At the end of each month, the SAFE Regulatory Radar highlights a selection of important news and developments on financial regulation at the national and EU level.
Proposed amendments to improve PRIIPs disclosure and strengthen investor protection
On 3 May 2022, the three European Supervisory Authorities (ESAs), namely the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA), published their joint technical advice to the European Commission on the review of the Regulation on packaged retail and insurance-based investment products (PRIIPs Regulation). The technical advice provides recommendations aiming to facilitate the transparency and simplicity of information provided to consumers and to allow for easier comparison between different investment products.
The Commission has mandated the ESAs to assess how to adapt the key information document (KID) in the context of the European Single Access Point’s (ESAP) implementation, a platform designed to access all data on financial services that entities and competent authorities are required to make public. The details on the ESAP, which is the central part of the latest Capital Markets Union Review, were outlined in the SAFE Regulatory Radar in December 2021.
The ESAs recommend taking advantage of digital disclosure opportunities and providing information in a layered format. The supervisors welcome more flexibility in the information presented in the KID, primarily in the performance section. The technical advice suggests different approaches for different types of products to ensure proper understanding by retail investors. Recommendations also include the introduction of a new section in KID to highlight sustainability goals.
Accordingly, ESMA issued a final report containing technical advice on certain aspects relating to retail investor protection under MiFID II on 29 April 2022. In its advice, ESMA requires a necessity of machine-readable disclosure documents to facilitate user-friendly searchable databases. The technical advice also proposes elaboration of an EU standard format for information on costs and charges and harmonization of information disclosure in line with MiFID and PRIIPs KID. In addition, ESMA highlighted the importance of properly dealing with misleading social media marketing campaigns and aggressive marketing communications.
Both documents with technical advice were submitted to the Commission and will serve as input for developing the retail investment strategy for the building of a coherent regulatory framework.
Commission proposes tax incentive for equity
On 11 May, the European Commission proposed a debt-equity bias reduction allowance (DEBRA). The proposal has two aims: to make European companies more resilient and to increase the accessibility of financing, particularly for start-ups and small and medium-sized enterprises (SMEs). Increased equity would also facilitate investments in innovative technologies and support green and digital transitions. DEBRA is part of the EU strategy on business taxation which contributes to the Capital Markets Union and promotes the integration of national capital markets into a single market.
The proposal foresees an allowance that will grant equity the same tax treatment as debt. The allowance on equity is calculated by multiplying the allowance base with the relevant notional interest rate. In turn, the allowance base is equal to the difference between equity at the end of the tax year and equity at the end of the previous tax year which is the year-on-year increase in equity. The relevant notional interest rate is a sum of the currency-specific risk-free interest rate and a risk premium. The risk premium is set at one percent or 1.5 percent for SMEs.
Next, the legislative proposal will be scrutinized by the Council and European Parliament.
EBA recommends improving the regulatory regime for non-bank lending
On 4 May 2022, EBA published a report on non-bank lending. The European Commission has mandated EBA to examine the current regulatory landscape for non-bank lending as a part of the digital finance strategy.
The EBA’s recommendations strive to address risks arising from the provision of lending by non-bank entities in the areas of supervision, consumer protection, anti-money laundering and countering the financing of terrorism (AML/CFT), macro and microprudential risks.
EBA emphasizes the necessity to overcome nationally fragmented non-bank regulatory regimes for lending to allow FinTech, BigTechs, and other non-traditional operators to develop successful business models and increase competition in the market.
First, EBA proposes to adapt the disclosure requirements for non-bank lending and to ensure the requirements are fair and effective as well as to strengthen the requirements for creditworthiness assessment. Second, the report recommends reviewing authorization and admission rules and to clarify the supervisory responsibilities in the cross-border provision of services. Third, the monitoring and reporting frameworks must be harmonized at the EU level to minimize macroprudential risks. Finally, EBA proposes to elaborate a mechanism to cover all non-bank lenders in the EU-wide AML/CTF framework.
The Commission will consider these recommendations and will prepare the necessary legislative proposals.
Current public consultations:
Anastasia Kotovskaia is Research Assistant at the SAFE Policy Center and currently pursuing a Ph.D. in Law at Goethe University.