There has been a notable increase in regulatory efforts to prevent harm to retail investors. New regulatory initiatives have been proposed or implemented to address retail market conduct issues.

Alongside traditional themes such as product governance, there is a significant focus on value for money and transparency, which is consistently reflected in new fair value considerations and disclosure requirements. And in addition to focusing on the distribution chain, disclosures and marketing materials, regulators are stepping up efforts to educate investors and protect them from scams.

Authorities are tackling investor protection issues from a variety of angles. As well as new regulation and supervisory activities (in some cases, taking advice from consumer advisory panels), there are efforts to increase investors' awareness and financial literacy. Some regulators are also reconsidering the role of compensation regimes and safety nets for when things go wrong. And the role of fund depositaries in the oversight ecosystem is also being reconsidered.

See below for more detail on the key themes

In March 2023, an IOSCO1 report highlighted risks from an increasingly online environment, noting the need for regulators to use technology to disrupt online marketing channels and to identify misconduct. The Australian regulator, ASIC2 co-chaired the IOSCO task force and noted that the findings would inform its own strategic priorities on retail investor harms.

Regulators have finalized or proposed entirely new retail investor protection frameworks. The most notable is the UK's “Consumer Duty”. Across all sectors, the Financial Conduct Authority (FCA) introduced:

  • A new principle requiring firms “to act to deliver good outcomes” for retail customers.

  • Cross-cutting rules requiring firms to act in good faith, avoid causing foreseeable harm, and enabling and supporting retail customers to pursue their financial objectives.

  • Specific rules regarding product governance and value for money (see below), consumer understanding and consumer support.

Firms must capture evidence of good outcomes. Asset managers devoted significant time and resources to implementing the Duty in the run-up to the end-July deadline, but all are expecting further activity will be required to address residual gaps and fully embed the requirements.

Similarly, the EU set out wide-ranging proposals to modernize its retail investment framework, to increase trust, transparency and investor participation. The proposals would introduce new product governance and value for money requirements, simplified disclosures, and new training and competence standards for financial advisers.

Likewise, the Monetary Authority of Singapore (MAS) consulted on revised guidelines regarding boards' and senior management's responsibilities for delivering fair outcomes for customers. The changes would widen the scope of the existing guidelines to include all products and services offered by firms and incorporate principles and guidance on the fair treatment of customers. The MAS also published new guidelines for fund management companies to establish clear policies and procedures to handle complaints and feedback, to identify the senior manager responsible for handling complaints, and to communicate the documented escalation and review process to all employees.

The JFSA3 introduced new provisions on customer-oriented business conduct, which require impacted Japanese firms to be sincere and fair in the performance of their services, taking into account customers' and beneficiaries' best interests.

The Central Bank of Ireland (CBI) commenced a review of its consumer protection code to ensure it remains fit for purpose in the rapidly changing landscape. The review focused on availability and choice for the consumer and ensuring that firms act in consumers' best interests (on which the CBI may develop specific guidance). The CBI also enhanced its client assets regulation and issued specific guidance on when client assets are transferred as part of a transfer of business.

In South Africa, the Conduct of Financial Institutions Bill (COFI) is still awaited and is unlikely to be passed before end-2023. The bill aims to build a consistent, strong and effective market conduct legislative framework for all financial services firms. In the absence of new requirements, some regulators such as ASIC in Australia have focused on culture and conduct from a supervisory perspective.

More broadly, the US Securities and Exchange Commission (SEC) adopted new rules to enhance the regulation of private fund advisers. Amongst the new requirements, these firms will need to provide investors with quarterly statements, obtain and share an annual financial statement audit of each private fund they advise, and to comply with new investor protection requirements. 

Investor protection

The way in which products are manufactured, designed and reviewed is under scrutiny in many jurisdictions. This is being reflected in both new rules and a supervisory focus.

The EU has enhanced its 2018 product governance guidelines to require firms to specify any sustainability-related objectives of a product. ESMA4 adjusted the requirements on “target market” identification, distribution strategy and the periodic review of products, and updated its guidelines on remuneration policies and requirements, and the consideration of conflicts of interest. The proposed EU retail investment strategy would further enhance existing requirements around the product approval and review process. 

The UK FCA's Consumer Duty requires wealth managers to implement formal product governance requirements for the first time, around product design, periodic review, adequate assessment of target market, and product testing and scenario analysis. Fund managers were already subject to such requirements.

