ESMA’s Impact on Structured Products in Europe: Enhancing Investor Protection & Assessments

The ongoing efforts by ESMA and the ESAs to enhance retail investor assessments and protection have significant implications for the structured products market in Europe.

Recent updates aim for transparent disclosures, improved product governance, and better-targeted offerings. These changes assist retail investors in making informed investment decisions.

The European Securities and Markets Authority (ESMA) has been actively engaged in enhancing retail investor suitability and appropriateness assessments to ensure effective investor protection. How recent updates and recommendations from ESMA may impact the structured products market in Europe.

ESMA’s Response to European Commission Consultation

On 19 April 2022, ESMA responded to the European Commission’s consultation on the enhancement of retail investor assessments. The Commission suggested modifying the current MiFID II/IDD suitability and appropriateness tests to no longer differentiate among various investment services offered to retail investors and replace the current ‘per product’ approach with a personalized asset allocation strategy. ESMA expressed support for taking a holistic view of investor protection but raised concerns about the effectiveness of a standardized retail investor assessment regime and the significant impact on the current model for providing services.

Recommendations to Improve Retail Investor Protection

ESMA published advice for the European Commission on 29 April 2022, seeking to maintain a high level of investor protection while ensuring retail investors benefit from digitalization opportunities. The recommendations include:

1. Ensuring machine readability of disclosure documents for searchable databases.
2. Preventing information overload by limiting the definition of vital information.
3. Developing standard formats for information on costs, charges, and disclosures, and aligning MiFID and PRIIPs KID disclosures.

These recommendations may lead to more transparent and standardized disclosures for structured products, making it easier for retail investors to understand and compare different offerings.

ESMA Consultation on Revised MiFID II Product Governance Guidelines

On 8 July 2022, ESMA published a consultation paper proposing updates to the MiFID II product governance guidelines. Key proposals related to structured products include:

1. Specifying sustainability-related objectives if the product is linked to such objectives.
2. Defining the target market at the individual product level, as opposed to using a clustering approach for complex products like OTC derivatives or structured products.
3. Ensuring a compatible distribution strategy is determined.
4. Conducting periodic reviews of products in line with the proportionality principle.

These proposals could result in better-targeted structured products for retail investors and a more robust product governance framework in the industry.

ESA’s Technical Advice on European Commission’s Review of the PRIIPs Regulation

On 2 May 2022, the European Supervisory Authorities (ESAs) published technical advice on the European Commission’s review of the EU PRIIPs Regulation, encouraging wide-ranging changes to the PRIIPs framework. Key proposals include increased use of digital disclosure, clarifying the regulation’s scope, and allowing flexibility on the information provided in the performance section of key information documents (KIDs) while introducing a new section focused on sustainability objectives.

These proposed changes could lead to more accessible and relevant information for retail investors, aiding them in making informed decisions about structured products.

Improvements to the “What is this product?” Section of PRIIPs KIDs

On 10 May 2022, the ESAs published recommendations to improve the “What is this product?” section of PRIIPs KIDs. The recommendations include:

1. Presenting information in clear and understandable language.
2. Avoiding technical jargon and terminology.
3. Including clear, precise, and direct descriptions of key information, such as the risk of capital loss, early termination features, and underlying assets.

These improvements would help retail investors better understand the key features of structured products and make more informed investment decisions.

In conclusion, ESMA’s recent updates and recommendations aim to enhance retail investor protection in the European structured products market.

By addressing concerns about disclosure transparency, product governance, and targeted offerings, these changes strive to create a more robust and investor-friendly environment. Ultimately, these efforts will empower retail investors to better understand structured products, make informed decisions, and contribute to a more transparent and accessible financial landscape in Europe.