It has been an exceptionally busy period for European regulators lately, as they push ahead with reforms aimed at promoting greater retail investor participation in capital markets and delivering on better sustainability outcomes.

Broadridge takes a look at what the proposed rule changes will mean for the asset management industry.

The EU aims for reform with the Retail Investment Strategy (RIS)

First proposed in 2023 by the European Commission (EC) and currently in the trilogue discussion stages, the RIS is designed to make it easier for retail investors to access capital markets.

The RIS coincides with the publication of the EC’s Competitiveness Compass, an ambitious initiative that draws heavily on the Draghi Reforms, and which aims to simplify EU regulations whilst also driving economic growth within the Single Market.

“The Competitiveness Compass will require all EU policies – and not just the RIS to consider competitiveness, something which may impact the proposals,” said Linda Gibson, Director and Head of Regulatory Change EMEA, BNY Pershing.

Ultimately, the EC hopes the RIS will galvanize EU consumers into investing more of their cash deposits. “In the US, 43% of all households are invested in financial securities, compared to just 17% in the EU, ¹“said Gibson.

The RIS wants to stimulate retail investment by implementing a series of consumer protection measures, including bans on execution-only inducements and the rollout of value for money (VFM) criteria. With investors becoming more tech-savvy, the RIS also lays down the foundations for the eventual establishment of a digital Key Information Document (KID).

Although the RIS’s proposals are well-meaning, there are some notable flaws.

“Despite increasing retail investor participation being the main objective of the RIS, some in the industry believe the rules will not achieve this in their current form,” said Darragh Sheeran, Senior Manager, Regulatory Intelligence, Broadridge.

Firstly, financial literacy levels among EU consumers are not where they should be. “The focus of the rules is to turn EU savers into EU investors. While this aim is laudable, we will only improve retail investor participation in capital markets if there is increased financial literacy as well. I am aware, however, that a number of member states are looking for ways to improve their citizens’ financial literacy levels,” said Gibson.

Rather than streamlining the EU’s byzantine rules around investing, the RIS could potentially have the opposite effect. According to Kimon Argyropoulos, Regulatory Adviser at the European Fund and Asset Management Association (EFAMA), the RIS is likely to create a lot of added complexity for fund  managers and investors alike. “The EC wants to enhance competitiveness and cut red tape by 25%, but the RIS package, despite containing some positive elements, is going to do little to achieve that objective , and might  actually make things worse,” he said.

There are several reasons for this.

Argyropoulos pointed out that not only are the RIS’s VFM criteria a bureaucratic nightmare, but the advice process for purchasing certain products could potentially take up to two hours. Also, the RIS provisions covering cost disclosures and warnings are so extensive that they risk overwhelming retail customers with information.²  These barriers to entry will almost certainly discourage people from making investments.  

By saddling firms with additional reporting and recordkeeping requirements, EFAMA – in a statement - warned the RIS will also cause the industry’s operating costs to increase, which will ultimately penalize investors.³

“If the RIS is to be successful, the rules need to be simpler,” commented Argyropoulos.

Driving retail investor participation in the UK

The UK is also spearheading its own rules to expedite the investment process for retail clients. 

As part of its post-Brexit legislative agenda, the UK is replacing the EU’s Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation with the Consumer Composite Investments (CCI) framework. 

Published in December 2024, the CCI applies to a number of products including things like open and closed ended funds, structured products and structured deposits, contracts for differences, insurance based investment products and derivative-like instruments.⁴

The CCI’s main objective is to simplify the PRIIPs and UCITS regimes.

It will do so by replacing the UCITS and PRIIPs KID with an easier to understand product summary document.  It also  introduces an element of digitalisation too, which should make investing a bit more attractive for the younger generation.

“In principle, the CCI is not that dissimilar to the PRIIPs regime. There are some deviations though. Most notably, the UK’s Financial Conduct Authority (FCA) has proposed that distributors be allowed to prepare the summary document instead of or in addition to the manufacturer. The key changes, however, relate to the contents of the document,” said Raza Naeem, Partner, Linklaters.

He added: “When talking about past performance, the EU focuses extensively on performance scenarios, complex calculations and showing how the fund would perform under different stress scenarios. The CCI summary documents drop this in favour of a single graph, showing past performance over a 10-year period. This should make it easier for retail investors to understand.”

The CCI Summary Document also does away with the PRIIPs’ 1-7 Summary Risk indicator, replacing it with a 1-10 metric based on product volatility. “This is partly driven by the UK regulators who consider that 1-10 is more understandable for retail investors versus a 1-7 scale,” noted Naeem.

And finally, the PRIIPS ‘reduction in yield’ table, i.e. returns lost due to ongoing charges, is also being removed under the CCI. Moving forward, investors will be provided with a summary cost illustration over a single holding period.

Although closed ended UK-listed investment trusts will be subject to the CCI when the rules go live in 2027, they will be exempted from the existing UK PRIIPs regime as an interim measure, meaning they will no longer need to provide a KID to retail investors.

According to Gibson, this is partly because the PRIIPs cost disclosure methodology was overly prescriptive, and did not properly reflect the actual cost of investing into a closed ended fund.

However, the exemption has created something of a conundrum for investment trusts, added Gibson. “This is because investment trusts are still bound by the UK’s Consumer Duty rules, suitability assessments, and the fair, clear and not misleading requirements, amongst others,” she said.

Furthermore, a handful of trusts, who stopped producing KIDs entirely, have since been banned from accepting new investments by certain platforms, ostensibly due to their limited disclosures around costs and charges. 

 “If an investment trust decides not to provide a KID, they may wish to consider providing additional product information to retail customers. However, this has received a mixed response from platforms. I know this is an issue which the industry associations are looking at,” commented Gibson.