The Parliament sent the legislation on packaged retail and insurance-based investment products (PRIIPs) back to the Commission for revision, it said.
The proposed regulatory technical standards (RTS) which investment providers must meet to provide greater transparency and clarity to investors are inadequate, the Parliament said.
The RTS lay out the information that must be given to retail investors in packaged investment products with an equity element. Key information documents (KIDs) containing standardised product information in a consumer-friendly format must be made available for all PRIIPS.
The Commission will now have to propose new RTS for implementing the PRIIPs legislation, which is due to come into force on 31 December.
Insurance expert Chris Riach of Pinsent Masons, the law firm behind Out-Law.com said: "The requirements for KIDs described in the RTS have faced considerable opposition from insurers and the wider financial services market for failing to provide the desired consumer protection outcomes as advanced by the level 1 regulation."
"From an insurance perspective, there has been concern that the RTS failed to adequately consider the distinguishing features of insurance-based investments and so would put such products at a competitive disadvantage to non-insurance products. This latest intervention by the European Parliament is likely to be welcomed by many firms and trade bodies that have grown concerned about the looming implementation deadline and the absence of real clarity on how to comply with the new regime," he said.
"While it appears probable that the level 1 regulation implementation date may now have to be delayed to allow for an amendment of the RTS, this has not yet been confirmed and so firms should still be preparing for compliance with the regulation from the start of next year," Riach said.
The Investment Association said that it supports the Parliament's stance.
Florian van Megen, retail markets specialist at the Investment Association said: "The proposed rules would have led to extremely flawed and misleading retail investor disclosure. We would urge the Commission to amend the presentation of costs and charges and improve the performance disclosure by adding historic performance alongside future scenarios."
"While past performance is not a guide to future performance, the inability to see the historic delivery of a product is risky for consumers. Although we do not disagree with the inclusion of future performance scenarios, we do not believe these should be given in isolation. Only past performance reliably shows the investment experience and a manager’s track record," he said.
"We are fully supportive of comprehensive costs and charges disclosure, but the rejected suggestion is based on assumptions rather than real delivery. Not only could it mislead investors by not showing what they will actually pay but it also makes the comparison of different products impossible," van Megen said.