Regulation from Europe is nothing new, although April saw the adoption of a raft of new legislation by the European Parliament.
These include the Packaged Retail and Insurance-based Investment Products (Priips) rules, Ucits V, and updates to the Markets in Financial Instruments Directive (MiFID) and the Markets in Financial Instruments Regulation (MiFIR).
Many of these regulations were agreed in February, and in some cases have been under discussion since 2011, so the question is now they have been approved by the European Parliament, what does this mean for UK retail investors?
As with most regulatory issues, the answer is quite complicated, but the overall idea is that retail investors now have more protection and more transparency.
Under the Priips rules, a new three page A4 key information document (Kid) has been introduced that must be given to all small, non-professional investors before they sign a contract. According to the EU this is meant to help “understand and compare, estimate the total cost of their investment as well as be aware of its risk-reward profile”.
Peter De Proft, director general of the European Fund and Asset Management Association (EFAMA), notes: “It is an important step towards a better protection of retail investors. The Kid – a synthetic, plain language document already well-known to Ucits investors – will enable them to make better informed investment decisions and will facilitate comparisons between different types of retail investment products, therefore contributing to a level playing field across competing retail products.”
A further development from the Priips regulations is the call for reliable online fund calculators across Europe, that should “cover the costs and fees charged by the various investment product manufacturers, together with any further costs or fees charged by intermediaries or other parts of the investment chain, not already included by the product manufacturers”.
Sharon Bowles, chairman of the European Parliament’s Economic and Monetary Affairs Committee, notes: “In a strong signal to Member States that they must ensure reliable and accurate online calculators are readily available, Parliament has inserted in a review clause an obligation on the European Commission to conduct an assessment as to whether these private tools are satisfactory or whether a European level calculator tool is necessary.”
Under changes to Ucits legislation, the European Parliament proclaimed “small investors will be better protected against investment funds that take excessive or unnecessary risks with their money”.
Changes include the appointment of a single independent depositary to oversee investor payments and act as custodian, while to encourage managers not to take unacceptable investment risks at least half of the variable part of their remuneration will be paid in the assets of their Ucits, with some exceptions.
Within the MiFID/MiFIR rules, there is the requirement for firms supplying investment services to design investment products for specified client groups according to their needs and to withdraw ‘toxic’ products from trading. The updated rules also cover high-frequency algorithmic trading and trading in commodity derivatives, highlighting the wide scope of the new regulations.
