European Commissioner Michel Barnier proposed today (3 July) new rules to dismantle shoddy practices amongst investment and insurance brokers in the financial sector, another building block in the EU's implementation of the global financial regulatory reform agreed by the G20.
The package of measures is designed to tackle low consumer confidence in financial products resulting from lack of transparency and conflicts of interest amongst salesmen, who sometimes sell inappropriate products to clients.
The new regulation would demand finance retailers to publish key information documents (KIDs) when selling complex packaged retail investment products (PRIPS) directly to the public.
New changes to the Insurance Mediation Directive will require insurance sellers to provide clearer information about the products they sell and be up front about any third party payments they receive – which can reveal conflicts of interest. That is supposed to protect consumers from fraud, no matter who sells them the products.
Consumer protection in the investment funds market will also be protected by tightening of the Undertakings for Collective Investments in Transferable Securities (UCITS) Directive.
Information documents will costs sector €171 million
The most far-reaching measure will be the introduction of the new KIDS, which will affect investments such as life insurance and pension products sold by fund managers, banks and insurers. Around €10 trillion is held in such investments at the moment throughout the EU.
The new documents must clearly set out the main features of the product sold, including an accurate assessment of risk to the consumer.
“The KIDs will make clear to every consumer whether or not they could lose money with a certain product and how complex the product is,” an EU official said.
The format of the new documents is designed to allow consumers to compare the benefits and risks of such products against others of the same nature, following a strict set of simple criteria.
Proposed changes to the insurance directive are designed to achieve similar levels of clarity in the sale of insurance, a market where 70% of products are sold without the appropriate levels of advice at the moment, according to Commission research.
It is estimated that introducing the KIDs will cost the finance sector a one-off hit of €171 million, with annual costs of around €14 million each year afterwards.
All three proposals will go to the Parliament and the Council for consideration under the co-decision procedure, with the KIDS set to be introduced by 2014, and the changes to the insurance directive and UCITS by 2015.