20 Financial services: key information
for retail investors
| (34087)
12402/12
+ ADDs 1-2
COM(12) 352
| Draft Regulation on key information for investment products
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| Legal base | Article 114 TFEU; co-decision; QMV
|
| Department | HM Treasury
|
| Basis of consideration | Minister's letter of 14 December 2012
|
| Previous Committee Reports | HC 86-xii (2012-13), chapter 9 (12 September 2012) and HC 86-xvi (2012-13), chapter 13 (24 October 2012)
|
| Discussion in Council | Not known
|
| Committee's assessment | Legally and politically important
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| Committee's decision | Cleared
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Background
20.1 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.
20.2 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.[60]
20.3 In July the Commission presented this draft
Regulation to improve transparency in the investment market for
retail investors. Currently disclosures for PRIPs vary according
to the legal form a product takes, 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.
20.4 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).
20.5 The draft Regulation was presented as part of
the Commission's retail package that also includes the draft Directive
to amend the UCITS Directive[61]
and the draft recast Directive on insurance mediation.[62]
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.
20.6 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.
20.7 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.
20.8 In October we heard additionally that the Government
was concerned that the proposed legal base, Article 114 TFEU,
might not be wholly appropriate for the proposal, that the provisions
on ADR might be a measure pursuant to Title V TFEU and that therefore
it was proposing to opt-in to the proposal. We said that, in addition
to the information we had 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
remained under scrutiny.[63]
The Minister's letter
20.9 The Economic Secretary to the Treasury (Sajid
Javid) first, telling us that the Government has consulted trade
associations and consumer groups, says that:
- they broadly welcome the proposals;
- their main concerns centre on the form and content
of the KID and they hope that the Government can reach a more
acceptable compromise during negotiations;
- some also share the Government's concern that
the scope of the Regulation would define the perimeter of the
additional selling practices for insurance investment products
within the Insurance Mediation Directive; and
- opinions on the decision to include pensions
are more diverse.
20.10 On negotiation of the proposal the Minister
tells us that this has progressed quickly and recently the Presidency
has moved unexpectedly to push for a general approach. He says
that as part of this the Presidency has agreed to meet all of
the key UK priorities:
- the financial ombudsman service
will be permitted to issue binding decisions;
- the Government no longer has any doubts about
the legal base of the proposals, so the opt-in does not apply;
and
- pensions have been removed from the scope of
the proposal.
20.11 The Minister continues that the general approach
push therefore represents an opportunity to secure the Government's
priority objectives, that may not re-emerge if agreement is delayed
into the Irish Presidency, which has indicated it does not intend
to prioritise PRIPs.
20.12 The Minister encloses with his letter the Government's
summary of the costs and benefits associated with the proposal,
which shows acceptance of the Commission's estimates of costs
for firms of an increase of around 7.5% for ongoing costs of product
disclosures and of a maximum of 0.016% of assets under management
for one-off implementation costs.[64]
Conclusion
20.13 We are grateful to the Minister for his
account of developments on this proposal and note the improvements
almost secured. We understand that a general approach is no unlikely
to be agreed yet. Nevertheless, having no further questions to
ask we clear the document.
60 (30623) 9493/09 + ADDs 1-2: see HC 19-xviii (2008-09),
chapter 26 (3 June 2009). Back
61
(34086) 12397/12 + ADDs 1-2: see chapter 19 of this Report. Back
62
(34089) 12407/12 + ADDs 1-2: see HC 86-xvi (2012-13), chapter
14 (24 October 2012). Back
63
See headnote. Back
64
See http://europeanmemorandum.cabinetoffice.gov.uk/. Back
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