In India, SEBI5 introduced a new limit for all mutual funds, specifying that they may not invest more than 10 percent of the fund's value in debt instruments issued by a single issuer, to ensure consistency with existing requirements for passively managed funds. It also introduced restrictions for AIFs that operate a “priority distribution model” (where certain investors have priority receiving distributions from the fund, which means other investors share a greater burden of any losses), while SEBI considers its position. 

ASIC demanded that Australian firms “lift their game” when it comes to compliance with its design and distribution obligations (DDO). The DDO review found that target markets were poorly defined (e.g. defined too broadly or used unsuitable investor risk profiles) and that product governance arrangements were inadequate or unclear. ASIC stated that “closer scrutiny of DDO is coming”.

Product governance is also a significant focus area in Japan. The JFSA encouraged asset management companies to check whether investment trusts are being managed as planned and are reaching the target market, and whether products represent value for money. A particular focus is on the effectiveness of product governance arrangements, for example whether poorly performing investment trusts are routinely identified. 

The French AMF6 has identified issues relating to private equity funds with a specified lifetime, where the lifetime has been regularly exceeded by a significant number of funds. It therefore consulted on proposals to enhance protection for investors — for example, by strengthening the regulatory framework of liquidation options. 

Various new rules have been introduced that focus on value for investors and aim to increase transparency. For example, new rules in Brazil will require greater disclosures on the remuneration of administrators, managers and distributors, as well further disclosures on rebates. 

The Canadian regulators finalized changes to enhance cost reporting disclosures by investment funds and segregated mandates. Firms will need to report annually to clients on the ongoing cost of owning funds, as a percentage for each fund and as an aggregate amount, which is likely to require substantial implementation efforts. A committee was established to help industry implement the requirements (through guidance) by end-2025. In Ontario specifically, the regulator also proposed eliminating deferred sales charges (paid if customers withdraw their money before the period specific in the contract) on new segregated fund contracts and restricting their use on existing ones. 

The French AMF has updated its policy on the disclosure of management fees in the prospectus, to include more guidance on the how firms should specify fees and present certain expenses. For actively managed funds, it noted that firms must have policies and procedures to ensure they can assess the long-term relationship between fees and performance against the benchmark. For passive funds, the AMF stated that there must be policies and procedure to compare fees with comparable funds.

The UK Consumer Duty requires all firms to undertake a fair value assessment on their products (whether the amount paid is reasonable relative to the benefits). Even before the rules entered into force, the FCA reviewed firms' approaches. Although it found that firms were “making substantial efforts”, it questioned the effectiveness of some firms' frameworks. Managers of UK retail funds can continue to comply with rules introduced in 2019, so the new rules have had the greatest impact on wealth managers. Although the Duty technically only applies to UK firms and certain firms in the FCA's temporary permission regimes (resulting from “Brexit”), the rules created challenges for EU fund managers distributing funds into the UK, with UK distributors asking them about the price and value of their products. Separately, the government is consulting on a framework for value for money in defined contribution pension schemes (which includes investment performance). 

There are new rules are on the horizon. The EU's proposed retail investment strategy would require firms to implement a structured pricing process and to compare their products against cost and performance benchmarks that would be maintained by the EU authorities. Fund managers would also need to assess the eligibility of costs they charge, prevent “undue costs” being charged to investors, and reimburse investors as required. Under the AIFMD7 review, ESMA will have the power to carry out a study and develop standards, with criteria for the assessment of undue costs.

Proposals for an EU ban on commissions paid from distributors to manufacturers were debated at length, but only a ban on execution-only commissions is now on the table. Before publication of the Commission's proposals, some regulators, such as in Sweden, had proposed to examine conflicts of interest in fund distribution, while others had strongly opposed any form of ban. Although only a limited ban is now being debated, there has been strong opposition from EU industry.

In Australia, APRA8 continues to publish a heatmap to provide insights on pension schemes' investment returns, fees and costs, and sustainability of member outcomes. Amidst concerns about some of the performance benchmarks used, APRA consulted on technical changes for products where performance histories need to be combined, and published an information paper outlining its methodology for combining performance histories of certain products.  

