Sixteenth Report of Session 2012-13 - European Scrutiny Committee Contents


13   Financial services: key information for retail investors

(34087)

12402/12

+ ADDs 1-2

COM(12) 352

Draft Regulation on key information for investment products

Legal baseArticle 114 TFEU; co-decision; QMV
DepartmentHM Treasury
Basis of considerationSEM of 5 October 2012
Previous Committee ReportHC 86-xii (2012-13), chapter 9 (12 September 2012)
Discussion in CouncilNot known
Committee's assessmentLegally and politically important
Committee's decisionNot cleared, further information requested

BACKGROUND

13.1  Packaged Retail Investment Products (PRIPs) allow retail customers exposure to a range of securities without requiring a direct holding in these securities. Examples of such products include investment funds, investment life insurance and structured products issued by banks. EU legislation already exists to protect those who invest in these products. But legal requirements on product transparency, sales and advice differ according to the legal form of the product and the distribution channel, making effective comparisons difficult for consumers.

13.2  In a Communication of April 2009 the Commission set out proposals to bring the EU's legislative framework for mandatory disclosure and sales practices for PRIPs into line with market realities.[58]

13.3  In July the Commission presented this draft Regulation to improve transparency in the investment market for retail investors. making effective comparisons difficult for consumers. The draft Regulation would ensure that retail investors receive short, comparable and standardised disclosures, termed Key Information Documents (KIDs) whatever the investment product they were considering.

13.4  The draft Regulation has a number of specific aims. These are to:

  • define what constitutes a PRIP so as to ensure all relevant products are captured — the proposal includes personal pensions, but not workplace or occupational pensions, simple deposits or pure insurance;
  • place responsibility for producing a KID on the investment product 'manufacturer';
  • set out the form and content of KIDs so they are as harmonised as possible — it is proposed that a KID should use the principles introduced for the Key Investor Information Document for undertakings for collective investment in transferable securities (UCITS), which have been compulsory for UCITS since 1 July 2012;
  • oblige the distributor to provide a KID before the sale;
  • ensure Member States have effective complaints procedures for PRIPs investors, including alternative dispute resolution (ADR);
  • introduce harmonised sanctions for breaches of the PRIPs rules;
  • provide a transition period for UCITS of five years — the Key Investor Information Document has been introduced only recently and it would be disproportionate and disruptive to subject these providers to the proposed PRIPs Regulation at this stage; and
  • complement, rather than replace, existing disclosures set out in the Prospectus Directive (applying to securities offered to the public or admitted to trading on a regulated market) and the Solvency II legislation (applying to insurance).

13.5  The draft Regulation was presented as part of the Commission's retail package that also includes the draft Directive to amend the UCITS Directive[59] and the draft recast Directive on insurance mediation.[60] It is expected that a further legislative proposal will follow shortly to address the remaining imbalances in investor protection as well as bringing wider reforms to UCITS funds.

13.6  When we considered this proposal in September we recognised its possible utility in improving protection for retail investors. But we noted the Government's reservations in relation, first, to personal pensions, including contracts of insurance. The second reservation was about ADR, where we heard that:

  • the Government supports the proposal that, where Member States have ADR procedures, participation in the procedure should be compulsory for firms;
  • however, imposition of specific criteria that restricts the ability for Member States to design such services is a cause for concern; and
  • in particular, the proposed Regulation as currently drafted would require that the ADR procedure results in decisions which are non-binding on firms — this would represent a significant weakening of the Financial Ombudsman's powers, whose decisions are binding on firms, but not consumers.

13.7  We asked, before considering this proposal further, to hear about developments in the Council's consideration of these matters and to have the Government's provisional impact assessment and an account of the outcome of its planned consultation. Meanwhile the document remained under scrutiny.[61]

THE SUPPLEMENTARY EXPLANATORY MEMORANDUM

13.8  The Economic Secretary to the Treasury (Sajid Javid) says that he is sending us this Supplementary Explanatory Memorandum because it has come to light that the provisions on ADR may be a measure pursuant to Title V TFEU. Reminding us that the proposed legal basis for the draft Regulation is Article 114 TFEU the Minister says that:

  • the draft Regulation includes a provision on ADR which may impose requirements on the operation of the UK's civil justice system, in terms of the operation of limitation and prescription periods and the availability of interim remedies;
  • this provision appears to be a measure pursuant to Title V, more specifically Article 81, TFEU, to the extent that it concerns cross border disputes; and
  • as such it engages the UK's opt in for Justice and Home Affairs (JHA) matters and should be adopted in a separate measure with an Article 81 TFEU legal base.

13.9  The Minister reminds us that:

  • the Government's policy is to insist on a Title V TFEU legal base for any measure containing JHA obligations but, if it is unsuccessful, to formally put the UK's position on the record (normally by means of a minute statement);
  • the Government's policy is to split the instrument so that the JHA obligations are contained in a separate measure with an Article 81 TFEU legal base; and
  • if the Government is unsuccessful in securing such a legal base, the policy is to assert that the opt-in applies nevertheless, in order to preserve its position on the opt-in.

13.10  The Minister says that in this case, as the Government agrees with the wider policy position, it intends to formally give notice of an opt-in.

13.11  The Minister also says that:

  • to the extent that the criteria for ADR are intended to apply to purely domestic disputes, there is a question as to whether this properly relates to the single market and therefore whether the EU has competence to legislate for these criteria under Article 114 TFEU; and
  • the Government intends to ask for an explanation from the Commission as to why it believes that this is an single market matter to ensure that the Government is satisfied that there is competence under Article 114 TFEU to legislate in respect of purely domestic disputes.

CONCLUSION

13.12  Whilst we are grateful to the Minister for this additional information, it is regrettable that the JHA issue was not identified and drawn to our attention at an earlier stage. We note the Government's intention to assert a UK opt-in in the absence of a Title V legal base, a policy which is not consistent with the terms of Protocol 21. Be that as it may, we presume that this intention will be formally notified to Parliament in accordance with the procedure promised by the Minister for Europe (Mr David Lidington) in his Written Ministerial Statement of 20 January 2011.

13.13  As for our further consideration of the draft Regulation, in addition to the information we have already requested, we should like to hear about developments in the Council's consideration of the new aspects now drawn to our attention. Meanwhile the document remains under scrutiny.



58   (30623) 9493/09 + ADDs 1-2: see HC 19-xviii (2008-09), chapter 26 (3 June 2009). Back

59   (34086) 12397/12 + ADDs 1-2, see chapter 12 of this Report. Back

60   (34089) 12407/12 + ADDs 1-2, see chapter 14 of this Report. Back

61   See headnote. Back


 
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