Retail finance

In its Action Plan for Capital Markets Union (CMU), the European Commission has recognised that retail investors in Europe have significant savings in bank accounts, but are less likely to invest directly in capital markets. One of the aims of CMU is to diversify funding away from pure bank lending and deposits, and a large part of this will involve redirecting the savings of individuals to where it is needed via the retail capital markets. CMU also aims to promote competition and economies of scale by promoting access to financial services on a Europe-wide basis.

In an effort to find ways of achieving these aims, the Commission published a Green Paper on retail financial services in December 2015 and held a public hearing in March 2016. Possible reforms could potentially include both legislative and non-legislative initiatives. Results to date appear to be focussed mainly on the provision of financial services (e.g. bank accounts and retail loans) rather than increasing retail investment in capital market products.

The Commission recently launched a comprehensive assessment of European markets for retail investment products, including distribution channels and investment advice. The study will consider whether retail investors can access suitable products on cost-effective and fair terms, and whether the potential offered by new possibilities stemming from online-based services and other technology to make financial services more efficient (i.e. ‘FinTech’) is being harnessed. The Commission has also tasked the European Supervisory Authorities with analysing the actual net performance and fees of long-term retail and pension products. The results of these studies are expected to be published in 2018.

Other CMU initiatives will also affect retail market participants, even if they are not primarily directed at them. For example, in response to the Commission’s consultation on the Prospectus Directive (PD), market participants have said that prospectuses are overly long documents that are neither read nor understood by retail investors (which is contrary to the stated aim of investor/consumer protection).

Under the current rules, the level of disclosure required depends on whether the prospectus is for a retail or wholesale bond issue. Retail bonds are aimed at a wide base of investors, including less sophisticated investors who regulators consider to be in need of greater consumer protection. The PD imposes a different disclosure regime for retail debt (i.e. issues of debt securities with denominations less than €100,000 (or equivalent in other currencies)), which is more onerous on issuers and intermediaries than that for wholesale debt (i.e. all other issues of debt that is mainly sold to institutional investors). As a result, retail issuances command a smaller share of total issues of debt securities in Europe, and the lion’s share of debt capital markets investment comes from institutional investors.

A new Prospectus Regulation, which will replace the existing PD regime, is approaching the final stages of the legislative process. On December 20, 2016 the European Parliament, Council and Commission formally came to a political compromise as to what the draft legislation will say. In a departure from the Commission’s original proposal, the compromise text of the Prospectus Regulation will keep the distinction between retail and wholesale disclosure. This is due in part to feedback from issuers that eliminating wholesale disclosure would not only fail to nudge them towards seeking retail funding, but also discourage them from issuing in debt capital markets more generally.

The Prospectus Regulation has some features that could be potentially conducive to retail investment. Examples include requiring prospectus summaries that are drafted in plain, non-technical language and allowing small and medium sized enterprises (SMEs) to use a new, lighter ‘EU growth prospectus’.

When adopted, the Prospectus Regulation will have direct effect without needing implementation at the national level. Except for some specific provisions that will apply earlier, it appears that the Prospectus Regulation will apply 24 months from the date of entry into force. That means if as expected the Prospectus Regulation is adopted in the first half of 2017, the bulk of it will apply in the first half of 2019. For more information please see our comprehensive briefing on the Prospectus Regulation on our CMU site.