Value for money is a supervisory focus in other jurisdictions. Traditionally in Japan, almost half the investment management fee is split equally between the management company and distributor. The JFSA expects reasonable explanations to be given to customers regarding the services corresponding to the distributor's share. The UK FCA reviewed fund managers' compliance with its 2019 value for money rules. Its follow-up review noted that firms have made significant improvements but there is more work to be done by some firms (for example, greater challenge in the assessment process from independent directors, and the need for more detailed cost allocation models).

Following ESMA's publication of a common supervisory action on costs and fees in May 2022, several EU national regulators published details of their specific findings. ESMA also completed a follow-up review of guidelines for UCITS9 and found cases where costs relating to efficient portfolio management are significantly higher than in other funds. ESMA also issued a statement to highlight retail investor protection concerns in the context of securities lending, and reminded firms of the existing requirements — for example, that revenues from securities lending should directly accrue to the retail client, net of a normal compensation for the firm's services. Some regulators, for example in Luxembourg, specifically require AIF managers (as well as UCITS managers) to review their pricing process. 

Various other monitoring exercises and studies are underway. ESMA published its fifth annual report on costs and performance of EU products, finding that costs incurred by investors is declining slowly compared to previous years. The Swedish regulator will publish the median fee for popular fund categories every quarter to help contextualize charges for investors. Meanwhile in India, SEBI kicked-off a study of regulatory expectations for fees and expense compared with market practices and will consider whether new policy measures are needed.

Investor protection

The way in which products reach the end investor remains under regulatory scrutiny, and existing regulatory frameworks are being amended (for updates from a digital perspective, see Chapter 5).

As part of its new regulatory regime, the Brazilian CVM10 updated its requirements to end exclusive relationships between distributors and manufacturers. Previously, distributors were able to work with only one manufacturer. The changes also enable distributors to recommend investments to their clients (observing the suitability rules) and provide flexibility around who can be a distributor (permitting companies as well as individuals). Companies need to appoint a director to be responsible for distribution services, and all remuneration arrangements need to be disclosed quarterly to investors.

The Canadian securities regulators announced they would review the distribution of funds through a principal distributor. The first phase of the work involved surveying fund managers and distributors about the scope of their arrangements and better understanding sales practices and distribution structures. The JFSA encouraged more Japanese firms to offer digital platforms, so that distribution of products with low fees can become widespread. 

Having identified concerns around issues such as pressure selling, the MAS proposed enhanced safeguards in Singapore regarding prospecting activities at public places and telemarketing. Its five measures included turning the guidelines into legislation, requiring a more transparent approach, and allowing customers more time to consider their purchases. Other measures, such as a prohibition on gifts to entice customers, are also under consideration. Separately, the MAS consulted on safeguards of digital prospecting and marketing — see Chapter 5 for details. 

In Australia, the Quality of Advice review (QAR) has been completed and 22 recommendations were delivered to the Australian government for consideration. One of the key questions was around whether regulation could have impacted the accessibility and affordability of advice. In June 2023, the government responded to the review across three themes: removing regulatory “red tape” that adds to the cost of advice without benefitting customers, expanding access to retirement income advice and exploring new channels for advice. It plans to consult later in 2023.

Similarly, the UK FCA consulted on efforts to make financial advice more accessible to the mass market and to address the “advice gap”. The proposals would allow firms to provide individuals with more straightforward financial needs with greater access to simplified advice on mainstream investments. A review of the boundary between advice and guidance is planned for late 2023, and the suitability of advice remains a key priority.

In the EU, ESMA published a supervisory briefing on understanding the definition of advice under MiFID (for example, on what constitutes investment advice). Separately, ESMA published revised guidelines regarding the EU suitability assessment, covering the role of “sustainability preferences” — how firms should help clients understand the concept, the information firms need to collect, and how to identify products that meet the client's preferences. Subsequently, ESMA consulted on the integration of sustainability preferences into the suitability assessment and product governance arrangements, to understand better how the market has evolved and how firms apply the rules. Similarly, the AFM in the Netherlands will review how advisers and asset managers ask their clients about their sustainability preferences. 

The US SEC plans to focus on the fiduciary standard for investment advisers, and to inspect recommendations made regarding products, disclosures to investors, the process for making “best interest” evaluations and factors that are considered in the light of the investor's investment profile (such as investment goals and account characteristics).

