Millions of investors suffered sometimes heavy losses during the EU-wide financial crisis. The Commission now tries, based on a package of three legislative proposals, to increase consumer protection on financial products and to regain the trust of consumers. Forms of investment shall be explained better and risks made more transparent. Sales practices in the insurance sector shall be better regulated and provisions on investment funds revised.
Financial products for small investors represent a vast market. The Commission estimates the volume of financial products for small investors in the European Union to be in the region of EUR 10,000 billion. Due to the negative experiences in the past, the Commission now tries to increase consumer protection with three legislative proposals. These are

•a proposed regulation on key information documents for investment products
•the revision of the Directive on Insurance mediation and
•a proposal for a Directive on improving the protection of investors purchasing shares of investment funds.

Better overview of financial products with key information documents

For the Commission, a proposed regulation on key information documents for investment products is a central approach concerning consumer protection in the financial services sector. The key information document shall make it possible to compare the vast number of different financial products, as well as improve the representation of possible risks and costs. According to the Commission, all information provided by the document has to be written in clear and understandable language and refrain from using technical terms, if it is also possible to explain the investment in simple terms. Apart from that, the document contains a separate section on the risk and yield profile of the investment. Also included must be warnings with regard to special risks, which are not or not sufficiently reflected in the risk/yield profile. Both direct and indirect costs have to be described in the document. The key information document shall be applied to the large number of funds products but also to old-age provision products.

Improvement of consumer protection for insurance products

By revising the existing Directive on insurance mediation, the Commission wants to improve the regulations for sales practices by insurance companies and increase consumer protection at the same time. Hence, the Directive shall now also apply in cases where the consumer has taken out insurance directly with the insurance company. So far, the Directive only applied to insurance mediators. The Directive shall cover all types of insurance - from motor vehicle via home contents up to life insurance. The disclosure of remuneration of the sellers of insurance policies shall avoid conflicts of interest (for example, the mediator only sells products that generate the highest commission).

Tightening the rules for investment funds

Apart from that, the Commission will aim at tightening the rules for investment funds. Concerning the proposed amendments to the Directive on undertakings for collective investment in transferable securities (UCITS), the Commission aims at ensuring investor security and market integrity. UCITS funds are investment funds, which are subject to regulation at EU level. The proposal specifies the responsibilities of depositories, which act for UCITS funds, as well as their liabilities in case of loss of a financial instrument that is held in custody. Apart from that, the amendments are to ensure that the remuneration of funds managers does not act as an incentive to take excessive risks. A third core issue of the proposal concerns a common approach with regards to sanctions to be taken in case of serious violations of the rules of the Directive.

According to experiences made with other legislative measures on regulation of the financial markets, it is to be expected that the financial sector will once again send hordes of managers and consultants to Brussels to amend the legislative proposals in accordance with their wishes. One can only hope that Council and European Parliament, in whose corner the ball now is, will remain unimpressed by these efforts and that the negotiations will bring a significant improvement of consumer protection.

Further information:

Proposal for a Regulation on key information documents for investment products

Proposal for a Directive on insurance mediation (recast)

Proposal for Amending the Directive on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (recast)