COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Key information documents for investment products
Date: 2012-07-03
Institutions: European Commission
Subjects: access to information, consumer information, documentary reference recording, investment protection, official market, regulation of investments

EUROPEAN COMMISSION 

Strasbourg, 3.7.2012  
SWD(2012) 188 final 

COMMISSION STAFF WORKING DOCUMENT 

EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT  

Accompanying the document 

Proposal for a  
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

on 
Key information documents for investment products 

{COM(2012) 352 final} 
{SWD(2012) 187 final} 

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COMMISSION STAFF WORKING DOCUMENT 

EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT  

Accompanying the document 

Proposal for a  
REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

on 
Key information documents for investment products 

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1. 

INTRODUCTION 

The focus of this impact assessment is product disclosures in the retail investment market.  

This  market  is  dominated  by  so-called  ‘packaged  retail  investment  products'  (PRIPs)  – 
financial  product  manufacturers  intercede  between  retail  investors  and  financial  markets, 
building products to satisfy specific investment goals, usually with the intention of being sold 
to  retail  investors  either  directly  or  through  intermediaries.  Common  examples  of  PRIPs 
include investment funds such as UCITS, retail structured products and unit-linked insurance 
contracts; there are others.  

To  protect  investors,  sectoral  measures  that  require  defined  information  to  be  provided  to 
retail  investors  have  developed.  This  information  is  used  by  investors  before  they  make 
investment decisions, though it sometimes has not been designed solely for this purpose. The 
existing measures have proven in some cases ineffective – requirements vary according to the 
legal  form  of  products,  not  their  economic  nature  or  risks,  making  comparisons  between 
products  and  comprehension  of  product  features  harder.  In  practice  product  disclosures  are 
typically  focused  more  on  covering  off  legal  risks  for  the  provider  rather  than  providing 
effective and balanced communication to clients.  

In  its  April  2009  Communication  on  PRIPs,  the  Commission  concluded  that  such  failings 
could be traced (amongst other things) to the lack of a common framework and approach to 
such information at the European level, which could only be addressed by legislative change 
at the European level. (The Communication noted two areas of further work: rules applying to 
sales, and rules on product disclosures. This impact assessment focuses on the latter only). 

The importance of transparency and comparability of information about products for ordinary 
investors  has  been  underlined  by  the  financial  crisis.  Retail  investors  have  lost  money  with 
investments  that  carried  risks  that  were  not  transparent  or  understood  by  those  investors. 
There  has,  perhaps  rightly,  been  a  collapse  in  investor  confidence:  a  recent  survey  of 
consumers across the EU showed they trust the financial services less than all other industry 
sectors.  

Improving transparency is vital to rebuild confidence on a sound basis. The EU has already 
taken innovative steps through the development of the UCITS 'key investor information' (KII) 
regime.  While  disclosures  for  UCITS  have  now  been  modernised;  those  for  the  other 
packaged  investment  products  have  not.  The  task  now  is  to  address  options  for  these  other 
products. 

2. 

WHAT IS THE PROBLEM? 

Retail  investors  are  not  always  provided  with  information  they  can  understand  and  easily 
compare. This impact assessment identifies three key ‘problem drivers’ and aims to tackle the 
second and the third: 

2.1.1.  Driver 1: Proliferation of product types aimed at same investment needs 

There  is  a  potentially  bewildering  variety  of  investment  products  being  targeted  at  retail 
customers,  combining  different  legal  forms  often  with  similar  underlying  investment 
propositions.  Many  factors  can  contribute  to  this  proliferation.  Yet  in  general  terms  all  of 

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these products seek to address a relatively simple investor need: capital accumulation (in other 
words, taking on risk so as to have the potential for beating the risk-free rate of return).  

2.1.2.  Driver 2: Patchwork of regulation 

European  and  national  regulation  on  product  disclosures  already  applies  to  most  products. 
However, Union law has developed on a largely sectoral basis, at different speeds and with 
different  outcomes  in  mind.  Such  a  regulatory  patchwork  can  increase  administrative  costs 
and potentially encourage regulatory arbitrage, incentivising choices of product structures to 
take advantage of less onerous requirements.  

