Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry

Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry - December 2012

2. Key Topics on the European Regulatory Agenda

Protecting investors, consumers and small and medium enterprises While the aforementioned regulatory work holds promises for the protection of all investor, the major regulatory initiative specifically aimed at retail or non-professional investors have been the proposed update (COM(2010) 0371) of the Investor Compensation Schemes Directive (97/9/EC, hereafter ICSD) and the proposal on key information documents for investment products (COM(2012) 0352). The proposed update of the ICSD harmonises definitions with MiFID, clarifies and expands the scope of coverage of the compensation scheme (notably to UCITS investors, including in cases where losses result from the failure of a depositary), harmonises the funding mechanisms for the national schemes and puts in place a (last-resort) borrowing mechanism among these – at this stage, the positions of the Commission, the Parliament, and the Council on this draft Directive remain far apart. If implemented, the proposal on key information documents (KIDs) – modelled on the UCITS IV Key Investor Information Documents (KIID) – would greatly enhance transparency and comparability on the Packaged Retail Investment Products (hereafter PRIPs) market. This market covers investment funds (UCITS and nationally regulated funds), insurance- based investment products, retail structured securities and structured term deposits. As we explained in Amenc, Ducoulombier, Goltz and Tang (2012), the European Commission is concerned that some PRIPs may be too complex for investors to understand and that those distributing them face conflicts of interests detrimental to investors. It is also worried that the sector/legal-form

regulatory approach taken in the past has resulted in “a complex patchwork of regulation” suffering from “inconsistencies and gaps” that “have raised concerns as to the overall effectiveness of the regulatory regime, both in relation to its capacity to protect investors and its ability to ensure the markets work efficiently.” Against this backdrop, it has launched the PRIPs initiative to raise standards of protection for retail customers and achieve a single market and level-playing field. To do so, it has vowed to adopt a horizontal/economic nature regulatory approach. The PRIPs initiative is focused on two key areas: pre-contractual product information and the conduct of business and conflicts of interests in the sales or advisory process. In terms of pre-contractual product information, the UCITS KIID is the benchmark for the standard of disclosures sought across all PRIPs. With regard to conflicts of interest, the European Commission regards the MiFID framework as a “key element and benchmark of the horizontal approach for the regulation of all sales of PRIPs”. A major legislative effort affecting non-professional investors and partially related to non-financial risk is the overhaul of MiFID and of the Insurance Mediation Directive (hereafter IMD). In force since November 2007, MiFID establishes a regulatory framework for the provision of investment services in financial instruments by credit institutions and investment firms and for the operation of regulated markets by market operators. In the context of MiFID, firms providing investment advice or individual portfolio management need to conduct suitability and appropriateness tests prior to giving

45

An EDHEC-Risk Institute Publication