Investors protection rules strengthened as EP and Council reach major agreement

The European Parliament and the Council have reached an informal agreement on new EU rules aimed at strengthening protections for retail investors, improving access to quality financial products, and encouraging broader participation in capital markets.

The agreement introduces amendments to several existing EU directives and focuses on placing retail clients’ interests firmly at the centre of financial and insurance advice. Under the new framework, advisers will be required to ensure that any product or service they provide is suitable for the individual client’s needs and circumstances.

Suitability assessments will need to consider proportionate and necessary information, including a client’s knowledge and experience, financial situation, ability to bear full or partial losses, investment objectives and risk tolerance. The objective is to ensure that products sold to retail clients genuinely reflect their profiles, rather than being driven by sales incentives.

The Malta Financial Services Authority (MFSA) welcomed the agreement, describing it as an important step towards strengthening investor protection across the EU. The Authority said the deal “forms part of wider reforms aimed at boosting retail participation in capital markets and reducing reliance on bank lending, particularly for smaller companies.”

Under the agreed framework, financial and insurance advisers will be required to act in clients’ best interests, ensuring that products are suitable based on factors such as financial situation, risk tolerance, investment objectives and capacity to absorb losses. In terms of this agreement, it would not be possible to distribute products that fail to offer value for money to the retail market, while greater transparency will allow consumers to compare costs, performance and non-financial features.

The MFSA noted that, under the agreed framework, “it would not be possible to distribute products that fail to offer value for money to the retail market, while greater transparency will allow consumers to compare costs, performance and non-financial features.”

The reforms also address the issue of inducements received by firms from third parties. While such inducements will remain permissible, they will only be allowed where they enhance the quality of services provided to clients, for example through better research, tools or training, and where conflicts of interest are properly mitigated. A new inducement test is intended to ensure firms act in clients’ best interests and that investors can clearly distinguish inducements from other fees.

Another area of focus is financial literacy, particularly among younger investors who may be more exposed to mis-selling through social media and online channels. EU countries will be required to promote financial education initiatives, tailored where appropriate to specific age groups. In addition, activities involving so-called “finfluencers” will be subject to closer supervision. Where investment firms use influencers to promote financial products, they will be required to have written agreements in place and maintain oversight of their activities.

Commenting on the expected impact of the reforms, Sarah Pulis, Head of Conduct Supervision at the MFSA, said: “the new measures are expected to significantly strengthen investor protection and enhance retail investors’ confidence in financial products, potentially encouraging greater participation in capital markets.”

She added that, throughout the negotiations, “careful consideration was given to ensuring that any additional obligations imposed on firms would deliver tangible benefits for consumers, while avoiding the imposition of unnecessary regulatory burdens on firms.”