This  legal  patchwork  poses  two  additional  threats,  separate  from  those  related  purely  to 
investor  protection:  first,  the  existing  internal  market  in  UCITS  is  subject  to  direct 
competition from products that are less strictly regulated in regards product disclosures – or 
not regulated at all. Second, the current differences in disclosure requirements are likely to be 
perceived  both  by  investors  and  by  industry  as  a  fragmenting  factor  along  national  borders, 
which do not help any future positive development towards market integration. Current action 
at  the  national  level  for  non-UCITS  PRIPs  is  necessarily  uncoordinated,  and  could  lead  to 
increased differences in approach across Member States and sectors without coordination at 
the European level. 

2.1.3.  Driver 3: Failures to effectively mitigate asymmetries of information between retail 

customer and the industry 

The financial services are difficult to understand even for professional market participants, in 
part due to their intrinsic complexity. For retail investors, low levels of financial literacy and 
capability  undoubtedly  compound  these  issues.  In  addition,  for  many  retail  customers  there 
are  few  opportunities  to  learn  from  experience  in  retail  investment  markets:  customers 
typically  do  not  engage  repeatedly  in  investment  activities,  but  do  so  only  in  relation  to 
certain  specific  and  widely-spaced  life  events  (inheriting  money,  or  investing  towards  a 
specific future liability or goal, such as buying a house, retirement or family planning).  

Existing  investor  protection  standards  are  however  ineffective  and  inconsistent,  and  a 
proliferation in new products and market innovation have also led to products being offered in 
forms that were not envisaged during the development of the existing disclosure requirements. 
The  impact  assessment  outlines  in  detail  evidence  showing  the  undoubted  difficulties  retail 
customers have comprehending and comparing investment products on the basis of current 
disclosures. It also sets out problems related to the timely provision of information so that 
retail customers actually receive it in the first place.  

2.2. 

Scale of the problem and consequences of not taking action 

These  drivers  lead  to  investor  detriment  through  mis-sales,  to  an  unlevel  playing  field 
between  industry  sectors,  and  to  the  erection  of  barriers  to  the  further  development  of  the 
internal market. 

•  For consumers, a recent study concluded that around 60% of sales in a mystery shopping 
exercise  across  all  EU  markets  might  be  deemed  'unsuitable'.  While  a  number  of  factors 
contribute  to  sales  that  are  not  suitable,  the  scale  of  this  problem  of  ‘mis-selling’  clearly 
requires  action.  To  get  a  feel  for  the  scale  of  impacts  in  aggregate,  even  if  only  10%  of 
sales  in  the  retail  investment  market  could  be  considered  as  'unsuitable'  this  still  could 
amount  to  almost  1  trillion  EUR  of  potentially  mis-held  products  given  the  size  of  this 

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market;  even  if  product  disclosure  contributed  only  1%  to  such  sales,  this  would  still 
amount to around 10 billion EUR.  

•  For  firms,  an  unlevel  playing  field  distorts  competition.  Regulatory  arbitrage  could 
encourage the development of products or sectors that are subject to the lowest levels of 
regulation, also undermining the effectiveness of regulation and potentially reducing price 
competition and so harming investors through higher costs. Other more direct impacts of 
failings in regulation are also important. Mis-sales can also have a strong impact on firms, 
raising  levels  of  compensation  claims  and  complaints  and  internal  costs  related  to 
managing these, and damaging brand identities.  

•  In keeping with the Commission's conclusions for the impact assessment that accompanied 
the 2009 Communication on PRIPs, the impact assessment concludes that without action at 
the  European  level  to  address  inconsistencies  and  gaps  in  European  product  disclosure 
rules, an opportunity to react to these problems would be missed, contributing to continued 
investor detriment and market distortions, and undermining the single market. 

3. 

