European Scrutiny Committee Contents

20 Financial services: key information for retail investors



+ 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 considerationMinister's letter of 14 December 2012
Previous Committee ReportsHC 86-xii (2012-13), chapter 9 (12 September 2012) and HC 86-xvi (2012-13), chapter 13 (24 October 2012)
Discussion in CouncilNot known
Committee's assessmentLegally and politically important
Committee's decisionCleared


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]


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 Back

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Prepared 2 January 2013