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6th Mar 2021

New EU rules on financial products in limbo

  • The standoff between MEPS and EU commission threatens to undo the entirety of one of the commission’s largest offenses against consumer exploitation by the financial industry. (Photo: SWIFT)

A feud between MEPs and the European Commission is threatening to derail financial services regulation that would protect consumers from misleading investment products.

The regulatory standoff on packaged retail investment and insurance products, or PRIIPs, has seen member states stepping in to support MEPs against the commission.

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The commission wants to move full-steam ahead with the regulation of packaged financial products, a €10 trillion market in Europe.

The parliament earlier this month rejected the regulatory standards put forward by the commission to implement the laws and says the commission cannot go ahead without its consent.

The standoff threatens to undo the entirety of the PRIIPs regulatory package, one of the commission’s largest attacks against consumer exploitation by the financial industry.

PRIIPs are investment products that offer returns above the standard interest rate for savings accounts. Consumers who advance a fixed sum of money to purchase a PRIIP are promised returns indexed to assets that a bank trades on the open market, such as stocks, derivatives, or currencies. Insurance companies also sell PRIIPs as life insurance policies with market-indexed returns.

European savers and investors rely heavily on packaged financial products as vehicles for their savings. In 2016, 74 percent of Europeans’ total savings, totaling around €10 trillion, were invested into packaged finance products according to Better Finance, a Brussels-based federation of retail investors.

KIDs not alright

While the safety of the capital advanced in a packaged financial product is usually guaranteed, consumers are at risk if they buy a PRIIP from an issuer who is overleveraged on debt and then defaults.

Sold with names like “Principal Protected Notes,” some investors before the financial crisis wrongly believed that the entire value of their investment was guaranteed in the same way as a bank account.

After the collapse of the banking sector in 2008, which had relied heavily on PRIIPs to fund its operations in Europe and the US, investors big and small hemorrhaged trillions as the market value of PRIIPs underwent a massive writedown.

The EU executive and MEPs are opposed on what standards must be adopted to specify a methodology of costs applicable for key information documents, or KIDs, which a bank must provide to a retail investor before it can sell a packaged financial product.

KIDs are designed to concisely spell out a product’s risks and costs and allow consumers to easily compare possible returns from different packaged products.

“The KIDs standards left too many questions open and would bring legal uncertainty for both the industry and the investors. We want to get things right from the very beginning,” said Petr Jezek, a Czech member of the Liberal Alde group in the parliament.

Doubt on legality

The insurance industry has also been one of the biggest critics of the KID’s calculation of costs, arguing that biometric risk premiums paid on life expectancy should be considered separate from the costs of packaged financial products.

“The KID currently makes insurance-based investment products appear more risky and expensive than they actually are, and so will mislead consumers about these products,” said William Vidonja, head of conduct of business for Insurance Europe, a federation of European insurance companies.

The parliament’s rejection of the commission’s standards for KIDs threatens to upend the implementation timeline for its investor protection legislation. Member states’ recent call for a delay is adding more pressure onto the commission, which is determined to stay the course.

The commission argues that the regulation on PRIIPs is standalone and can come into force separately from the finalised regulatory standards for KIDs, a path it argues is in the benefit of both industry and retail investors.

But some MEPs voiced doubts about the legality of such a move.

“This is simply appropriation of power that the commission doesn’t have. If the commission wants simply to go ahead, this would be an unprecedented breach of trust,” said Sven Giegold, a German Green MEP.

Backfire

“The commission’s reluctance to take on board the concerns of the European Parliament is backfiring,” said Peter Simon, a German MEP from the center-left S&D group and vice-chair of the parliament’s ecomomic affairs Committee in a statement to EUobserver.

“We expect that in the future the commission improves her cooperation and takes our concerns seriously,” he said.

The commission said it is ready to cooperate with the parliament and will submit new standards before the implementation deadline passes at the end of the year.

Any delay in the implementation date would have to comply with legislative procedure and would require the commission to submit an entirely new regulation.

“The best solution is to have both the PRIIPs regulation and KIDs standards apply together as of 31 December. We are ready to work quickly with the European Parliament over the coming weeks,” a spokeswoman for the commission said.

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