Disclosure, inducements, and suitability rules for retail investors

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Financial markets, within and beyond the EU internal market, are characterised by their complexity. Consequently, the risk is that consumers make decisions that go against their interests as (potential) private buyers. Instead, their decisions could benefit the suppliers or intermediaries involved in the sale of financial products. Product diversity and how products are presented make it very challenging for many consumers to make an informed decision by weighing up the (absolute and relative) risks and costs of different investment offers against their (potential) returns. There is therefore a risk that (new) investment decisions are driven by factors other than rational choice.

EU legislation in retail investor protection aims to address, at least partly, challenges stemming from such information asymmetry and the lack of product transparency. It aims to make the supply of financial products more easily ‘navigable’ for consumers through pre-contractual disclosure, and also to ensure that advisors act in the client’s best interests and are able to offer impartial advice on the basis of a clear assessment of the client’s needs, objectives and financial situation. The legislation aims to prevent conflicts of interest and ensure that potential conflicts of interest are disclosed.

In this context, the European Commission requested a detailed study to feed into the development of the Retail Investment Strategy that was announced for 2022, one of the actions planned under the Capital Markets Union’s Action Plan 1. The Retail Investment Strategy aims to respond to new challenges in the market, such as the increasing digitalisation of investment advice and the use of digital distribution channels.

The objectives of the Retail Investment Strategy, as defined in the CMU Action Plan, are expected to ensure that retail investors in the EU benefit from adequate protection; are offered bias-free advice and fair treatment; have access to open markets with a variety of competitive and cost-efficient financial services and products; and are provided with transparent, comparable and understandable information about various financial products. The CMU Action Plan also defines 16 action areas. The eighth action area – building retail investors’ trust in capital markets – covers issues at the core of this study, notably inducements and disclosure.

The following CEPS researchers also contributed to this report: Fredrik Andersson, Agustina Korenblit, Beatriz Pozo and Apostolos Thomadakis.