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Economic Impact Assessment - Ordoliberal Assessment
Uniform key information documents for all packaged retail investment products can in principle strengthen investor protection and avoid distortion of competition. However, they should also be prescribed for non-packaged retail investment products, for if the information requirements for non-packaged retail investment products remain in existence, the retail investor will be confronted with different information in future as well. The existing vertical regulation approach provides for different disclosures, depending on the sales channel and type of investment product. This restricts the capability of investors to take informed investment decisions. Moreover, this approach leads to distortion of competition, since investment product manufacturers are subject to disclosures which vary in strictness and thus entail different costs. The existing approach also strengthens the incentive for investment product manufacturers to design and sell investment products in order to ensure that the costs relating to disclosures are kept as low as possible. This regulation arbitrage is imposed on the investor.
New competitive distortions are also created by the fact that the regulations on civil compensation are not in line with those of the key investor information on UCIT products (Directive 2009/65/EC, see CEP Policy Brief). Moreover, in the case of alternative dispute resolution, synchronisation is necessary. The PRIPS Regulation and the proposed Directives on alternative dispute resolution [COM (2011) 793] differ in several issues. This leads to uncertainty as regards the future legal situation. The latter of the two leaves it to the Member States to stipulate whether or not participation in alternative dispute resolutions is mandatory for companies.
The PRIPS Directive, however, prescribes compulsory participation. The fact that compulsory participation does not apply to UCIT investment funds for the time being, as they are exempted from the Regulation for five years, distorts competition.
Apart from that, key information documents do not allow for a comparison of all investment products. On the contrary, they disclose the differences between investment products and in fact enable the investor to identify comparable investment products. There is also the risk that investors see key information documents as a substitute for a more thorough analysis of the investment product or as a consultation; however, the documents cannot reflect the individual situation of each investor.
Furthermore, the validity of the indicators on the risk profiles and the costs of investment products in the key information document is limited. The different risk and cost factors cannot be bundled into specific, comparable indicators that apply to different products. In addition, the costs relating to investment products often cannot be reflected validly. Due to their different investment horizons alone – shorter in the case of investment funds and longer in the case of pension scheme products – they are hardly comparable.
The regulations on damage compensation under civil law are extraordinarily vague and therefore incorporate substantial legal uncertainty. For it is not specified when a key information document is “easily understandable“ or when it is deemed “jargon“. Not even a substantiation in the form of delegated acts is provided. This lack of clarity makes it more difficult for investment product manufacturers to draw up lawful key information documents. It is to be expected that such uncertainty generates higher costs, which the manufacturers pass on to the investors.
Conclusion
Uniform key information documents can strengthen investor protection and help prevent distortion of competition. However, they should be prescribed for non-packaged investment products as well; this would further improve investor protection and prevent new distortion of competition. Legal uncertainty is created because the PRIPS Regulation and the proposed Directives on alternative dispute resolution [COM (2011) 793] differ and because the compensation rules are very vague. The validity of the “summary indicators” in the key information documents on the risk profile and the costs of investment products is limited.