Opinion: Giancarlo Bosser, Vice-chair, Conduct of Business Committee, Insurance Europe and Chief Life Officer, Generali
The Retail Investment Strategy (RIS) proposal presented by the European Commission in May 2023 is a key opportunity to boost EU citizens' participation in capital markets so that they can make the most of their money while supporting the European economy. Since its publication, member states have been busy defining their position in the Council, while the ECON Committee of the European Parliament adopted the report of Rapporteur MEP Stéphanie Yon-Courtin in March this year.
The insurance industry is highly supportive of the RIS goal as insurance-based investment products (IBIPs) are key to enabling consumers to invest with confidence in capital markets, access insurance protection, and prepare for old age.
Efforts have been made in the Commission’s proposal to ensure that the legal framework is better adapted to digital trends and that consumers are better educated on financial matters. However, there is still a long way to go to make the RIS workable for insurance products, distributors, and consumers. This is because some of the Commission’s proposals, despite laudable intentions, would make it much more complicated for consumers to invest, discourage them from doing so, or steer them to buy the cheapest product, rather than the best one for their needs.
The RIS should be a Strategy
It is crucial that the RIS discussions are approached with a strategic mindset aimed at making investment more attractive, more efficient, and more accessible to all citizens.
It is not a solution to make the consumer’s journey longer and more difficult. Completing an advised sales process for a green IBIP under the current Insurance Distribution Directive (IDD) rules already requires one and a half to two hours of a consumer’s time. Instead of shortening this process, the RIS is adding new steps to the existing “suitability test” and “appropriateness test” while introducing a new “best interest test”. As all these different tests are made of several steps and requirements that come on top of each other, this will make the purchasing process even longer – probably around three hours for the same IBIP – and will make financial services less cost-efficient. Of course, it is important to have robust distribution processes, but this must not lead to excessive bureaucracy with endless checklists and processes.
The advice process with the RIS: a much more tedious consumer journey
Moreover, the Commission’s proposals would lead, in practice, to a very broad ban on inducements. When it comes to insurance, they include three new bans for execution-only sales, non-advised sales, and independent advice, as well as further requirements under the new “best interest” test for advised sales which will be unfeasible for most insurance distributors to meet. This is very much against the goal of making investing more inclusive, as it will be difficult, or even impossible, for consumers to take investment decisions without having to pay an upfront fee – something that most consumers would not be able or willing to do and that would very much restrain consumers’ opportunity to shop around.
Let’s take a concrete example. Pablo wants to start investing EUR100/month – quite a significant amount for most EU consumers – but he has no financial expertise and prefers to buy an IBIP on advice. For independent advice, he would need to pay out of pocket more than EUR 3601. Hard to imagine he would accept to do so considering his investment capacity! The other option is to get access via non-independent advice, but the new best interest test criteria are highly problematic.
So long story short: it is quite likely that Paolo will abandon the process and instead go for faster and cheaper – and much riskier – alternatives such as buying investment products via unregulated trading platforms or investing in crypto-assets.
An excessive focus on cost and not enough on the quality
The sad story does not stop there. The combined effect of the new cost disclosure requirements, the criteria under the “best interest” test, and value for money benchmarks based on cost and performance will push consumers towards the cheapest product. But in an insurance context, cheaper does not mean better as it often means having fewer or no guarantees, lower insurance coverage and less flexibility. Pushing the market towards risky and volatile investments will not help Pablo to find the products and safety net he needs to take his first steps into the investment world.
Unfortunately, not enough progress on disclosures
It is also a missed opportunity that the Commission's proposals do not improve disclosures, but rather continue to add further information. The same applies to the Council and the European Parliament, which seem to keep increasing the number of disclosures, without considering the impact on consumer behaviour and the decision-making process. This tendency to pile on information must stop.
Consumers need clear, concise, and understandable information. The solution is not to overwhelm consumers with longer documents, complex figures, warnings, and multiple tables. On the contrary, transparency requirements should be kept simple to make the investment journey smoother and more attractive.
Policymakers have indeed made efforts to facilitate the use of layering of information and consumer testing, to better display insurance benefits and adopt a digital-by-default approach. However, there is still a long way to go to improve disclosures and make them user-friendly and understandable to a layperson.
Looking forward: how to make the RIS work
So, what does the RIS need in the end? It is crucial that investing remains accessible and affordable to all, to bridge the protection and pension gaps that Europe is facing. Likewise, insurers should not be pushed to offer fewer insurance products that offer guarantees, protections, and peace of mind that are all highly valuable to consumers. The RIS should adopt a more consumer-centric approach by focusing on essential information that matters to consumers and prioritising quality over quantity.
MEP Stéphanie Yon-Courtin’s report is a positive step towards a RIS that delivers on its promise to encourage more EU citizens to invest in financial markets. It is positive that advice and other distribution services will continue to be accessible to everybody, attention is paid to the benefits of insurance products and the focus on financial education is increased. At the same time, much more needs to be done to ensure better disclosures and a smoother consumer journey, preserve consumer choice, and prevent the risk of product and price homogenisation.
The RIS journey is far from over. As the Council continues to negotiate before engaging in trilogues, it is critical the final text creates a well-designed legislative framework that works for consumers, industry, and Europe.
Checklist for trilogues
• Avoid direct or indirect bans on inducements, which would make it more difficult for consumers to access products, services, and protection.
• Fix the “best interest test” criteria, to ensure they are workable for all insurance distribution channels and allow consumers to get the products that best meet their demands and needs.
• Avoid price regulation and additional reporting in relation to value for money benchmarks.
• Highlight the protection elements of products instead of hiding them, as they are a key driver to increase retail investment.
• Simplify disclosures and access to distribution services, focusing on the essential information that consumers need to receive or provide.
• Avoid an increase in compliance and reporting costs, which would ultimately increase the cost of products.