclusions in relation to the impact of the proposals on employment 
given the high-level nature of the options being currently analysed.  

It is nonetheless likely that the net impact of any legislative options would be marginal, though longer 
term  improvements  to  market  confidence,  competitiveness  and  cross-border  activity  could  combine 
with other factors leading to shifts in the location and concentration of financial services. This would 
require further analysis.  

We  would  not  expect  any  significant  impact  on  the profile  of  those  employed  in  the  sector,  beyond 
such rebalancing. 

7.3. 

SMEs 

Given  the  role  of  relatively  small  firms  in  both  distribution  and  to  an  extent  product  origination 
sectors, interventions will necessarily have an impact. However, we cannot at this stage determine the 
number  of  SMEs  in  the  financial  sector,  as  the  definition  of  SME  relies  on  a  combination  of 
employment and turnover/balance sheet figures,34 and employment data is only collected for the non-
financial business economy, where 99.8% of firms are SMEs.  

Looking  at  only  turnover/balance  sheet  totals,  we  already  see  however  that  there  is  a  significantly 
smaller proportion of SMEs in the financial sector; more than 65% of credit institutions35 and at least 
55% of insurance  companies are large  enterprises.  It is  acknowledged though that the ratio of small 
and  large  firms  is  likely  to  vary  across  markets,  for  instance  depending  on  the  distribution  channels 
that  are  most  prevalent.  For  instance,  in  some  local  markets  –  notably  UK  –  IFA  distributors  are 
common,  while  in  others  –  e.g.  Spain,  but  to  a  degree  most  other  territories  –  bancassurance 
distribution is more common.  

The findings of the FSAP cost survey36 suggest that the relative impact on smaller firms will be greater 
than larger ones, for instance with proportionate costs in relation to MiFID on the average around 70% 
greater  for  small  firms  (this  survey  does  not  cover  insurance  firms  and  insurance  intermediaries). 

34 

35 

36 

A  small  and  medium-sized  enterprise  is  one  that  employs  less  than  250  persons  and  has  an  annual 
turnover  of  up  to  EUR  50  million  or  an  annual  balance-sheet  total  of  no  more  than  EUR  43  million. 
(See  Commission  Recommendation  2003/361/EC  of  6  May  2003  concerning  the  definition  of  micro, 
small and medium-sized enterprises). 
only 35% of credit institutions have a balance sheet total below EUR 100 million, the smallest threshold 
foreseen in this industry, while the definition of SMEs categorises as large enterprise any firm with a 
balance sheet figure above EUR 43 million. 
Europe Economics: Study on the Cost of Compliance with Selected FSAP Measures. 

EN 

36 

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Likewise, the FSAP cost survey suggests that the impact of changes to intermediary regulation would 
be greater than pure disclosure changes. 

There  is  also  a  second  way  in  which  SMEs  may  be  impacted  by  changes  to  investor  protection 
measures:  as  clients  of  the  financial  services,  rather  than  as  service  or  product  providers.  This  is 
because  many  SMEs  may  be  classified  as  retail  clients,  either  electively or  otherwise.  In  such  cases 
steps to improve protections in the retail market could well benefit SMEs. 

However, it is premature to assess the precise impact on SMEs at this stage, as the exact nature of the 
proposals is not yet determined. Further and more detailed analysis will be carried out at a later stage 
to assess detailed proposals. 

7.4. 

Environment and third countries 

There  would  be  no  considerable  impact  on  the  environment  as  a  result  of  the  introduction  of  the 
preferred policy options. 

Likewise,  no  considerable  negative  impact  of  policy  options  on  third  countries  is  apparent,  though 
impact of detailed proposals on branches of non-EEA firms might be material. Notably, recent work 
(such as the FSAP study) has found it difficult to distinguish between EEA and non-EEA business. 

7.5. 

Administrative burden 

Any follow-up measures to the Communication are likely to affect the current level of administrative 
burden on firms. The analysis of options examined above has also made reference to costs that include 
items qualifying as administrative burdens. Here a separate assessment of foreseeable administrative 
burden is carried out.  

It should be recalled however that the current Impact Assessment only analyses high level options, and 
the exact contents of the options to be taken forwards will only be determined at a later stage. Thus it 
is not possible to calculate precisely with the use of the standard cost model what the exact change in 
administrative burden would be. We can only assess the direction and magnitude of such change. A 
separate  impact  assessment  on  follow-up  measures  will  be  carried  out  at  a  later  stage,  which  will 
contain precise measurement of administrative burden. Further steps will be undertaken as necessary 
then to gather the necessary data for such an assessment.  

At  this  stage  however,  it  can  be  established  that  legislative  action  to  harmonise  pre-contractual 
disclosure  requirements  would  likely  create  incremental  administrative  costs  for  firms  where 
disclosure  requirements  change  or  where  new  requirements  apply.  Experience  from  the  Prospectus 
Directive suggests these will be material costs, particularly for smaller firms. However, as a proportion 
of  total  operating  expenses  the  Prospectus  Directive  experience  was  that  they  could  be  well  below 
0.5%. For reasons outlined in the analysis of options above, the impact of the follow-up measures to 
the Communication can be estimated to be lower than this in terms of administrative burden.  

The  administrative  burden  related  to  the  regulation  of  intermediaries  (for  instance,  relating  to  the 
management of conflicts of interest and general conduct of business) was greater than in the case of 
pre-contractual disclosures, if the experience of MiFID is taken as a proxy. But again, there are good 
reasons for thinking that the costs of the Communication follow-up measures would be significantly 
lower (largely because changes are likely to be purely incremental for many intermediaries, and many 
who  are  already  exposed  to  different  requirements  may  well  already  having  put  in  place  consistent 
'highest common denominator' standards to ease their own compliance burden). 

To give an order of magnitude of the number of firms potentially impacted by any follow-up measures 
to the Communication, in the EU 27 there are 8,348 credit institutions,37 and 769 life insurance and 

37 

Source: 2007 Eurostat data, http://www.ecb.int/pub/pdf/other/eubankingstructures2008en.pdf. 

EN 

37 

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composite insurance companies.38 There are over 50000 investment funds, but we do not have at this 
stage a precise figure on the number of enterprises managing those funds (which will be considerably 
lower than the number of individual funds). 

A separate impact assessment on the follow-up measures will be carried out at a later stage, to contain 
a  precise  measurement  of  the  administrative  burden  using  the  Standard  Cost  Model.  Further  steps 
would be taken as necessary to gather necessary data for such an assessment. 

7.6. 

Monitoring and evaluation 

A  comprehensive  monitoring  and  evaluation  programme  can  only  be  developed  once  detailed 
proposals have been made. Different policy options carry different implications in terms of such work: 
for  instance,  it  is  unlikely  that  achieving  effective  disclosure  practices  across  the  various  market 
segments will be possible solely through the relevant degree of harmonisation of requirements at the 
European level, without considerable additional supervisory work to encourage best practices amongst 
market participants.  

38 

Own  calculations  based  on  Eurostat  2005  data  on  life  and  composite  insurance  enterprises.  No  data 
available for Germany, Ireland, France, Malta and the United Kingdom. 

EN 

38 

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8. 

CONCLUSIONS 

A key challenge in the aftermath of the financial crisis is 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 retail investments reflects the realities of modern financial markets and that a lack of 
coherence  resulting  from  out-dated  regulatory  silos  is  not  allowed  to  lead  to  investor  detriment  and 
distorted competition.  

This impact assessment has reviewed the regulatory landscape for packaged retail investment products 
at  European  level  and  has  demonstrated  clear  inconsistencies  in  rules  on  pre-contractual  disclosures 
and  selling  practices  between  products  and  sectors.  In  some  sectors,  rules  are  entirely  absent  at 
European level.  

The available evidence does not allow us to be precise about the scale of the problems arising from 
this  fragmented  regulatory  framework.  However,  we  have  outlined  the  mechanisms  by  which 
problems are likely to arise, provided a range of examples of investor detriment relating to the sale of 
each  of  the  product  families  concerned,  and  have summarised  the  qualitative  evidence  that  we  have 
received from a range of stakeholders on the impact of gaps and inconsistencies in Community law. 

We have also reviewed the responses by Member States to these problems. In some Member States, 
action  has  been  taken  to  buttress  the  provisions  of  Community  law  in  order  to  enhance  consumer 
protection and to provide a level playing field for competing investment propositions. However, there 
has  not  been  a  systematic  or  co-ordinated  response  at  national  level.  The  result  has  been  further 
fragmentation  of  the  regulatory  framework  for  retail  investment  products,  with  potential  impacts  on 
cross-border service providers and hence the single market. 

We conclude, therefore, that in the absence of action at the European level, the lack of coherence in 
approaches to pre-contractual disclosures and the regulation of intermediaries in Community law will 
continue  to  pose  a  threat  to  the  efficiency  of  the  market  for  retail  investment  products.  Consumer 
detriment,  distorted  competition  between  product  families  on  the  basis  of  regulatory  arbitrage,  and 
barriers to the development of the single market will remain as significant problems. 

Further to this, our analysis of options indicates that while a thorough assessment of costs and benefits 
cannot be made prior to the development of detailed provisions, legislative action appears necessary to 
address the problems identified. This shall of necessity be at the European level, since it is differences 
in Community law which underpin many of the problems. 

We  are  unable  at  this  stage  to  draw  firm  conclusions  about  the  details  of  an  optimal  legislative 
intervention,  so  it  is  not  possible  to  be  precise  about  its  likely  costs  and  benefits.  The  level  of 
harmonisation to be delivered and relatedly the degree of flexibility for national authorities or industry 
sectors  to  maintain  existing  regimes  will  be  a  key  determinant  of  both  sides  of  the  scorecard. 
Considerable further work will be required to target further legislative work at the European level, so 
that it may effectively achieve an optimal trade-off between costs and benefits. 

