The new laws will raise the standard of information that must be provided to consumers before they purchase certain investment products, ensure adequate advice is given on insurance sales and tighten certain rules on investment funds.
"In the aftermath of the biggest financial crisis in recent memory, the financial sector must place consumers at its heart," said Internal Market and Services Commissioner Michel Barnier, announcing the proposals. "Retail products must be safer, information standards must become clearer, and those selling products must always be subject to the highest standards. That is why we have adopted a package solely dedicated to consumers, so that they can choose financial products based on clear and sound information and professional advice which puts the consumer's interests first."
The Commission has proposed (32-page / 120KB PDF) introducing a 'key information document' (KID) to be provided to consumers before certain packaged retail investment products (PRIPS) are sold. The KID, as envisaged by the Commission, will be a "short and plain-speaking" document specific to each product, containing information on that product's main features as long with a straightforward, comparable outline of associated risks and costs. Products that will require a KID include investment funds, insurance-based investments, retail structured products and private pensions.
Inconsistent information currently made available to consumers purchasing these products made it "difficult to compare them or fully grasp the risks involved", it said. The proposed KID will follow a "common standard" with regards to structure, content and presentation; and will have to make it clear to consumers whether or not they could lose money on a certain product and how complex it is.
"The consequences of taking unexpected risks and facing consequent losses can be devastating for consumers, given that investments often form the backbone of a consumer's life savings," the Commission said. "Given an EU retail investment market of up to 10 trillion euro, buying wrong or unsuitable products can quickly become a major problem."
In addition, the Commission plans to revise the existing Insurance Mediation Directive (IMD) to ensure proper advice and common standards regardless of where insurance products are sold. The IMD, which regulates selling practices for all insurance products from home and motor insurance to more complex products containing investment elements, currently applies solely to products sold by intermediaries – agents or brokers – and not products sold directly by insurers.
The Commission proposes a legal requirement for insurance product sales to be accompanied by "honest, professional advice". Consumers must be provided with clear information about the professional status of the person selling the product in advance, including details of any risk of conflict of interest such as commission-related remuneration arrangements. The changes will, the Commission said, also make it easier for insurance intermediaries to operate cross-border.
Changes to the current Undertakings for Collective Investment in Transferrable Securities (UCITS) rules, which regulate European investment funds, are also proposed, in order to "continue the safety of investors and the integrity of the market". UCITS are already widely used by European retail investors and manage almost €6 trillion in assets, according to Commission figures.
The proposed changes will prevent UCITS managers financially benefitting from "excessive risk-taking" with customers' investments, and introduce precise definitions of the tasks and liabilities of all depositaries acting on behalf of a fund, the Commission said. It also plans to introduce a "common approach" towards penalties for breaches of the UCITS rules, including common standards on administrative fines.
The proposals will now pass to the European Parliament and member states for their consideration, and could be in force by the end of 2014, the Commission said.