Regulation from Europe is nothing new, although April saw the adoption of a raft of new legislation by the European Parliament.
These include the Packaged Retail and Insurance-based Investment Products (Priips) rules, Ucits V, and updates to the Markets in Financial Instruments Directive (MiFID) and the Markets in Financial Instruments Regulation (MiFIR).
Many of these regulations were agreed in February, and in some cases have been under discussion since 2011, so the question is now they have been approved by the European Parliament, what does this mean for UK retail investors?
As with most regulatory issues, the answer is quite complicated, but the overall idea is that retail investors now have more protection and more transparency.
Under the Priips rules, a new three page A4 key information document (Kid) has been introduced that must be given to all small, non-professional investors before they sign a contract. According to the EU this is meant to help “understand and compare, estimate the total cost of their investment as well as be aware of its risk-reward profile”.
Peter De Proft, director general of the European Fund and Asset Management Association (EFAMA), notes: “It is an important step towards a better protection of retail investors. The Kid – a synthetic, plain language document already well-known to Ucits investors – will enable them to make better informed investment decisions and will facilitate comparisons between different types of retail investment products, therefore contributing to a level playing field across competing retail products.”
A further development from the Priips regulations is the call for reliable online fund calculators across Europe, that should “cover the costs and fees charged by the various investment product manufacturers, together with any further costs or fees charged by intermediaries or other parts of the investment chain, not already included by the product manufacturers”.
Sharon Bowles, chairman of the European Parliament’s Economic and Monetary Affairs Committee, notes: “In a strong signal to Member States that they must ensure reliable and accurate online calculators are readily available, Parliament has inserted in a review clause an obligation on the European Commission to conduct an assessment as to whether these private tools are satisfactory or whether a European level calculator tool is necessary.”
Under changes to Ucits legislation, the European Parliament proclaimed “small investors will be better protected against investment funds that take excessive or unnecessary risks with their money”.
Changes include the appointment of a single independent depositary to oversee investor payments and act as custodian, while to encourage managers not to take unacceptable investment risks at least half of the variable part of their remuneration will be paid in the assets of their Ucits, with some exceptions.
Within the MiFID/MiFIR rules, there is the requirement for firms supplying investment services to design investment products for specified client groups according to their needs and to withdraw ‘toxic’ products from trading. The updated rules also cover high-frequency algorithmic trading and trading in commodity derivatives, highlighting the wide scope of the new regulations.
Jonathan Herbst, head of financial services regulation at Norton Rose Fulbright, says: “MiFID II is one of the most important pieces of the post-crisis regulatory reform puzzle, no one should underestimate its importance. Not only are there new markets requirements including those relating to position limits, algorithmic trading and transparency but there are also new conduct of business requirements that add up to change for firms.”
However, while these have all been approved they are not all in force just yet. MiFID and MiFIR will come into force 20 days after publication in the EU Official Journal, however Priips and Ucits V both have to be officially endorsed by member states and then countries have two years to implement Priips and 18 months for Ucits V to take effect.
But with the RDR having been implemented in the past 18 months, some of the new European rules are already included in UK regulation.
Peter Snowdon, financial services partner at Norton Rose Fulbright, notes: “We’ve seen a huge number of new rules post-crisis which are borne out of the European legislators’ strong investor protection agenda, and this is no exception. Lots of the changes we’re seeing are there to tighten up rules we’ve had for a while, but following the 2008 financial crisis the feeling was that they may not have completely achieved their original aim.”
With up to two years for some of these rules to come into effect, regulation looks like it is in for further change.
Nyree Stewart is features editor at Investment Adviser
European Long Term Investment Funds (ELTIFs)
At the same time as the European Parliament passed the rules for Priips, Ucits and MiFID/MiFIR, it also voted in favour of an EU proposal that aims to establish European investment funds that only invest in assets with a long-term focus – called European Long Term Investment Funds (ELTIFs).
ELTIFs are a proposed new type of collective investment framework allowing investors to put money into companies and projects that need long-term capital, such as infrastructure projects across Europe. Although to benefit from this cross-border passport, the new funds would have to meet rules designed to protect both investors and the companies and projects they invest in.
Following the debate in the European Parliament on April 17, the scope of these was expanded to also include shares or debt issued by small and medium enterprises (SMEs), and for ELTIFs to be encouraged to pay particular attention to environmental, social and governance characteristics of projects or companies they invest in. Sharon Bowles, chair of the European Parliament’s Economic and Monetary Affairs Committee, explains: “It is a well-known fact that since the financial crisis, project finance through banks has been restricted. This proposal is therefore very encouraging as it presents an alternative source of funding across the EU with a specific focus on the long term.
“Ambitious in its objectives, the parliament is also realistic and wants ELTIFs to be a successful vehicle. For this reason, parliament has ensured certain opportunities for flexibility around lifecycles of ELTIFs and redemption rights, in particular for retail investors, without taking the focus away from the long term. Long-term financing is and has to continue to be an absolute priority for Europe and its citizens, and once in place this legislation should have a very positive knock-on effect on the real economy and Europe’s ongoing economic recovery.”
Julie Patterson, director of regulatory affairs – investment funds and retail at the IMA, says: “We are only at the first stage of the EU debate. The vote signals that the EP has agreed its opening position for ‘Trialogue’. The Council has only recently begun its discussions on the commission’s proposals. Even if the council reaches a common position soon, Trialogue will not now begin until September or October at the earliest (after the newly-elected MEPs have agreed who is to be the rapporteur and shadow rapporteurs for this file).
“So, there is still some way to go before we have a clear view of what the final text will look like. The commission’s proposal allows ELTIFs to be sold to both retail and professional investors, but it is too early to say what the council position may be on this question. However, it seems likely that at least some types of retail investors will have access to ELTIFs, such as the high net worth. Therefore, the open question is whether other retail investors (such as those within personal pension schemes) will have access to ELTIFs sold cross border.
“Whatever the outcome, individual member states can still allow ELTIFs to be sold within their own jurisdiction to their own citizens.”