Nonetheless, updating the European regulatory framework so as to replace out-dated regulatory silos 
with  a  more  coherent  approach  which  ensures  a  consistently  high  level  of  investor  protection  and  a 
level playing field for comparable investment propositions is likely to underpin effective engagement 
in  packaged  retail  investment  products  by  retail  investors,  and  in  turn  contribute  to  an  efficient 
allocation of resources, with attendant benefits for the individual and the wider economy. 

EN 

39 

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ANNEX 1 

1. 

LIST OF ACRONYMS 

3L3 
AFM 
AIMA 
AILO 
BIPAR  
CEA 
CEIOPS 

CLD 
EEA 
EFAMA 
EVCA 
FECIF 

FIN-USE 

FSA  
FSAP 
IFA 
IMD  
IOSCO 
MiFID  
PFSA 
SME 
UCITS  

Insurance  and  Occupational 

Lamfalussy Level 3 Committees 
Dutch Financial Markets Authority 
Alternative Investment Management Association 
Association of International Life Offices 
European Federation of Insurance Intermediaries 
European Insurance and Reinsurance Federation 
Committee  of  European 
Pension Supervisors 
Consolidated Life Directive 
European Economic Area 
European Fund and Asset Management Association 
European Venture Capital Association 
European  Federation  of  Financial  Advisers  and  Financial 
Intermediaries 
Independent  expert  forum,  comprising  consumer  protection 
and  small  business  experts,  academics  and  consumer 
organisation representatives 
Financial Services Authority (UK) 
Financial Services Action Plan  
Independent Financial Adviser 
Insurance Mediation Directive 
International Organization of Securities Commissions  
Markets in Financial Instruments Directive 
Polish Financial Supervision Authority  
Small- and Medium-Sized Enterprise 
Undertakings  for  Collective  Investment  in  Transferable 
Securities 

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40 

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Effects 

Problems 

Drivers 

2
.

P
R
O
B
L
E
M
T
R
E
E

E
N

4
1

E
N

 
 
 
 
 
 
 
 
 
3. 

WHAT ARE PACKAGED 'RETAIL INVESTMENT PRODUCTS'? 

There  is  currently  no  definition  of  a  'packaged  retail  investment  product'  in  Community  law,  nor  is 
there a common definition in Member State legislation. We define the concept here with reference to 
the characteristics of the products on offer and the set of investors to whom they are sold. The core 
characteristics are as follows: 

•  They  are  'packaged'  products  which  combine  investments  in  (usually)  multiple  financial 

instruments; 

•  They are typically held for a medium to long term period; 

•  Their core economic function is capital accumulation; and 

•  They are designed for, and sold predominantly to, retail investors. 

This set of products should not be confused with retail financial products or services in general, which 
may include credit products (mortgages, loans), insurance products, payment services etc. 

All  of  the  product  families  described  in  this  Impact  Assessment  offer  comparable  economic 
functionality.  However,  there  is  considerable  variation  in  product  characteristics  both  within  and 
between product families. The key differences are as follows: 

•  The products are structured differently. For instance, investment in a fund entails the delegation of 
fiduciary responsibility to a fund manager, and with actively managed funds the return is affected 
by  the  decisions  taken  by  that  manager  over  the  lifetime  of  the  investment.  By  contrast,  the 
calculation  of  the  return  on  a  structured  security  at  maturity  is  determined  in  advance  by  a  fixed 
algorithm. 

•  The legal relationship between the investor and originator varies. The client remains the beneficial 
owner of the assets in a fund investment, whereas this is not the case when an investment is made 
through an insurance wrapper: the underlying assets are legally owned by the insurance company. 
The  company  promises  to  provide  a  return  to  the  policy  holder  based  on  the  investment 
performance of the assets. 

•  The  (non-investment)  risks  associated  with  the  products  differ.  For  example,  an  investor  in  a 
structured  security  bears  a  counterparty  risk  against  the  issuer  of  the  security.  An  investor  who 
entrusts his/her assets to a fund manager accepts the risk that the  manager will not act in his/her 
best  interests.  There  can  also  be  differences  in  the  exposure  to  liquidity  risks  between  different 
types of product. 

•  The characteristics of the products may differ, for example in terms of the types of market exposure 
they offer and the existence and nature of a capital guarantee. The liquidity and accessibility of the 
products may also vary significantly, with some having lock-ins or penalties if the investor needs 
quick access to their capital. 

•  Average holding periods may vary; anecdotal evidence suggests  that insurance-based products in 

particular are typically held for longer than the average maturity of a structured security.  

•  They  are  subject  to  differential  tax  treatment,  according  to  the  policy  preferences  of  national 

authorities. 

•  Some products may offer additional functionality, such as biometric risk coverage in a unit-linked 

life insurance policy. 

It is important that these differences are taken into account in the design of any policy response to the 
problems identified. However, it is clear that, from the perspective of the retail investor, all of these 
products perform comparable economic functions. 

Work conducted on these issues in other public fora (e.g. Joint Forum, IOSCO, 3L3 and at national 
level) has variously referred to the same set of products as 'competing' or 'substitute' products. While 

EN 

42 

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these descriptions may apply to a subset of the products in question, we do not consider these terms to 
be  generally  applicable.  For  the  reasons  given  above,  we  do  not  consider  all  of  the  products  under 
consideration  to  be  perfect  substitutes.  Moreover,  while  they  do  compete  for  retail  savings,  it  is  not 
always  accurate  to  treat  them  as  being  in  direct  competition.  For  example,  unit-linked  life  policies 
often serve simply as a 'wrapper' for an investment in an underlying fund. In this case the 'competing 
product' is more accurately described as an alternative channel for the distribution of the investment 
fund. 

4. 

HOW BIG IS THE MARKET FOR PACKAGED RETAIL INVESTMENT PRODUCTS? 

It is not straightforward to arrive at an accurate estimate of the size of the market for retail investment 
products.  The  available  data  on  unit-linked  insurance  investments  do  not  distinguish  between  those 
products offering significant biometric risk cover and those that do not. Data on term deposits do not 
distinguish between those that are structured and those that are not. There is also a problem of double-
counting, to the extent that investments in units of investment funds through unit-linked life wrappers 
are included in both product categories. Nevertheless, an estimate of total market size of €8-10 trillion 
is not unreasonable, even following the outflows that occurred during 2008. 

Capital outstanding (EURO trillion) 39 

Investment Funds (Assets under Management)

Unit-linked life investments

Capital in retail structured securities

Deposits held by households

9

8

7

6

5

4

3

2

1

0

end 2002

end 2003

end 2004

end 2005

end 2006

end 2007

Source EFAMA, CEA, retailstructuredproducts.com and ECB 

5. 

HOW ARE PACKAGED RETAIL INVESTMENT PRODUCTS DISTRIBUTED? 

On the supply side, it is necessary to distinguish between the originators of retail investment products 
and their distributors. Originators include fund managers, securities issuers and insurance companies. 
These entities may distribute their products directly to retail investors – in which case the originator 
and distributor are the same – or through an intermediary. 

Funds  and  structured  securities  are  distributed  predominantly  by  banks  in  many  Member  States, 
although independent financial advisers are prevalent in the UK. Financial institutions also distribute 

39 

Investment funds: includes UCITS and non-UCITS but not hedge funds or private equity. Unit-linked 
life investments: includes life insurance policies with biometric risk component. Term deposits held by 
households: with Monetary and Financial Institutions: includes deposits without embedded optionality 

EN 

43 

   EN 

 
 
                                                 
the  majority  of  unit-linked  life  insurance  policies,  along  with  insurance  company  employees,  agents 
and, in some countries, insurance brokers. Greater detail is given in the sections that follow. 

Traditionally,  financial  institutions  distributed  products  developed  'in  house'  by  fund  managers  and 
structurers. In recent times, however, funds and securities distributors have moved towards more open 
models  of  distribution,  with  third-party  products  offered  alongside  own-brand  products  ('open 
architecture'). It is also common for different types of investment product to be made available from 
the same distribution channel. For example, a prospective investor seeking to purchase an investment 
from branch of a bancassurer or from an independent financial advisor may be offered products from 
any  of  the  product  families.  There  are  also  signs  of  developments  whereby  intermediaries  offer 
services which blur some of the distinctions between intermediation and product origination, such as 
distributor managed funds and wrap platforms. 

Investment funds 

Industry  estimates  suggest  that,  in  continental  Europe,  commercial  banks  and  insurance  companies 
remain the largest distributors of investment funds but that their market share in fund distribution fell 
from 97% to 75% between 1990 and 2005. In the UK, independent financial advisors (IFAs) are the 
main distribution channel.  

Distribution channels by country, 2007 

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

France

Germany

Italy

Spain

UK

Retail bank

IFA

Private bank

Supermarket

Funds of funds

Corporate/institution

Pension or insurance w rapper

Direct

Other

Source: Lipper FERI, European Fund Market Data Digest 2007 

Structured securities 

In 2006, banks were the primary distributors of retail structured securities, with a market share close to 
86%.  IFAs  and  brokers,  which  can  either  sell  structured  products  from  multiple  issuers  or  from  a 
single issuer, accounted for 12% of structured product retail sales in 2006. 