SUBSIDIARITY 

Taking action at EU level is necessary because the problems identified have been exacerbated 
by  inconsistencies  and  gaps  in  regulatory  approach  at  the  EU  level.  Member  States  acting 
alone  would  not  address  cross-border  regulatory  inconsistencies,  and  could  not  overcome 
inconsistencies  in  EU  legislation.  In  addition,  action  at  the  EU  level  ensures  the  greatest 
effectiveness in steps to standardise disclosures and improve their comparability. 

4. 

OBJECTIVES 

The initiative seeks to improve the quality of investor decision making and the functioning of 
EU  capital  markets,  tackling  a  breakdown  in  confidence  and  trust  in  the  retail  markets. 
Concrete  operational  objectives  for  developing  more  consistent  and  effective  regulatory 
standards  flow  from 
the  comprehensibility  and 
comparability  of  products,  ensuring  disclosures  are  provided  at  the  right  time  in  sales 
processes; through all of these improving regulatory consistency. 

the  problem  analysis: 

improving 

5. 

OPTIONS 

Policy  options  for  improving  EU  rules  on  disclosures  are  developed  following  extensive 
consultations and experiences developing improved disclosures for UCITS funds. Options are 
identified in the context of a possible new instrument with level 1 and level 2 measures; the 
analysis at this stage is in relation to the level 1 measures setting the overall approach, with 
level  2  measures  to  follow  at  a  later  stage  subject  to  their  own  impact  assessment.  In 
summary, the key areas and the preferred options that emerge are: 

(1) 

Scope  of  initiative.  The  scope  of  products  that  might  be  covered  impacts  on  all 
operational objectives. Alternative options included no action, a narrow scope of only 
packaged products, a broad scope covering all possible investment products that might 
be offered, including those that are not ‘packaged’. The preferred option is focusing on 
packaged products, as these products raise particular consumer protection challenges 

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(2) 

(3) 

(4) 

(5) 

and make up the vast bulk of the retail investment market, but subjecting this to future 
review. 

Degree and nature of standardisation of product disclosures. Standardisation relates 
both to the degree of prescription imposed on firms in regards the content and format 
of  disclosures  provided  to  retail  customers,  and  to  the  degree  of  consistency  in 
requirements  between  products  and  financial  sectors.  Options  included  different 
degrees  of  prescription  and  standardisation  on  clarity  of  language,  length,  and 
comparability.  The  impact  assessment  proposes  a  form  of  'targeted  standardisation', 
with  flexibility  for  addressing  different  products,  but  as  much  standardisation  as 
feasible of key information on risks, costs and performance; details on standardisation 
and its application to specific types of products determined through level 2 measures. 

Responsibilities  for  preparation.  Stakeholders  and  consultation  respondents  have 
broadly underlined the importance of clarity over who is responsible for preparing and 
updating  disclosures.  The  impact  assessment  analysed  the  option  of  not  prescribing 
who  prepared  the  document,  but  it  concluded  for  a  broad  rule  that  product 
manufacturers are responsible for preparing product disclosures, with some targeted 
exceptions. 

Timely  provision.  Ensuring  effective  provision  of  product  disclosures  to  retail 
investors  before  they  decide  on  their  investment  is  vital.  The  impact  assessment 
proposes strict requirements on provision of information, but targeted exceptions may 
be necessary. 

Civil  liability  and  sanctions.  Flanking  the  outlined  options,  secondary  questions  on 
sanctions and civil liabilities arise. Options include a baseline of no action, following a 
high-level approach or specifying more detailed rules. The impact assessment foresees 
a clarification of the liability, to address concerns that the PRIPs product disclosures 
become  used  as  legal  rather  than  communicative  documents;  it  also  foresees  some 
further elaboration of the sanctioning tools competent authorities have available. 

6. 

IMPACTS OF THE PROPOSED APPROACH 

The  retained  options  propose  the  establishment  of  a  new  disclosure  regime  for  packaged 
investment products, modelled on that recently developed for UCITS, though with some 
additional  tailoring  of  requirements  at  level  2  to  address  variations  between  different 
products.  

