The Ris directive ultimately restricts states from placing bans on incentives

In the light of the final version of the text of the Retail Investment Strategy (RIS) directive - in what should be the final text - the picture that emerges is one of downward compromise. A bit like Artemis2 dropping a piece at every step. Indeed, in an incredible u-turn, from the ban on downgrades, which the Commission had envisaged, to a limitation of the possibility of a ban in the final version.

Let's go in order. As pointed out by Francesco Mocci, partner at Advant Nctm: "We are faced with a significant softening of the rules, with a directive that appears watered down even compared to the initial negotiating positions of Parliament and the Council". One of the issues that emerges in the last passage relates to the so-called 'best interest test'. Lexia's Angelo Messore recalled how the original proposal had severely frightened the industry: "The obligation to always recommend the least expensive or least complex product," he said, "would have risked triggering a race to the bottom towards very basic instruments, penalising private clients in particular, who instead need more sophisticated investment solutions.

The reference to the obligation to recommend the most cost-efficient products now appears only in a Recital of the Directive, which clarifies that acting in the best interests of the client, as part of the suitability test, includes the assessment of overall costs and requires, all suitable instruments being equal, to recommend the most cost-efficient option. In contrast to the Commission's original proposal, however, the possibility for the intermediary to prove that a more costly product objectively provides greater benefits for that specific investor is provided for. Also gone is any reference to recommending products with additional features.

A major downsizing is also observed on the Value for Money front. Indeed, Mocci points out that the feared European prescriptive benchmarks have in fact disappeared for financial products and been downgraded to mere supervisory tools for insurance products, leaving room for an assessment based mainly on a comparison with a 'peer group' for financial products, i.e. a group of similar instruments. On this new mechanism, Angelo Messore raises two critical issues related to a potential heterogenesis of ends. "On the one hand," he says, "basing cost justification to a significant extent on performance risks incentivising the industry to offer products with higher expected returns, which are inherently riskier and more volatile for the client. Although these effects are, of course, mitigated by the additional obligations under Mifid2, particularly with regard to target market and suitability, this is a phenomenon that must be adequately monitored. On the other hand, the obligation of continuous monitoring, which requires action to be taken if a product performs poorly with respect to its costs, could force advisors, during market downturns, to recommend hasty disinvestments; this would crystallise losses instead of waiting for physiological recovery. Again, the risk should be partially mitigated by the use of peer groups, which contextualise losses to the general market trend.

As far as inducements are concerned, Mocci points out that the spectre of a total ban has definitively vanished, replaced by a new test that is very reminiscent of the current rules. "The real political victory for the industry," says Mocci, "lies in the introduction of a limit for the individual Member States: to avoid leaps forward at national level, the directive prevents governments from imposing stricter rules or autonomous bans on inducements, allowing them only in very exceptional, proportionate and objectively justified cases.