The following reforms highlight Parliament’s move to solidify consumer protection within the wider European market. These reforms, the BAD, PRIIPs KID and UCITS V (179 pages in total), seek to provide a ‘safety net’ for retail investors and everyday citizens.
This safety net aims to better protect the investor by forcing institutions to provide greater information regarding complex investments, allowing greater access to basic banking payment accounts and imposing significant penalties on institutions who take excessive or unnecessary risks with their customers’ investments.
Bank Account Directive (BAD)
Anyone legally residing in the EU will now be able to open a basic payment account, providing they can satisfactorily explain their reasons for wanting to do so. This directive aims to ensure all fees and rules for payments are “transparent and comparable”, as well as aiding migratory and disadvantaged peoples, facilitating freer movement and stimulating economic modernisation.
A significant requirement of the legislation states that “basic payment accounts must be offered by all, or at least enough, credit institutions in any given EU country”. This has the possibility of incurring significantly higher costs for credit institutions that may be legally required to provide potentially low earning accounts. Secondly, the inclusion of provisions that will allow migratory individuals, or those with no fixed address, to switch accounts will undoubtedly put pressure on AML operations.
The European Parliament adopted the 27-page directive in a plenary session on ‘Super Tuesday’, and it must be transposed into national laws and take effect within two years.
A Key Information Document (KID), outlined in the 87-page Regulation on Key Information Documents for Investment Products, must be signed by all non-professional investors “to help them understand and compare packaged retail and insurance-based investment products (PRIIPs)”. Though the directive for the public harmonisation of transparency requirements was passed on 11 December 2010, the three-page KID update will have major implications.
On the surface, it is simply a few new fields to include the total cost of the proposed investment and to make the holder aware of the risk-reward profile of the investment. However, this regulation seeks to guard retail investors against potentially confusing investment products, forcing providers to “set up a prior product approval process to ensure that their investment products do not expose retail investors” to underlying asset risk which is not easily understandable.
As well as the introduction of KIDs, a further safety net in the form of reliable online fund calculators has been written into the regulation. These aim to help retail investors by providing information on the costs and fees charged by investment product manufacturers.
Firms must ensure their existing documentation is updated to include the new legislation regarding KIDs … or face the consequences which will be defined in each member State. This regulation will be published in the Official Journal of the European Union and is expected to apply from Q2 2016.
This latest amendment to the Undertakings for Collective Investments in Transferable Securities (UCITS) directive seeks to better protect small investors and clarify responsibility for investor funds. The 65-page amendment to UCITS IV will require a UCITS fund to appoint a separate independent depositary to act as a custodian of its assets and hold investors’ money with a clear separation from their own assets.
Furthermore, the rule aims to clarify UCITS depository’s liability, in cases of losses held in custody, in line with the third party safekeeping duties included in AIFMD. “The UCITS depositary, in case a financial instrument held in custody is lost, shall be under the obligation to return a financial instrument of the identical type or of the corresponding amount to the UCITS”.
Severe penalties for funds that fail to comply with the new UCITS amendments have been included. Firms may be fined 10% of their annual turnover or €5 million. Alternatively, “individuals and companies may be fined up to twice the amount of profits made, even if that exceeds the €5 million or 10%”.
The new rules still need to be officially endorsed by the European Council and published in the EU Official Journal which is expected in June. EU member States would then have 18 months to draft UCITS V into national law.
In aggregate, you need to give the MEPs credit for helping the market restore trust. Will it look the same all across the EU? Most certainly not. Will everything now be transparent and safe? Well, perhaps a bit more so … Will there need to be a more serious conversation within the banks about ‘how’ they create a safety net for everyday investors? Absolutely.
The bottom line is that financial institutions will have to ensure that they adhere to these new regulations by 2016, or risk the possibility of incurring large financial penalties. As with all the 2,300 pages of EU legislation passed last month, the early birds will catch the worm. Better assess the way you will respond to these opportunities before your competitors do.
Stay tuned for more Super Tuesday coverage soon …