Distribution channels, EU, 2006 

EN 

44 

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100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Other

IFA

Retail banks 

Source: www.structuredretailproducts.com 

Unit-linked life insurance 

EU

The  available  data  do  not  distinguish  between  distribution  channels  for  unit-linked  life  insurance 
policies,  and  life  insurance  more  generally.  Financial  institutions  remain  the  main  distribution 
channels, with the exception of the UK and the Netherlands, where brokers and agents predominate. 
Life insurance products are also distributed through networks of insurance company employees. 

Life insurance (new individual contracts) distribution channels, EU, 2006 

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Belgium

France

Italy

Netherlands

Spain

UK

Financial instit ut ions

Employees

Agent s

Brokers

Direct

Other

Source: CEA 

Structured term deposits 

No  data  are  available  on  distribution  channels  for  structured  term  deposits.  However,  it  can  be 
reasonably  assumed  that,  by  nature,  structured  term  deposits  are  distributed  by  deposit-taking 
institutions,  i.e.  commercial  banks.  In  some  Member  States,  financial  advisers  might  well  propose 
these as part of their range of products. 

6. 

MEMBER STATE APPROACHES TO THE REGULATION OF RETAIL INVESTMENT PRODUCTS. 

Many  Member  States  have  supplemented  the  provisions  of  European  directives  with  additional 
provisions within their own jurisdictions. This section provides examples from three Member States, 
which are included for illustrative purposes only. 

EN 

45 

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United Kingdom: At the time of the implementation of MiFID, the UK introduced a new Conduct of 
Business sourcebook40 under which many MiFID provisions were applied to non-scope business, e.g. 
life  insurance  products.  In  particular,  conduct  of  business  obligations,  requirements  for  client 
categorisation,  communicating  with  clients,  including  financial  promotions,  information  about  the 
firm, its services and remuneration, suitability (including basic advice) and appropriateness (for non-
advised services) generally apply to MiFID and non-MiFID firms. Both MiFID and non-MiFID firms 
must  also  prepare  a  Key  Features  Document  (KFD)  and  a  Key  Features  Illustration  (KFI)  for  some 
'packaged products' (not including structured term deposits). (The UK concept of a 'packaged product' 
includes,  in  addition  to  retail  investment  products,  other  products  such  as  personal  pension  schemes 
and  annuities.)  The  requirements  for  financial  promotions  generally  apply  to  all  investment  activity, 
without  distinguishing  between  products.  Certain  additional  requirements  apply  to  all  types  of 
'packaged product'. Many of the UK requirements significantly predate the introduction of MiFID. 

In  Italy,  the  amended  Consolidated  Law  on  Financial  Intermediation41  adopted  a  homogeneous 
approach  for  both  product  disclosure  and  rules  on  conduct  of  business.  Any  public  offering  of 
securities, investment funds (both UCITS and non-UCITS) or "financial products issued by banks or 
insurance  undertakings"  is  subject  to  the  same  rules  concerning  the  prospectus  as  well  as  to  the 
supervision  of  the  CONSOB.  For  instance,  MiFID  rules  on  conduct  of  business,  including  the 
provisions concerning inducements and conflicts of interest are applicable also to: i) subscription and 
placement  of  financial  products  issued  by  banks  and  insurance  undertakings;  and  ii)  collective 
management service and UCITS directly marketed by management companies. Moreover, the Law n° 
252  of  5  December  2005  introduced  new  transparency  requirements  for  supplementary  pension 
schemes, providing investors with pre-contractual and contractual information similar to that required 
for retail investment funds.  

In  Portugal,  the  Decree-Law42  transposing  MiFID  into  national  law  transferred  the  powers  of 
supervision  and  rulemaking  on  the  assurances  linked  to  investment  funds  and  the  individual 
subscription contract to open-end pension funds, from the Portuguese Insurance Institute (ISP) to the 
Portuguese Securities Commission (CMVM), with regard to the business conduct duties imposed on 
the distribution of said products, particularly within the context of information duties. Making use of 
these new regulatory competences, the CMVM approach was to supplement the existing requirements 
for  unit-linked  insurance  contracts  and  open-ended  pension  funds  with  some  relevant  MiFID 
provisions. One example was the obligation to provide retail clients with key product information in 
the  form  of  a  simplified  prospectus  similar  to  that  required  for  UCITS.  It  also  introduced  a  rule  of 
“suitability” and “know your customer” (also applicable to investment advice) but not as prescriptive 
as  the  related  MiFID  rules,  as  these  products  are  investment  products  in  substance,  but  insurance 
products in their legal form. In addition, the CMVM Regulation nº 8/200743 supplemented the existing 
requirements44 for these two types of product with some relevant MiFID provisions: e.g. key product 
information  in  the  format  of  a  simplified  prospectus  similar  to  that  required  for  UCITS;  a  rule  of 
“suitability” and “know your customer” (also applicable to investment advice) but not as prescriptive 
as the related MiFID rules. 

40 
41 

42 
43 

44 

New Conduct of Business Sourcebook (COBS) applying to firms with effect from 1 November 2007 
Legislative  Decree  n°  58  of  24  February  1998  -  Consolidated  Law  on  Financial  Intermediation, 
pursuant  to  Articles  8  and  21  of  Law  52  of  6  February  1996  (as  amended  by  Legislative  Decrees 
164/2007, 195/2007 and 229/2007) 
Decree-Law No. 357-A/2007 of 31 October 2007 
CMVM  Regulation  n.º  8/2007  "Selling  open-ended  pension  funds  with  individual  adhesion  and 
insurance contracts related to investment funds" (only available in Portuguese). 
For  more  detailed  explanations  on  requirements  introduced  by  this  regulation,  see  the  CMVM's 
contribution to the Call for Evidence (page 12) 

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46 

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7. 

EUROPEAN DISCLOSURE AND DISTRIBUTION RULES FOR RETAIL INVESTMENT PRODUCTS  

7.1. 

Pre-contractual product disclosures 

Investment funds 

Funds  covered  by  the  UCITS  Directive  are  subject  to  disclosure  requirements  in  the  form  of  the 
Simplified Prospectus that must be provided before the conclusion of the contract and, on request, a 
full prospectus, an annual report and a half-yearly report covering the first six months of the financial 
year. Article 33 UCITS provides that a Simplified Prospectus  must be offered to subscribers free of 
charge before the conclusion of the contract. Article 28 UCITS indicates that the simplified prospectus 
must include the information necessary for investors to be able to make an informed judgment of the 
investment proposed to them, and in particular of the risks attached thereto. The key information to be 
provided  in  the  simplified  prospectus  is  further  defined  in  Schedule  C,  Annex  I  to  the  UCITS 
Directive.  In  addition,  MiFID  imposes  high-level  disclosure  requirements  notably  in  relation  to  the 
distributor  (when  it  is  MiFID  regulated).  Concerning  nationally  regulated  funds,  most  national  laws 
require a full and a simplified prospectus, whereas others require additional disclosure documents. In 
addition,  the  distributing  firm  has  to  meet  all  MiFID  information  requirements.  This  means  that  the 
firm must check whether the requirements as regards risk disclosure and costs and associated charges 
(including  exit  and  entry  fees)  of  Article  19(3)  MiFID  are  fulfilled,  for  instance  by  provision  to  the 
(potential)  investor  of  a  simplified  prospectus  or  any  other  disclosure  document  required  under 
national law. 

Structured securities  

Structured  securities  which  are  to  be  distributed  to  the  public  on  a  pan-EU  basis  are  subject  to  the 
Prospectus Directive and hence to the publication of a prospectus. Article 5 of this directive states that 
the prospectus "shall contain all information which, according to the particular nature of the issuer 
and of the securities offered to the public or admitted to trading on a regulated market, is necessary to 
enable investors to make an informed assessment of the assets and liabilities, financial position, profit 
and  losses,  and  prospects  of  the  issuer  and  of  any  guarantor,  and  of  the  rights  attaching  to  such 
securities. This information shall be presented in an easily analysable and comprehensible form". The 
prospectus  shall  also  include  a  summary,  which  "in  a  brief  manner  and  in  non-technical  language, 
convey  the  essential  characteristics  and  risks  associated  with  the  issuer,  any  guarantor  and  the 
securities".  This  prospectus  has  to  contain  all  the  information  required  by  the  annexes  of  the 
Prospectus  Regulation  (Commission  Regulation  N°  809/2004),  depending  on  the  issuer  and  the 
securities offered. The prospectus has to be approved by the relevant competent authority. Thus, the 
prospectus must describe the essential features and risks associated with the issuer and the securities 
issued,  with  considerable  detail  on  the  issuer,  but  less  about  the  financial  details  of  the  product.  In 
addition,  MiFID  imposes  high-level  disclosure  requirements  notably  in  relation  to  the  distributor 
(when it is MiFID regulated). 

For security issues which are subject to MiFID, Article 19(2) provides that information addressed by 
an  investment  firm  to  clients  or  potential  clients,  including  marketing  communications,  should  "be 
fair, clear and not misleading". In addition, Article 27 of MiFID Implementing Directive45 specifies in 
particular  the  conditions  with  which  information  must  comply  in  order  to  be  fair,  clear  and  not 
misleading. It provides inter alia that if the information contains an indication of past performance of 
a  financial  instrument,  financial  index  or  an  investment  service,  or  refers  to  simulated  past 
performance  of  such  financial  instrument  or  financial  index  certain  conditions  are  to  be  satisfied. 