Benefits 

Product information the average investor can actually understand and use for comparisons is a 
fundamental  for  empowering  consumers,  without  prejudice  of  course  to  the  role  and 
responsibilities  of  intermediaries  at  the  point  of  sale.  In  addition,  the  benefits  of 
standardisation and comparability have been underlined by a recent study by the Commission, 
which  concluded  that  using  these  techniques  in  relation  to  investment  decision-making  is 
likely  to  lead  in  practice  to  changes  in  investor  behaviour  that  contribute  to  better  decision 
making. Given the potential scale of mis-selling outlined above, small changes could have a 
huge  impact:  even  if  product  disclosure  were  taken  to  contribute  only  1%  to  changes,  this 

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could still amount to around a 10 billion EUR reduction in holdings of unsuitable products (or 
4 billion EUR, if UCITS, already subject to KII requirements, are subtracted). 

Greater  consistency  in  requirements  would  ensure  a  level  playing  field  between  firms 
operating  in  different  sectors  and  reduce  barriers  to  the  internal  market  for  those  operating 
cross-border. Tackling investor detriment would also benefit the industry: improving trust and 
reducing the costs generated by problems when they emerge. 

Costs 

The  impact  assessment  establishes  a  rough  estimate  of  one-off  costs  of  EUR  171  million, 
and  on  going  costs  of  around  EUR  14  million  per  year.  (Given  the  nature  of  the  changes 
foreseen, which relate to requirements on disclosures to third parties, these figures are also a 
good  indication  of  the  administrative  burden  of  changes).  Evidence  is  mixed  on  whether 
smaller and larger product manufacturers would bear disproportionate costs, and impacts on 
employment are expected to be low. Distributors are also likely to be impacted, though this is 
unlikely to be significant, given the focus of this initiative is on product manufacturers. 

Final  costs  will  be  dependent  on  options  selected  at  level  2,  which  necessarily  limits  the 
accuracy of any assessment possible at this stage. For this reason, a full impact assessment of 
Level 2 options will be necessary to establish more accurate estimates of the impacts of the 
proposals,  to  underpin  proportionate  choices.  This  would  also  allow  for  better  estimates  of 
differential impacts (e.g. on SMEs, distributors).  

Monitoring and evaluation 

Given the potential for regulatory arbitrage and continued innovation in the retail investment 
market,  continued  monitoring  of  developments  will  be  vital,  including  evidence-based 
assessments of the future scope of the regime. In addition, the impact of measures to improve 
comparisons,  particularly  on  risks  and  costs,  will  need  careful  monitoring  and  their 
effectiveness be subject to further evaluation and fine-tuning. 

7. 

CONCLUSIONS 

Product disclosures need to improve. New requirements to address such issues have already 
been introduced for UCITS: this impact assessment has examined options for making similar 
improvements for all the packaged investment products currently sold to retail customers.  

The  core  tool  identified  is  to  increase  standardisation  of  information  to  allow  for  greater 
comparability, though the heterogeneity of products entails a need for some flexibility. This is 
termed  'targeted  standardisation'  in  this  impact  assessment.  The  analysis  concludes  that 
such  an  approach  offers  the  best  chance  to  achieve  clearer  and  more  comparable  product 
disclosures whilst reflecting the practical realities of complex and varied products. 

Of  course,  consumer  protection  measures  in  the  retail  investment  markets  must  always  be 
understood in a holistic manner: a variety of regulatory tools are important and support one 
another, including steps  to improve financial literacy amongst retail consumers and steps to 
improve the regulation of distributors and sales processes.  

However,  if  clear  and  comparable  information  is  not  made  available,  informed  decisions 
cannot be taken. The wider significance for the regulation of retail markets of any continued 

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failure  to  enable  better,  more  informed  decision-making  should  not  be  understated.  For  this 
reason, the effort and care needed to develop effective disclosure requirements and the costs 
and  effort  needed  to  implement  them  are  small  prices  to  pay  for  putting  retail  investment 
markets onto a surer footing.  

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