Despite its name, the retail investment strategy (RIS) is an omnibus directive amending several pieces of existing legislations with the ambition to improve the conditions for greater participation of retail investors in capital markets. The final requirements are expected to become applicable by the beginning of 2026 at the earliest.

Price regulation: threat or opportunity?

As part of their pricing process, product manufacturers and distributors will be required to identify and quantify all costs and charges and assess whether such costs and charges could undermine the value which is expected to be brought by the product. Pricing of Priips, Ucits or AIFs would need to consider cost benchmarks, which are relevant for the type of fund and investment strategy. These benchmarks will be developed by the European Securities and Markets Authority and European Insurance and Occupational Pensions Authority. In case of deviation from the benchmarks, manufacturers should be able to establish that costs and charges are justified and proportionate in order to obtain authorisation.

Such benchmarks and increased transparency on costs are likely to lead to a rationalisation of fund ranges at the manufacturer level in order to remain competitive versus direct lines. This price regulation could reinforce the trend to passive investment strategies while adding pressure on actively managed investments. It could also become a threat to the democratisation of private markets: when asset managers are prescribed to charge assumingly lower fees this could impact their interest in sourcing retail investor money.

A first step to a full inducements ban?

In its current form, the directive foresees that in case of non-independent advice, investment firms, insurance undertakings and intermediaries will have to perform a client’s best interest test, replacing the Mifid “quality enhancement” and the IDD “consumer detriment” tests.

This new test will require intermediaries to perform more quantitative assessments of the eligibility of inducements and be attentive to the relevance and the added value of services provided to end clients. This difficulty could lead to a switch to more value-added services to higher customer segments, on which it will be easier to deploy fee-based models.

Impact on distributor service models

The share of execution-only services remains high in the banking sector. However, more recently private banks have had to face fierce price competition from electronic trading platforms in the execution-only arena, and now they see a growing demand for advisory services from investors who are seeking expertise but in a collaborative and interactive way. In this context, the future rules on inducements should be integrated by the distributors when they review their strategies, design their investment plans and adjust their service models.

As a consequence we could see a significant reshuffle in the offering of services and the distribution landscape which would impact product ranges too. The pressure on cost will also exacerbate the need to rethink service models, considering the expected increased share of digital distribution versus physical channels, leading to a form of hybrid models.

Norman Finster moderated “The RIS and pressure on costs: will distribution models change?” panel at the Association of the Luxembourg Fund Industry’s Global Asset Conference on 19 March 2024. This guest contribution first appeared in Delano’s print edition.