45 

Commission  Directive  2006/73/EC  of  10  August  2006  implementing  Directive  2004/39/EC  of  the 
European  Parliament  and  of  the  Council  as  regards  organisational  requirements  and  operating 
conditions for investment firms and defined terms for the purposes of that Directive 

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Article  19(3)  of  MiFID  requires46  that  appropriate  information  shall  be  provided  in  comprehensible 
form  to  clients  or  potential  clients  about  –  amongst  others  –  risks  associated  with  investments  in 
financial  instruments  and  costs  and  associated  charges.  In  extensor,  it  reads  that  "[…]  Appropriate 
information  shall  be  provided  in  a  comprehensible  form  to  clients  or  potential  clients  about:  the 
investment firm and its services, financial instruments and proposed investment strategies; this should 
include  appropriate  guidance  on  and  warnings  of  the  risks  associated  with  investments  in  those 
instruments  or  in  respect  of  particular  investment  strategies,  execution  venues,  and  costs  and 
associated  charges  so  that  they  are  reasonably  able  to  understand  the  nature  and  risks  of  the 
investment  service  and  of  the  specific  type  of  financial  instrument  that  is  being  offered  and, 
consequently, to take investment decisions on an informed basis. This information may be provided in 
a standardised format". Articles 30 to 33 of MiFID Implementing Directive, Article 31 ("Information 
about  financial  instruments"),  specify  requirements  on  'appropriate  information'  to  be  provided  to 
clients  or  potential  clients.  In  particular,  Article  31  of  MiFID  Implementing  Directive  lays  down 
detailed rules on risk disclosure, whereas Article 33 deals with information about costs and associated 
charges.  

Unit-linked life insurance 

The third Life Insurance Directive of 1992, consolidated by the 2002 Directive (the Consolidated Life 
Directive) concerning direct life assurance, indicates in a detailed list the information to be provided to 
the  policyholder  prior  to  the  conclusion  of  the  contract.  The  information  will  first  relate  to  the 
insurance  undertaking  and  to  the  commitment  itself.  Article  36  of  the  Consolidated  Life  Directive 
states that: 

•  "Before the assurance contract is concluded, at least the information listed in Annex III(A) shall be 

communicated to the policy holder. 

•  The  policy-holder  shall  be  kept  informed  throughout  the  term  of  the  contract  of  any  change 

concerning the information listed in Annex III (B). 

•  The Member State of the commitment may require assurance undertakings to furnish information 
in addition to that listed in Annex III only if it is necessary for a proper understanding by the policy 
holder of the essential elements of the commitment". 

Annex  III  lists  the  required  elements  of  pre-  and  post-contractual  disclosures  and  states  that  the 
information "must be provided in a clear and accurate manner, in writing, in an official language of 
the  Member  State  of  the  commitment".  Specifically  regarding  unit-linked  policies,  definition  of  the 
units  to  which  the  benefits  are  linked  as  well  as  an  indication of  the  nature  of  the  underlying  assets 
must be disclosed.  

In addition, the Insurance Mediation Directive (IMD) includes disclosure requirements regarding the 
intermediary (status, service and suitability). Its article 13 provides that: 

"All information to be provided to customers in accordance with Article 12 shall be communicated:(a) 
on paper or on any other durable medium available and accessible to the customer; (b) in a clear and 
accurate manner, comprehensible to the customer; (c) in an official language of the Member State of 
the  commitment  or  in  any  other  language  agreed  by  the  parties…".  This  however  relates  more  the 
form of the disclosure and less to its content.  

Structured term deposits 

There are no European pre-contractual disclosure rules applicable to structured term deposits. 

46 

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7.2. 

Conduct of business rules 

Investment funds 

Direct sales by the management company of its own products are governed by the relevant provisions 
of  the  UCITS  Directive.  When  intermediaries  sell  third-party  investment  funds,  MiFID  applies  and 
provides rules on conduct of business (see below). 

Structured securities 

MiFID applies to distributors which offer either third-party or proprietary retail structured securities. 
Under  Level  1  MiFID  provisions,  structured  securities  are  considered  as  complex  products  which 
cannot be sold on an "execution only" basis. 

The overarching principle in MiFID as regards conduct of business is in Article 19 which states that 
"[…]  (1)  Member  States  shall  require  that,  when  providing  investment  services  and/or,  where 
appropriate, ancillary services to clients, an investment firm act honestly, fairly and professionally in 
accordance with the best interests of its clients […]". A distinction is then made between the provision 
of investment advice or portfolio management, and other investment services. 

•  In the former case, "[…] the investment firm shall obtain the necessary information regarding the 
client's  or  potential  client's  knowledge  and  experience  in  the  investment  field  relevant  to  the 
specific  type  of  product  or  service,  his  financial  situation  and  his  investment  objectives  so  as  to 
enable the firm to recommend to the client or potential client the investment services and financial 
instruments that are suitable for him". The Directive also describes situations in which investment 
services can be provided without these disciplines applying. In all such cases, "(6) […] the client or 
potential client has been clearly informed that in the provision of this service the investment firm is 
not  required  to  assess  the  suitability  of  the  instrument  or  service  provided  or  offered  and  that 
therefore he does not benefit from the corresponding protection of the relevant conduct of business 
rules; this warning may be provided in a standardised format". 

•  In  the  latter  case,  "[…]  (5)  Member  States  shall  ensure  that  investment  firms,  when  providing 
investment services other than those referred to in paragraph 4, ask the client or potential client to 
provide information regarding his knowledge and experience in the investment field relevant to the 
specific  type  of  product  or  service  offered  or  demanded  so  as  to  enable  the  investment  firm  to 
assess whether the investment service or product envisaged is appropriate for the client. In case the 
investment  firm  considers,  on  the  basis  of  the  information  received  under  the  previous 
subparagraph,  that  the  product  or  service  is  not  appropriate  to  the  client  or  potential  client,  the 
investment  firm  shall  warn  the  client  or  potential  client.  This  warning  may  be  provided  in  a 
standardised format. (6)  In  cases  where  the  client  or  potential  client  elects  not  to  provide  the 
information referred to under the first subparagraph, or where he provides insufficient information 
regarding  his  knowledge  and  experience,  the  investment  firm  shall  warn  the  client  or  potential 
client  that  such  a  decision  will  not  allow  the  firm  to  determine  whether  the  service  or  product 
envisaged is appropriate for him. This warning may be provided in a standardised format. […]" 

Suitability and appropriateness tests are different47 and should not be confused. As well as applying to 
different  types  of  services,  they  differ  in  the  degree  of  information-gathering  and  the  rigour  of  the 
assessment required.  

47 

The ‘appropriateness’ test is less wide-ranging than the suitability test. Firms are only required to assess 
whether  the  client  has  the  knowledge  and  experience  necessary  to  understand  the  risks  involved  in 
relation to the specific type of product or service in question. For the purposes of the ‘suitability’ test, 
the  firm,  in  addition  to  this  element,  also has  to be  satisfied  that  the  specific  transaction  a)  meets  the 
client’s  investment  objectives,  and  b)  is  such  that  the  client  is  able  financially  to  bear  any  related 

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Unit-linked life insurance 

Employees of insurance companies, who are not considered as intermediaries, are not within the scope 
of the Insurance Mediation Directive and hence are not subject to the same obligations as insurance 
intermediaries.  The  latter  are  subject  to  IMD,  which  provides  that  they  must  deliver  written  advice, 
taking into account the demands and needs of the policyholder. The scope of this obligation might be 
considered to be similar to that applying to financial advisors subject to MiFID. Thus, Article 12 of 
IMD provides that: "[…] 

2. When the insurance intermediary informs the customer that he gives his advice on the basis of a fair 
analysis, he is obliged to give that advice on the basis of an analysis of a sufficiently large number of 
insurance contracts available on the market, to enable him to make a recommendation, in accordance 
with  professional  criteria,  regarding  which  insurance  contract  would  be  adequate  to  meet  the 
customer's needs. 

3. Prior to the conclusion of any specific contract, the insurance intermediary shall at least specify, in 
particular  on  the  basis  of information provided  by  the  customer,  the  demands and  the  needs  of  that 
customer as well as the underlying reasons for any advice given to the customer on a given insurance 
product. These details shall be modulated according to the complexity of the insurance contract being 
proposed. […]" 

Structured term deposits 

There are no European conduct of business rules applicable to structured term deposits. 

7.3. 

Conflicts of interest and inducement rules 

Investment funds 

Direct sales by the management company of its own products are governed by the relevant provisions 
of  the  UCITS  Directive.  When  intermediaries  sell  third-party  investment  funds,  MiFID  applies  and 
provides rules on conflicts of interest (see below).  

Structured securities 

MiFID rules on conflicts of interest apply to distributors which offer either third-party or proprietary 
retail  structured  securities.  First,  Article  18  of  MiFID  disposes  that  conflicts  of  interest  should  be 
avoided and, if not possible, managed and disclosed by stipulating that: "[…] 

(1)  Member  States  shall  require  investment  firms  to  take  all  reasonable  steps  to  identify 
conflicts  of  interest  between  themselves,  including  their  managers,  employees  and  tied 
agents,  or  any  person  directly  or  indirectly  linked  to  them  by  control  and  their  clients  or 
between  one  client  and  another  that  arise  in  the  course  of  providing  any  investment  and 
ancillary services, or combinations thereof.  

(2)  Where  organisational  or  administrative  arrangements  made  by  the  investment  firm  in 
accordance  with  Article  13(3)  to  manage  conflicts  of  interest  are  not  sufficient  to  ensure, 
with  reasonable  confidence,  that  risks  of  damage  to  client  interests  will  be  prevented,  the 
investment  firm  shall  clearly  disclose  the  general  nature  and/or  sources  of  conflicts  of 
interest to the client before undertaking business on its behalf. […]". 

investment risks. The firm is required to collect all necessary information to have a reasonable basis for 
reaching  this  opinion.  Finally,  the  regulatory  consequences  of  the  two  tests  are  different:  while  an 
investment  firm  may  not  provide  an  ‘unsuitable’  recommendation,  it  may  provide  a  service  which  it 
considers as not ‘appropriate’ to the client, as long as the client is given adequate warning. 

