The complex structure behind investment products makes it difficult to compare their returns and risks.The European Parliament and the Council have reached agreement on a mandatory Key Information Document to be supplied to retail consumers who wish to invest their savings.
The proposed rules require the financial services industry to provide basic information about their investment products, the risk and return that can be expected as well as the overall aggregate cost that will arise in making the investment.
“European consumers need a clear and understandable explanation on how they invest their savings. Too often, retail investors have been caught out due to a lack of basic information being provided before an investment is made. I am encouraged to see that the European Parliament and the Council agree and support the Commission on a mandatory Key Investor Information Document that has to be supplied to all retail investors before they take the decision to invest in a financial product.
“The broad coverage of the Key Information Document aims to ensure that no investment product slips through the net and that the consumer can compare different investment proposals. This measure is essential to restore consumers’ confidence in the financial sector,” said Michel Barnier, Commissioner for the Internal Market and Services.
Up to 60% of sales of investments could be considered not in the best interest of the consumer
The Key Information Document will cover a wide range of investment products offered to retail customers, either through banking channels, financial advisors or via the internet. Products within the scope will cover structured products offered by banks, insurance-based investments (including unit-linked and ‘with-profit’ products) and investment funds.
The complex structure behind different investment products makes it difficult to compare their returns and risks.
The proposal does not apply to occupational pension schemes or other pension products recognised or certified under national law as providing income in retirement.
The introduction of the document is a response to a myriad of problems that retail investors faced in the past. For example, a consumer Ombudsman in one member state recently found 12-year subordinated notes being sold to the very elderly. Risks of exiting these investments were not fully explained. In another example, a study for a consumer affairs ministry suggested that up to 50 to 80 per cent of consumers wish to terminate long-term investments prematurely, indicating investments were made that were not suited to their investment or savings needs.
On an EU-wide level, a mystery shopping exercise by the Commission indicated that up to 60 per cent of sales of investments could be considered unsuitable or not in the best interest of the consumer.
It is expected that the European Parliament will vote on this legislation in plenary in April, followed by formal adoption by the Council.