There are ongoing questions for regulators and firms about the information to be provided to investors, and in what format. The Brazil CVM found that 75 percent of people invested based on information from digital channels and “influencers”, while the French AMF found that some investors see fund documentation as off-putting and not easily readable — with problems relating to the “excessive density of information”. Several regulators are considering amending rules to simplify and digitalize disclosures, to increase their usefulness for the end investor (see more on digital innovation in Chapter 5). 

The US SEC introduced new rules to require fund managers to send “concise and visually engaging” reports to their investors, including information such as expenses, performance, and portfolio holdings. As well as modernizing shareholder reports, the advertising rules were changed to ensure that fees and expenses presented in adverts are consistent with the prospectus and are not misleading. SEBI wishes to increase transparency in Indian AIFs. It noted that distribution and placement fees are prohibited in some instances, and where they are permitted, they should be disclosed at the time of customer onboarding. And the Chinese regulators issued new specifications for standardized and structured digital disclosures by public investment funds, to enhance disclosures and their comparability. 

The EU's retail investment strategy includes simplification of disclosures, for delivery in electronic format by default, and a standardized presentation of costs and charges. Meanwhile, the UK will repeal the EU disclosure regime for retail products, and the FCA will deliver a new tailored regime for the UK market (including UK UCITS), which will be guided by the principles of proportionality, clarity and choice. In parallel, the FCA consulted on improving investor engagement through technology, and on how documents such as the prospectus could be redesigned to engage investors' attention and interest. Aspects of financial promotion rules are being reviewed — for example, the FCA has consulted on updating its guidance to reflect the use of social media — and there are new advertising rules for crypto-assets.

Canada has proposed an “access-based” model for delivery of fund financial statements and performance reports. This would increase their online availability and accessibility, while allowing investors the option to request documents in other media.

Switzerland considers the harmonized EU product disclosure document (PRIIP KID)11 to be equivalent to its own regulated document (FinSA KID)12, but is working on new requirements concerning sustainable disclosures and the disclosure of risks and equity capital for securities firms. Meanwhile, Poland has removed closed-ended AIFs from the scope of its prospectus requirements for listed companies. 

In addition to rules, new guidance on disclosures is being issued. The Spanish regulator issued technical guidance for certain fixed income funds to improve investor warnings and clarify the criteria for calculating certain disclosures. The CBI updated its guidance on marketing requirements for Irish fundsproviding updated information on the format and content of marketing materials, and on its approach to verification. And in Belgium, FAQs were published to clarify the advertising rules, as well as procedures for obtaining regulatory approval before issuing marketing communications. 

There is also ongoing supervisory work on existing disclosure frameworks. 

  • ASIC reviewed Australian firms' marketing arrangements and noted some firms “must do more to meaningfully oversee the way in which their funds are marketed to investors”.
  • ESMA and national regulators are reviewing whether marketing communications and advertisements in the EU are fair, clear, and not misleading, with a particular focus on digital distribution channels. ESMA will also collect information on possible greenwashing practices.
  • While the UK has chosen to retain the existing UCITS disclosure regime, from January 2023 EU funds have needed to comply instead with the requirements for retail AIFs. 
  • The Swedish regulator completed a review of fund managers' compliance with the new regime and found errors as well as differing practice where firms refer investors to historical performance scenarios. It expected fund managers to remediate errors as quickly as possible. 
  • In the Netherlands, the AFM13 found that execution-only investors receive inadequate information before investing. It reminded firms of the need to comply with pre-and post-trade transparency requirements. 
  • The US SEC plans to focus on compliance with the new marketing rule. It will review whether firms are substantively compliant with the requirements (including whether they can substantiate their statements in adverts, for instance), and whether necessary policies and procedures are in place.

In some jurisdictions, funds are required to have licensed depositary entities, which act independently from the fund management company (FMC). They are required to safeguard fund assets (custody) and oversee the activities of the FMC and the fund (an additional layer of investor protection). Changes in the regulation or supervisory expectations of depositaries can have a significant impact on the way in which funds are operated and monitored. 

Hong Kong (SAR), China is to introduce a new “Type 13” regulated activity covering fund depositary services with effect from October 2024. In addition to requirements on minimum capital, professional indemnity insurance, conduct of business and fund operations, individuals involved in the custody of a fund (or in overseeing the activities of a sub-custodian) will need to be licensed. 

The review of the EU AIFMD deleted the temporary provision (already time-expired) that permitted depositaries to be domiciled in a different member state to the fund domicile (a depositary “passport”). The widely-held view among policymakers is that, while the FMC can operate from a different member state to the fund's domicile (the “managing” passport), it is essential on investor protection grounds for the depositary to be in the same jurisdiction as the fund. 