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In  addition,  Article  19(1)  of  MiFID  requires  an  investment  firm  to  "act  honestly,  fairly  and 
professionally  in  accordance  with  the  best  interests  of  its  clients".  Furthermore,  the  MiFID  Level  2 
directive contains extensive guidance on conflict of interest policy and the disclosure of 'inducements'. 
Article 26 of Implementing Directive complements MiFID Article 19(1) so as to regulate the giving 
and receipt of fees, commissions or non-monetary benefits (inducements) by investment firms. Thus, 
firms must be careful to ensure that any inducements they provide or are provided with do not conflict 
with their fiduciary duty of loyalty to their clients. In particular, the provision targets any economic 
flows which distort the integrity of advisory or other services provided to clients. In particular, under 
Article  26  of  MiFID  Implementing  Directive,  firms  may  not  pay or  provide,  or  be  paid  or  provided 
with,  any  inducement,  in  connection  with  the  provision  of  an  investment  or  ancillary  service  to  the 
client, with three limited exceptions48:  

•  The first is where inducements are paid or provided to or by the client or a person acting on behalf 

of the client. 

•  The second applies when the following three tests are met: i) the existence, nature and amount of 
the inducement, or, where the amount cannot be ascertained, the method of calculating that amount, 
must  be  clearly  disclosed  to  the  client,  in  a  manner  that  is  comprehensive,  accurate  and 
understandable,  prior  to  the  provision  of  the  relevant  service;  ii)  the  inducement  is  designed  to 
enhance  the  quality  of  the  relevant  service  to  the  client;  and  iii)  the  inducement  does  not  impair 
compliance with the firm’s duty to act in the best interests of the client. 

•  The  third  exception  covers  all  "proper  fees  which  enable  or  are  necessary  for  the  provision  of 
investment services, such as custody costs, settlement and exchange fees, regulatory levies or legal 
fees, and which, by their nature, cannot give rise to conflicts with the firm’s duties to act honestly, 
fairly and professionally in accordance with the best interests of its clients". 

Unit-linked life insurance 

Employees of insurance companies, who are not considered as intermediaries, are not within the scope 
of the Insurance Mediation Directive and hence are not subject to the same obligations as insurance 
intermediaries.  The  latter  are  subject  to  IMD.  Although  the  concept  of  conflict  of  interest  is  not 
explicitly mentioned in the IMD, this directive provides some high level rules in this respect. Thus, the 
IMD Article 12 provides that: "[…] 

1.  Prior  to  the  conclusion  of  any  initial  insurance  contract,  and,  if  necessary,  upon 
amendment or renewal thereof, an insurance intermediary shall provide the customer with at 
least the following information: 

(c) whether he has a holding, direct or indirect, representing more than 10 % of the voting 
rights or of the capital in a given insurance undertaking; 

(d)  whether  a  given  insurance  undertaking  or  parent  undertaking  of  a  given  insurance 
undertaking  has  a  holding,  direct  or  indirect,  representing  more  than  10  %  of  the  voting 
rights or of the capital in the insurance intermediary; 

(i) he gives advice based on the obligation in paragraph 2 to provide a fair analysis, or 

(ii) he is under a contractual obligation to conduct insurance mediation business exclusively 
with  one  or  more  insurance  undertakings.  In  that  case,  he  shall,  at  the  customer's  request 
provide the names of those insurance undertakings, or 

48 

See recommendations "inducements under MiFID" published by CESR in May 2007 for more detailed 
explanations. 

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(iii)  he  is  not  under  a  contractual  obligation  to  conduct  insurance  mediation  business 
exclusively with one or more insurance undertakings and does not give advice based on the 
obligation in paragraph 2 to provide a fair analysis. In that case, he shall, at the customer's 
request  provide  the  names  of  the  insurance  undertakings  with  which  he  may  and  does 
conduct business. […]". 

Structured term deposits 

There are no European conflict of interest rules applicable to structured term deposits. 

7.4.  Marketing and advertising rules 

Investment funds 

The UCITS Directive does not harmonise rules for advertising and only stipulates that distributors of 
UCITS funds have to comply with national rules governing advertising in each Member State. When 
intermediaries sell third-party investment funds, MiFID applies and provides some rules on marketing 
communications. 

Structured securities 

Structured  securities  which  are  offered  to  the  public  are  subject  to  article  15  of  the  Prospectus 
Directive. Inter alia, this article requires that advertisements state that a prospectus has been or will be 
published,  with  an  indication  of  where  investors  can  obtain  it.  Advertisements  shall  be  clearly 
recognisable  as  such.  The  information  contained  in  an  advertisement  shall  not  be  inaccurate,  or 
misleading. This information shall also be consistent with the information contained in the prospectus. 
In addition, Article 15 gives the competent authority of the home Member State the power to exercise 
control over the compliance of advertising activity. However, this does not predetermine whether such 
a control has to be ex ante or ex post and, therefore, this varies in Member States. In addition, MiFID 
applies to structured security offers to the public.  

MiFID has not harmonised marketing/advertisement requirements. Thus, Member States can impose 
such  measures  subject  to  applicable  Community  legislation.  However,  MiFID  has  introduced 
information  requirements  that  include  marketing  communications.  In  particular,  Article  19(2)  of 
MiFID  provides  that:  "[…]  (2)  All  information,  including  marketing  communications,  addressed  by 
the  investment  firm  to  clients  or  potential  clients  shall  be  fair,  clear  and  not  misleading.  Marketing 
communications shall be clearly identifiable as such. […]". Moreover, Recital 42 and Article 24(2) of 
MiFID Implementing Directive provide that marketing communications should be clearly identifiable 
as such and carry other disclaimers in certain circumstances concerning investment research. Article 
27 MiFID Implementing Directive specifies in particular the conditions with which information must 
comply in order to be fair, clear and not misleading. It provides – inter alia – that if the information 
contains an indication of past performance of a financial instrument, financial index or an investment 
service, or refers to simulated past performance of such financial instrument or financial index certain 
conditions are to be satisfied. 

Unit-linked life insurance 

The Consolidated Life Directive (Article 47) does not harmonise rules for advertising. It is limited to 
state that Member States may require compliance with their national rules on the form and content of 
advertising. Therefore, rules for marketing communications on unit-linked life insurance product will 
vary between Member States. 

Structured term deposits 

There are no European conflict of interest rules applicable to structured term deposits. 

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In addition, at the EU level, a piece of Community legislation on advertising may apply to marketing 
communications for the broad range of product families considered. Indeed, The Directive concerning 
unfair  business-to-consumer  commercial  practices49  provides  safeguards,  such  as  in  the  Section  1 
(Misleading commercial practices); Article 6 - Misleading actions: "[…] 

1. A commercial practice shall be regarded as misleading if it contains false information and 
is therefore untruthful or in any way, including overall presentation, deceives or is likely to 
deceive the average consumer, even if the information is factually correct, in relation to one 
or more of the following elements, and in either case causes or is likely to cause him to take 
a transactional decision that he would not have taken otherwise: 

(a) the existence or nature of the product; 

(b) the main characteristics of the product, such as […]; 

2.  A  commercial  practice  shall  also  be  regarded  as  misleading  if,  in  its  factual  context, 
taking  account  of  all  its  features  and  circumstances,  it  causes  or  is  likely  to  cause  the 
average consumer to take a transactional decision that he would not have taken otherwise, 
and […]". 

In addition, Article 7 defines misleading omissions as: "[…] 

1.  A  commercial  practice  shall  be  regarded  as  misleading  if,  in  its  factual  context,  taking 
account  of  all  its  features  and  circumstances  and  the  limitations  of  the  communication 
medium,  it  omits  material  information  that  the  average  consumer  needs,  according  to  the 
context, to take an informed transactional decision and thereby causes or is likely to cause 
the  average  consumer  to  take  a  transactional  decision  that  he  would  not  have  taken 
otherwise. 

2.  It  shall  also  be  regarded  as  a  misleading  omission  when,  taking  account  of  the  matters 
described  in  paragraph  1,  a  trader  hides  or  provides  in  an  unclear,  unintelligible, 
ambiguous or untimely manner such material information as referred to in that paragraph 
or fails to identify the commercial intent of the commercial practice if not already apparent 
from  the  context,  and  where,  in  either  case,  this  causes  or  is  likely  to  cause  the  average 
consumer to take a transactional decision that he would not have taken otherwise.  

[…] 

4.  In  the  case  of  an  invitation  to purchase,  the  following  information  shall be  regarded  as 
material, if not already apparent from the context: 

(a) the main characteristics of the product, to an extent appropriate to the medium and the 
product; 

(b) the geographical address and the identity of the trader, […]; 

(c) the price inclusive of taxes, […] or, where these charges cannot reasonably be calculated 
in advance, the fact that such additional charges may be payable; […] 

(e)  for  products  and  transactions  involving  a  right  of  withdrawal  or  cancellation,  the 
existence of such a right. […]". 

49 

Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair 
business-to-consumer commercial practices in the internal market 

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7.5. 

E-Commerce Directive and Distance Marketing of Financial Services Directive  

In  addition,  other  provisions  of  EU  law  may  be  applicable  to  the  distribution  of  retail  investment 
products. 

