When the European Parliament’s ECON Committee recently approved the Retail Investment Strategy (RIS) trilogue agreement, a predictable sigh of relief washed over the co-legislators in Brussels. With this vote over the line, the main (Level 1) deal is effectively “done,” and the remaining approvals by the Parliament and the Council are mere formalities expected before the end of the year.
Unfortunately, the strategy remains a prime example of political momentum carrying a flawed idea across the finish line simply because no one wanted to pull the emergency brake. A framework meant to increase retail engagement in capital markets has instead delivered a regime far more complex than the one we have today. But debating this complexity is now a purely philosophical exercise, as the industry will have to implement the rules.
This is why the prevailing narrative that the RIS is “done” is an illusion. Yes, the high-level text is locked in. But it leaves behind a myriad of technical (Level 2) measures that still need to fill in the blanks. These are not minor administrative details – they will fundamentally change how funds and other investment products are distributed in Europe. The European Commission and the European Supervisory Authorities are now tasked, among other things, with defining Value for Money (VfM), executing a major rewrite of the PRIIP KID, and figuring out how a new “suitability-light” regime will actually work. As a result, the financial industry will be swamped with consultations and highly technical discussions for most of next year.
The value for money paradox
To understand the scale of this impending exercise, look no further than the Value for Money rules. The core of the VfM framework relies on comparing products against a peer group. The main text already mandates nine specific criteria for defining these peers, including: risk, recommended holding period, investment strategy, distribution strategy, and whether the management is active or passive. There is just one glaring problem; apply all nine criteria simultaneously, and your peer group often shrinks to zero.
Even if a peer group can be successfully established, the framework requires measuring underperformance, defined in the text as a “significant distance” from the benchmark. Initial modeling exercises, conducted before the VfM framework was completed, flagged certain funds as underperforming over a five-year period, even though those same funds overperformed or delivered steady returns in subsequent years. This will be tricky to get right, but it is crucial, as it could dictate which financial products remain on the shelves and which are withdrawn.
Beyond the arithmetic and market cycles, major structural questions remain entirely unresolved. For instance, the framework is not clear whether inducements should be factored into the peer groups of product manufacturers or distributors. Complicating matters further, if a fund is used within an insurance-based product, the peer grouping assessment must somehow align with the Insurance Distribution Directive’s (IDD) benchmarking system, leaving the industry guessing how to actually reconcile these two distinct regimes. Given these compounding complexities, it is already clear that the final technical rules must provide sufficient flexibility to make this benchmarking exercise remotely workable.
Hidden costs and open questions
The open questions do not stop there. The new “suitability-light” regime is theoretically supposed to ease the compliance burden, but the final text restricts it to “well-diversified, non-complex and cost-efficient financial instruments.” This leaves massive questions regarding which products actually qualify.
Then there is the issue of inducements. The RIS lifts the term “tangible benefits” from the IDD and applies it across the board, replacing MiFID’s established concept of “quality enhancement.” Policymakers have promised that this linguistic shift will not lead to substantial changes. However, redefining foundational terms always presents a clear and present danger of triggering massive implementation costs across the distribution chain as legal and compliance teams scramble to adapt.
Simplification, quo vadis?
Whether this framework simply adds more red tape is no longer a theoretical debate for politicians – it is an operational reality the financial industry must now shape, ensuring the final regime is practically workable rather than prohibitively expensive. The political headlines may be fading, and the co-legislators are eager to declare victory. But the next time someone in Brussels tells you the RIS is “done,” remind them that the real work is just beginning.
Editor’s note: EFAMA’s ongoing series of responses to RIS can be viewed on its website here.