National regulators in the EU include depositaries in their inspection programs from time to time. For example, the French AMF undertook a series of thematic inspections on depositaries' organization, governance and controls, their due diligence when onboarding a fund management company and ongoing monitoring, and compliance with conflicts of interest and independence requirements of depositaries. The AMF found a range of good and poor practices, and called on depositaries to strengthen their mechanisms for interacting with and monitoring FMCs, including in relation to non-financial contractual commitments.

The UK review of future asset management regulation includes proposals to clarify rules on fund depositaries' resources and knowledge, and oversight of fund liquidity management and pricing. The FCA is also considering a “Direct2Fund” model that would allow investors to transact directly with the fund when buying and selling units (the common practice around Europe and elsewhere), rather than requiring the fund manager to buy and sell units through its own book.

Some regulators are increasingly focused on the key role played by fund administrators and how these entities should be regulated. The new fund regime in Brazil includes rules on the limited liability of fund service providers, and defines the co-responsibility of fund managers and administrators (which are called “essential” service providers).

There has been a marked increase in the volume of messages to the public on regulators' websites around the world.

Many of these messages advise consumers to beware of impersonation scams, unregulated products and services, fraudulent activity and online (cyber) risks. Some regulators offer tips on how to spot scams in general or specific types of scams, some target their advice to specific sections of the public (such as the elderly), some offer advice for victims of financial crime, and some are strengthening their Ombudsman arrangements. IOSCO has called for greater international collaboration and cooperation to combat cross-border scams, greenwashing, misconduct and fraud.

Regulators recognize the link between educated consumers and being resilient to scams. A report by the European Supervisory Authorities (ESAs) highlighted the fact that a lack of financial literacy and unfamiliarity with digital technologies can increasingly lead to financial vulnerability and exclusion of consumers. More specifically, without appropriate digital financial skills and the ability to ensure their cybersecurity, consumers are more at risk of becoming victims of scams and fraud.

Regulators are also noticeably more active in drawing consumers' and investors' attention to forms of financial risk. Many are highlighting the risks in buying virtual assets of any sort, and some are commenting on other risks. For example, the ESAs have drawn consumers' attention to how rises in inflation and interest rates might affect their finances. IOSCO has issued sound education practices for securities regulators to consider in a crisis situation, to support investor protection.

Financial and investor education is needed all around the world. Investors in developed and emerging markets alike can benefit from increased levels of financial literacy to take informed investment decisions.

Pasquale Munafò
Chair, IOSCO Committee on Retail Investors and Senior Finance Professional, CONSOB14
October 2022

There is an increase in regulatory activity relating to investor education more generally. To mention just a handful of initiatives:

  • Investor education events and initiatives were held across China as part of World Investor Week, and each investor education entity was assessed.

  • In response to a drive in South Africa for the regulator to educate the population, a new Consumer Advisory Panel has been established.

  • The Canadian regulators published an investor education activity report and held a financial literacy month, and the British Columbia Securities Commission launched a redesigned investor education website, InvestRight.

  • In the Netherlands, the regulator wants to prevent consumers from being nudged in the direction of products or services that are not primarily in their interest.

  • The Swedish regulator issued a practical guide entitled “How do I talk to my children about money?”

  • In Japan, an organization will be established to provide a wide range of financial and economic education from a user-centered perspective.

  • The Australian government launched a national financial capability strategy, to help consumers adapt to the evolving financial and digital landscape and contribute to individuals' financial resilience.

Actions for firms:

  • Review the firm's evolving strategy, culture and purpose to ensure it remains aligned with acting in customers' best interests.

  • Review governance structures and MI that is used to consider customer outcomes, and whether good or poor customer outcomes are being evidenced.

  • Check whether a target market for products has been defined with sufficient granularity, and whether products are being distributed to that market.

  • Ensure disclosures on costs and charges are understandable and consistent with new regulatory requirements.

  • Challenge whether products are demonstrably meeting clients' needs and providing value for money.

  • Review arrangements with distributors, and whether distributor due diligence is formalized and underpinned by adequate policies and procedures.

  • Ensure systems and controls are keeping pace with technology developments efficiently to deliver accurate electronic disclosures.

Key topics captured within the report

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