According to the E-Commerce Directive, service providers are entitled to provide their services by 
the means of Internet throughout the EU, exclusively on the basis of the rules of the Home Member 
State without any further restriction. Indeed, in contrast to the UCITS Directive, for instance, which 
confers some residual competences to the Host Member State, the e-commerce Directive is based on a 
strict  “country-of-origin”  principle.  This  Directive  imposes  certain  information  requirements  for  the 
conclusion of contracts by electronic means. In addition to other information requirements established 
by EU law, the service provider must give the following information prior to the service provision: 

•  the technical steps to follow to conclude the contract; 

•  whether or not the concluded contract will be filed by the service provider and whether it will be 

accessible; 

•  the technical means for identifying and correcting input errors prior to the placing of the order; 

•  the languages offered for the conclusion of the contract; 

•  any relevant codes of conduct to which he subscribes and information on how those codes can be 

consulted electronically; and 

•  contract  terms  and  general  conditions  provided  to  the  recipient  must  be  made  available  in  a  way 

that allows him to store and reproduce them.  

Moreover,  the  service  provider  shall  supply  information  on  its  name;  address;  e-mail  address; 
company  registration  number;  professional  title;  VAT  number;  and  details  of  membership  of 
professional  associations  easily,  directly  and  permanently  accessible.  These  requirements  are  in 
addition to those imposed by MiFID. 

The  Distance  Marketing  of  Financial  Services  Directive  (DMFSD)  applies  to  the  distribution  of 
financial services or products sold by the means of distance communication, i.e. those means which do 
not  require  the  simultaneous  physical  presence  of  the  supplier  and  the  consumers  such  as  fax, 
telephone  and  again  Internet.  In  contrast  to  the  e-commerce  Directive  and  similarly  to  the  UCITS 
Directive,  the  Distance  Marketing  of  Financial  Services  Directive  recognises  certain  residual 
competences of the Host Member State. The Distance Marketing of Financial Services Directive also 
regulates  the  information  which  has  to  be  provided  to  the  investor.  The  "distance  marketing 
information" must be provided before the client is bound by a contract. This information includes: 

•  all  the  contractual  terms  and  conditions  and  the  information  on  paper  or  on  another  durable 
medium  available  and  accessible  to  the  consumer  in  good  time  before  the  consumer  is  bound  by 
any distance contract or offer;  

•  the identification of the supplier; 

•  the description of the financial services; 

•  the characteristic of the distance contract; and 

•  the existence of a redress. 

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Although  the  DMFSD  requirements  appear  to  add  a  separate  layer  of  information  to  be  disclosed, 
these  requirements  are  often  already  satisfied  through  existing  disclosure  requirements.  They  are 
partly similar to those of the UCITS Directive.  

These two Directives may be seen as making the regulatory patchwork governing the distribution of 
retail investment products to retail investors more complex. The question of the relationship of their 
provisions with those of other Directives (such as MiFID, UCITS, IMD, Prospectus, etc.) may arise. 
The two directives do not establish exemptions to the application of the complementary provisions of 
the  UCITS,  MiFID,  Life  Insurance  and  Insurance  Mediation  Directives.  The  obligations  to  offer 
information  and  advice provided  for  by  these  latter  directives  should  consequently  be  applicable  for 
distance marketing. 

EN 

55 

   EN 

 
ANNEX 2 

1. 

DETAILED  ANALYSIS  OF  HIGH-LEVEL  OPTIONS  FOR  PRE-CONTRACTUAL 
DISCLOSURES 

1.1. 

Analysis of options 

1.1.1.  Commission sponsored self-regulation  

Effectiveness 

Efficiency  

Consumer protection 

Level playing field 

Single Market 

Pros 

Pros 

Pros 

–  Reputational 
incentives for 
industry to avoid 
mis-selling, promote 
effective decision-
making as a means 
of building 
confidence in the 
industry, linked to 
importance of brand 
identity within many 
retail markets.  

–  Allows disclosures 
to be adapted to the 
specifics of 
particular products 
and sales channels; 
originators may be 
best placed to 
understand the 
features of their 
products. 

Cons 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Sub-optimal 

standards possible as 
consensual solution, 
reducing potential 
extent of consumer 
protection (e.g. 
focus on limiting 
legal liability or 

–  Originators may be 
best placed to 
understand features 
of their products 
and devise solutions 
which provide 
information about 
these consistently 
across product 
types. 

–  Originators may be 
best placed to 
understand 
features of their 
products and 
devise solutions 
which provide 
information about 
these consistently 
cross border. 

Cons 

Cons 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Sub-optimal 

standards possible 
as consensual 
solution, reducing 
potential impact. 

–  Coordination 

challenges with 
segmentation of 
industry. 

–  Inconsistencies 

and constraints in 
EU law would 
remain. 

–  Limited in 
capacity to 
overcome 
differences 
between Member 
States where 
national regimes 
are already in 
place. 

–  Existing national 
regimes may limit 
scope for 
improvements. 

–  The problem 

analysis suggests 
market failings 
require more robust 
regulatory 

–  Sub-optimal or 

minimal standards 
likely as 
consensual 
solution, reducing 
potential impact. 

–  Coordination 

challenges with 
segmentation of 

–  Flexibility for the 
industry might 
promote disclosures 
which are more 
specific and suited to 
particular products. 

–  Industry may be 

more sensitive to cost 
drivers, and so able 
to lower cost impacts 
of changes. 

–  Self-regulatory codes 
already exist in the 
sectors in question in 
several Member 
States. One such code 
(the 'JAC principles') 
is intended for 
application on a pan-
European basis. 
Other industry 
associations (EBF, 
BIPAR, FECIF / 
AILO) have begun to 
develop additional 
measures in response 
to the Commission's 
ongoing work on this 
topic. 

–  Some Member States 
have already invited 
industry participants 
to develop codes. An 
EU-level request 
would not necessarily 
create additional 
costs for all industry 

EN 

56 

   EN 

 
intervention to 
achieve optimum 
outcomes (e.g. 
around balanced 
presentation of 
costs and potential 
benefits). 

–  Enforcement of 

standards 
challenging with 
reduced 
opportunities for 
sanctions. 

industry. 

participants.  

–  Enforcement of 

–  The design and 

standards 
challenging with 
reduced 
opportunities for 
sanctions. 

production of new 
disclosure documents 
would nevertheless 
entail significant 
incremental 
compliance and 
administrative costs 
for those affected. 
See the general 
discussion above for 
indicative figures 
relating to MiFID 
and the Prospectus 
Directive. 

marketing goals for 
industry). 

–  Information 

advantage with 
respect to regulators 
and consumers could 
be exploited. 

–  Unlikely that 

industry would 
develop consistent 
approaches across 
different products, 
such that shopping 
around by investors 
would be no easier 
than currently. 

–  Segmentation of 

industry may limit 
scope for change, as 
different segments 
reluctant to move 
without 
commitments from 
other segments to 
move. 

–  Enforcement of 

standards 
challenging with 
reduced 
opportunities for 
sanctions. 

Overall assessment 

-- 

-- 

- 

≈ 

Magnitude of impact as compared with the baseline scenario: ++ strongly positive; + positive; – – strongly 
negative; – negative; ≈ neutral; ? uncertain; n.a. not applicable 

EN 

57 

   EN 

 
1.1.2.  Mandate to Level 3 committees to promote supervisory convergence 

Effectiveness 

Efficiency  

Consumer protection  Level playing field 

Single Market 

Pros 

Pros 

Pros 

–  Offers potential for 

–  Provides flexibility 
to local supervisors 
for solutions that 
can be tailored to 
local markets 
context which may 
be better focused on 
local consumer 
needs. 

–  IMD (and to lesser 
extent MiFID) 
explicitly allow 
Member States the 
latitude to tackle 
these issues in their 
local markets. 

–  Convergence at MS 
level likely to raise 
overall consumer 
protection standards 

Cons 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Sub-optimal 

standards possible 
as consensual 
solution, reducing 
potential extent of 
consumer 
protection. 

–  Gold-plating and 
inconsistency of 
implementation: 
likely to offer less 
consistency across 
products than a 
mandatory solution, 
both within 

–  Potentially 

–  History of joint 

work (in 3L3) on 
this topic, so could 
be seen as natural 
and organic next 
step. 

–  Convergence at MS 
level likely to lead 
to more consistent 
requirements 

Cons 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Inconsistencies of 
implementation. 
Fragmentation of 
internal market 
would remain, with 
attendant costs for 
cross-border service 
providers. 

–  Experience of low 

levels of co-
ordination between 
national authorities. 

responsive to 
changes in market 
and emergence of 
new products. 

–  Convergence at MS 

level likely to lead to 
more consistent 
requirements 

Cons 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Sub-optimal 

standards possible as 
consensual solution, 
reducing potential 
extent of consumer 
protection. 

–  Coordination 

challenges between 
3L3 committees. 

–  Inconsistency of 
implementation: 
likely to offer less 
consistency in MS 
approach to level-
playing fields than a 
mandatory solution. 

–  Likely to be more 

suited to establishing 
only the weakest 
forms of 
harmonisations, and 
limiting equivalence 
in treatment for 
different products.  

improved 
consistency and 
convergence. 

–  Some Member 

States have already 
supplemented EU 
law at national level 
to provide for 
simplified 
disclosures. 
Possibly no 
additional action 
required in these 
cases, but firms in 
these Member 
States would also 
face significant 
additional costs if 
the Member States 
chose to make 
changes to bring 
alignment to 
common standards. 

–  Progressive 

refinement of 
existing practices, 
where necessary, 
may be less costly 
than introducing 
entirely new 
disclosures. 

–  Level 3 committees, 
Member States and 
to lesser extent 
COM would face 
costs in preparing 
for convergence, 
including e.g. 
potential for 
increased 
supervision costs 
especially where 

EN 

58 

   EN 

 
 
particular Member 
States and between 
different Members 
States, reducing 
extent to which 
investors can 
effectively choose 
between products. 

new supervisory 
responsibilities or 
approaches are 
developed 

–  New mandatory 

disclosures would 
be costly for 
industry to 
implement, as 
discussed above. 

Overall assessment 

+ 

+ 

+ 

+ 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  –  strongly 
negative; – negative; ≈ neutral; ? uncertain; n.a. not applicable 

EN 

59 

   EN 

 
1.1.3.  Commission Recommendation to implement principles through national regulation  

Effectiveness 

Efficiency  

Consumer protection  Level playing field 

Single Market 

Pros 

Pros 

Pros 

–  Can combine a 

–  Can combine a 

stronger common 
starting point 
(within the 
recommendation) 
with the flexibility 
for Member States 
to adjust 
requirements as 
necessary for local 
market, which may 
lead to disclosures 
which are more 
responsive to local 
consumer needs. 

stronger common 
starting point 
(within the 
recommendation) 
with the flexibility 
for Member States 
to adjust 
requirements as 
necessary for local 
market, which may 
lead to disclosures 
which are more 
responsive to local 
consumer needs. 

–  IMD (and to lesser 
extent MiFID) 
explicitly allow 
Member States the 
latitude to tackle 
these issues in their 
local markets. 

–  IMD (and to lesser 
extent MiFID) 
explicitly allow 
Member States the 
latitude to tackle 
these issues in their 
local markets. 

Cons 

–  Potentially 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Gold-plating and 
inconsistency of 
implementation: 
likely to offer less 
consistency across 
products than a 
mandatory solution, 
both within 
particular Member 
States and between 
different Members 
States, reducing 
extent to which 
investors can 

responsive to local 
distribution and 
product issues, as 
Member States 
would have some 
flexibility to adapt 
requirements to suit 
local landscape. 

Cons 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Gold-plating and 
inconsistency of 
implementation: 
likely to offer less 

–  Can combine a 

stronger common 
starting point (within 
the recommendation) 
with the flexibility 
for Member States to 
adjust requirements 
as necessary for 
local market, which 
may lead to 
disclosures which 
are more responsive 
to local consumer 
needs. 

–  IMD (and to lesser 
extent MiFID) 
explicitly allow 
Member States the 
latitude to tackle 
these issues in their 
local markets. 

–  Develops starting 
point for further 
work without 
imposing costs of 
wholesale change on 
industries where 
cross-border trade is 
currently limited. 

Cons 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Gold-plating and 
inconsistency of 
implementation: 
significant 
fragmentation of 
internal market 

–  Offers potential for 

improved 
consistency and 
convergence. 

–  Impact on Member 
States likely to be 
very varied. Some 
Member States have 
already 
supplemented EU 
law at national level 
to provide for 
simplified 
disclosures. 
Possibly no 
additional action 
required in these 
cases, but (should 
change be 
necessary) costs of 
change would likely 
be high and benefits 
more limited than 
the case where no 
existing 
supplementary 
requirements are in 
place. 

–  New Member State 
requirements on 
disclosures would 
be costly for 
industry to 
implement, as 
discussed above. 

–  Full benefits of 

changes may not be 
realised due to 
remaining 
inconsistencies 

–  May be time 

consumer and 

EN 

60 

   EN 

 
 
effectively choose 
between products. 

–  Likely to be more 

suited to low degree 
of harmonisation, 
possibly reducing 
overall investor 
benefits depending 
on effectiveness of 
Member State 
actions.  

consistency in MS 
approach to level-
playing fields than a 
mandatory solution. 

would likely remain, 
with attendant costs 
for cross-border 
service providers. 

–  Likely to be more 

–  Likely to be more 

suited to 
establishing low 
degree of 
harmonisation, and 
limiting equivalence 
in treatment for 
different products. 

suited to establishing 
low degree of 
harmonisation, and 
limiting cross-border 
consistency. 

Overall assessment 

costly for COM and 
stakeholders to 
develop effective 
recommendation, 
particularly if 
detailed and so 
tailored for nature 
of individual 
product families 

+ 

+ 

+ 

+ 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  –  strongly 
negative; – negative; ≈ neutral; ? uncertain; n.a. not applicable 

EN 

61 

   EN 

 
1.1.4.  EU-level legislative action  

Effectiveness 

Efficiency  

Consumer protection  Level playing field 

Single Market 

Pros 

Pros 

Pros 

–  Greater consistency 

–  The greater the 

–  More harmonised 

harmonisation the 
greater the 
disclosure 
contribution to 
creating a level 
playing field (across 
products and 
distribution 
channels). 

–  Allows any 

inconsistencies in 
EU requirements to 
be addressed. 

–  Likely to be more 
effective than non-
binding tools at 
driving change (e.g. 
overcoming 'first 
mover' issues). 

Cons 

requirements would 
ensure better 
consistent approach 
across all Member 
States – reduced 
compliance costs 
and legal certainty 
for cross-border 
service providers; 
greater 
certainty/familiarity 
for investors moving 
across borders. 

–  More harmonised 
requirements may 
serve to 
counterbalance local 
factors such as brand 
loyalty, increasing 
competitiveness of 
EU markets as 
whole. 

–  For products with 

–  For products with 

significant 
variations across 
different local 
markets, degree of 
harmonisation of 
approach at the EU 
level may be more 
limited, reducing 
the overall impact. 

significant variations 
across different local 
markets, degree of 
harmonisation of 
approach at the EU 
level may be more 
limited, reducing the 
overall impact. 

requirements, 
raising net 
standards across EU 

–  Degree of 

standardisation 
possible through 
harmonised and 
enforced approach 
may aid investors in 
comparing the costs 
and features of 
otherwise very 
different products 

–  Allows any 

inconsistencies in 
EU requirements to 
be addressed. 

–  Likely to be more 
effective than non-
binding tools at 
driving change (e.g. 
overcoming 'first 
mover' issues). 

Cons 

–  For products with 

significant 
variations across 
different local 
markets, degree of 
harmonisation of 
approach at the EU 
level may be more 
limited. Overall 
effectiveness may 
depend on 
supporting work by 
local Member 
States and effective 
supervisory 

–  Offers greatest 
potential for 
consistency and 
convergence, 
alongside stronger 
net impact on 
market behaviour 
across EU. 

–  In Member States 

and sectors in which 
principles are 
already respected, 
would not 
necessarily require 
additional action, 
though this would 
depend on the 
legislative form of 
the proposals – 
harmonised 
documents with 
common cost and 
performance 
metrics, for 
instance, would 
likely require costly 
changes if benefits 
are to be realised. 

–  New mandatory 

disclosures would 
be costly for 
industry to 
implement, as 
outlined above. 

–  Time consuming to 

design and 
implement for 
COM and those 
COM consult. This 
would particularly 
be the case for 
products where 
disclosure 

EN 

62 

   EN 

 
 
initiatives. 

–  May be less able to 
respond to product 
innovation and 
change, so risk that 
harmonised 
requirements do not 
work so effectively 
for new products. 

requirements at EU 
or national level are 
so far limited or 
patchy, or for 
options which seek 
to develop a 
common basis for 
comparing different 
products, including 
those which are not 
harmonised – such 
as common price or 
'value for money' 
metrics.  

Overall assessment 

++ 

++ 

+(+) 

++ 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  –  strongly 
negative; – negative; ≈ neutral; ? uncertain; n.a. not applicable 

EN 

63 

   EN 

 
2. 

DETAILED ANALYSIS OF HIGH-LEVEL OPTIONS FOR SELLING PROCESSES 

2.1. 

Analysis of options 

2.1.1.  Commission sponsored self regulation  

Consumer protection  Level playing field 

Single Market 

Effectiveness 

Efficiency  

EN 

64 

   EN 

 
Pros 

Pros 

Pros 

–  If industry agree 

–  If industry agree and 

–  If industry agree and 

and adopt effective 
common 
approaches, could 
lead to higher 
standards of 
consumer 
protection. 

adopt effective 
common approaches, 
could lead to a more 
even playing field 
across products and 
distribution 
channels. 

Cons 

Cons 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Sub-optimal 

–  Sub-optimal 

standards possible as 
consensual solution, 
reducing potential 
impact. 

–  Monitoring and 

compliance issues 
difficult to address in 
voluntary approach. 

–  Voluntary approach 
hinders spread of 
best practice, as 'first 
movers' may be put 
at competitive 
disadvantage. 

–  The logistical 

challenge of co-
ordinating multiple 
industry sectors 
would be significant. 
No guarantee that 
industry would be 
able to agree, 
particularly given 
incentives within 
market. 

–  Enforcement of 

standards 
challenging with 
reduced 
opportunities for 
sanctions. 

standards possible 
as consensual 
solution, reducing 
potential extent of 
consumer 
protection. 

–  Information 

advantage with 
respect to regulators 
and consumers 
likely to remain. 

–  Monitoring and 

compliance issues 
difficult to address 
in voluntary 
approach. 

–  Voluntary approach 
hinders spread of 
best practice, as 
'first movers' may 
be put at 
competitive 
disadvantage. 

–  Overall 

effectiveness may 
be limited due to 
identified market 
failings and 
incentives on firms.  

–  Enforcement of 

standards 
challenging with 
reduced 
opportunities for 
sanctions. 

adopt effective 
common approaches 
across different 
Member States, could 
lead to greater cross-
border consistency. 

Cons 

–  Inconsistencies and 

constraints in EU law 
would remain. 

–  Sub-optimal standards 
possible as consensual 
solution, reducing 
potential impact 

–  Monitoring and 

compliance issues 
difficult to address in 
voluntary approach. 

–  Voluntary approach 

hinders spread of best 
practice, as 'first 
movers' may be put at 
competitive 
disadvantage. 

–  Divergence of 
regulatory 
requirements at the 
national level would 
not be tackled. 

–  The logistical 

challenge of co-
ordinating multiple 
industry sectors across 
different jurisdictions 
would be significant. 
No guarantee that 
industry would be 
able to agree, 
particularly given 
incentives within 
market. 

–  Enforcement of 

standards challenging 
with reduced 
opportunities for 
sanctions. 

65 

EN 

–  Offers marginal 
potential for 
improved 
consumer 
outcomes, 
consistency 
between sales 
practices for 
product types and 
convergence 
cross-border 
whilst allowing 
industry 
opportunity to 
manage costs. 

–  May nonetheless 
lead to significant 
costs through 
process of 
negotiation 
without practical 
outcomes if 
consensus proves 
elusive. 

–  High costs may 
be incurred by 
some industry 
segments where 
changes made – 
including 
opportunity costs 
for first movers. 

   EN 

 
Overall assessment 

-- 

-- 

- 

- 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  –  strongly 
negative; – negative; ≈ neutral; ? uncertain; n.a. not applicable 

2.1.2.  Mandate to Level 3 committees to promote supervisory convergence 

Effectiveness 

Efficiency  

Consumer protection  Level playing field 

Single Market 

Pros 

Pros 

Pros 

–  Changes in national 
approaches may 
lead to improved 
standards of 
consumer protection 
in relevant 
jurisdictions 

–  Changes in national 
approaches may lead 
to greater 
consistency in 
treatment of 
different products 
and channels. 

–  May be more 

–  May be more 

effective than self-
regulation at driving 
change (e.g. 
overcoming 'first 
mover' issues). 

effective than self-
regulation at driving 
change (e.g. 
overcoming 'first 
mover' issues). 

Cons 

Cons 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Inconsistencies and 
weaknesses also 
likely to remain, as 
consistent 
approaches would 
not necessarily be 
effectively 
implemented across 
all jurisdictions. 

–  Enforcement of 

standards 
challenging with 
reduced 
opportunities for 
sanctions. 

–  Coordination 

–  Inconsistencies and 
weaknesses also 
likely to remain in 
some Member 
States, as 
convergence would 
not necessarily be 
effectively 
implemented across 
all jurisdictions. 

–  Enforcement of 

standards 
challenging with 
reduced 
opportunities for 
sanctions. 

–  Changes in national 
approaches may 
lead to greater 
consistency in 
treatment between 
Member States, 
though differences 
in EU law would 
remain. 

–  May be more 

effective than self-
regulation at driving 
change (e.g. 
overcoming 'first 
mover' issues). 

Cons 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Inconsistencies and 
weaknesses also 
likely to remain, as 
convergence very 
unlikely to be 
implemented in 
same manner across 
all jurisdictions, 
particularly those 
with prior art in this 
area. 

–  Coordination 

challenges between 
3L3 committees. 

–  Offers potential for 
improved global 
standards of 
consumer 
protection, 
consistency in 
approaches and 
convergence cross-
border, whilst 
allowing Member 
States to tailor local 
impact according to 
pre-existing 
approach. 

–  Potentially high 

costs for industry, 
depending on the 
degree of change 
locally, though 
continued 
inconsistencies 
between 
jurisdictions and 
channels likely to 
significantly limit 
benefits despite 
costs. 

–  Costs for 3L3 

committees and 
Member States in 
developing and 
implementing 
approaches. 

EN 

66 

   EN 

 
challenges between 
3L3 committees. 

–  Coordination 

challenges between 
3L3 committees. 

Overall assessment 

+ 

+ 

+ 

+ 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  –  strongly 
negative; – negative; ≈ neutral; ? uncertain; n.a. not applicable 

2.1.3.  Commission Recommendation to implement principles through national regulation 

Effectiveness 

Efficiency 

Consumer protection  Level playing field 

Single Market 

Pros 

Pros 

Pros 

–  Improved standards 

of consumer 
protection in some 
jurisdictions 

–  Greater consistency 
in treatment of 
different products 
and channels. 

–  Offers stronger 

–  Offers stronger 

common starting 
point than 3L3 
convergence alone. 

common starting 
point than 3L3 
convergence alone. 

–  May be more 

–  May be more 

effective than self-
regulation at driving 
change (e.g. 

effective than self-
regulation at driving 
change (e.g. 

–  Greater consistency 

in treatment 
between Member 
States, though 
differences in EU 
law would remain. 

–  Offers stronger 

common starting 
point than 3L3 
convergence alone. 

–  May be more 

effective than self-

–  Offers potential for 
improved global 
standards of 
consumer 
protection, 
consistency in 
approaches and 
convergence cross-
border, given 
common starting 
point, whilst 
allowing Member 
States some 
flexibility to tailor 
local impact 
according to pre-

EN 

67 

   EN 

 
 
regulation at 
driving change (e.g. 
overcoming 'first 
mover' issues). 

Cons 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Inconsistencies and 
weaknesses also 
likely to remain, as 
Recommendation 
very unlikely to be 
implemented in 
same manner across 
all jurisdictions, 
particularly those 
with prior art in this 
area. 

existing approach. 

–  Potentially high 

costs for industry, 
depending on the 
content of 
Recommendation 
and implementation 
by Member States; 
continued 
inconsistencies 
between 
jurisdictions and 
channels likely to 
significantly limit 
benefits despite 
costs. 

–  May be time 
consuming to 
develop with no 
certainty of 
consistent impact. 

overcoming 'first 
mover' issues). 

overcoming 'first 
mover' issues). 

Cons 

Cons 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Inconsistencies and 
constraints in EU 
law would remain. 

–  Inconsistencies and 
weaknesses also 
likely to remain, as 
Recommendation 
would not 
necessarily be 
effectively 
implemented across 
all jurisdictions. 

–  Enforcement of 

standards 
challenging with 
reduced 
opportunities for 
sanctions. 

–  Inconsistencies and 
weaknesses also 
likely to remain in 
some Member 
States, as 
Recommendation 
would not 
necessarily be 
effectively 
implemented across 
all jurisdictions. 

–  The effectiveness of 
a recommendation 
would greatly 
depend on the extent 
to which it would be 
followed by Member 
States. 

–  Enforcement of 

standards 
challenging with 
reduced 
opportunities for 
sanctions. 

Overall assessment 

+ 

+ 

+ 

+ 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  –  strongly 
negative; – negative; ≈ neutral; ? uncertain; n.a. not applicable 

2.1.4.  EU-level legislative action 

Effectiveness 

Efficiency  

Consumer protection  Level playing field 

Single Market 

EN 

68 

   EN 

 
Pros 

Pros 

Pros 

–  Likely to achieve 
highest level of 
consistency of 
approach and seeks 
to ensure all 
jurisdictions 
brought up to same 
standard 

–  Allows any 

inconsistencies in 
EU requirements to 
be addressed. 

–  Likely to be more 
effective than non-
binding tools at 
driving change (e.g. 
overcoming 'first 
mover' issues). 

Cons 

–  Significant 

challenges in 
developing effective 
and consistent 
requirements that 
are responsive and 
flexible to local 
market conditions 
and national 
regimes. 

–  Effectiveness likely 
to depend heavily 
on consistent and 
successful 
supervision at local 
level 

–  Most effective in 
laying basis for a 
level playing field 
(across products and 
distribution 
channels).  

–  Allows any 

inconsistencies in 
EU requirements to 
be addressed. 

–  Likely to be more 
effective than non-
binding tools at 
driving change (e.g. 
overcoming 'first 
mover' issues). 

Cons 

–  Significant 

challenges in 
developing effective 
and consistent 
requirements that are 
responsive and 
flexible to local 
market conditions 
and national 
regimes. 

–  Effectiveness likely 
to depend heavily on 
consistent and 
successful 
supervision at local 
level 

–  Most effective in 
promoting greater 
cross border 
homogeneity. 

–  Would ensure 

consistent approach 
across all Member 
States  

–  Reduced 

compliance costs 
and legal certainty 
for cross-border 
service providers 
and originators in 
marketing cross-
border; greater 
certainty/familiarity 
for investors 
moving across 
borders. 

–  Likely to be more 
effective than non-
binding tools at 
driving change (e.g. 
overcoming 'first 
mover' issues). 

Cons 

–  Impact likely to 

vary according to 
channel (e.g. sales 
via distance means 
c.f. face-to-face 
advice services, 
where cross-border 
service provision 
less common). 

–  Offers greatest 
potential for 
consistency and 
convergence, 
alongside stronger 
net impact on 
market behaviour 
across EU. 

–  In Member States 

and sectors in which 
principles are 
already respected, 
would not 
necessarily require 
additional action; 
and action that did 
impact on them 
potentially would 
be costly with little 
or no incremental 
benefit. 

–  Changes in selling 
rules would be 
costly for industry 
to implement. Such 
costs may 
ultimately be passed 
through to the 
consumer. The net 
cost would depend 
on the starting point 
in a particular 
Member State / 
sector. 

–  Time consuming to 

design and 
implement. 

Overall assessment 

++ 

++ 

++ 

++ 

Magnitude  of  impact  as  compared  with  the  baseline  scenario:  ++  strongly  positive;  +  positive;  –  –  strongly 
negative; – negative; ≈ neutral; ? uncertain; n.a. not applicable 

EN 

69 

   EN