Date: 18th May 2022

Individual, non-professional investors have an increased appetite for investing in capital markets following the global health pandemic. Evidence in several jurisdictions shows that many new, young, and tech-savvy savers started to invest without professional assistance through what is called execution-only services under EU law .

The European Supervisory Authorities (ESMA, EIOPA, EBA) have a legal duty to promote simplicity, according to their founding Regulations. Manufacturers or distributors of financial products are forbidden under EU law to distribute financial products under the execution-only regime if the products are deemed complex. This rule applies both under the MiFID II framework (securities markets) and under IDD (insurances).

Generally, complex products are those whose structures, either regarding costs, risks, or other features, make it difficult for “retail” clients to understand. EU law took a novel approach and assumed all financial instruments are complex, with the exception of a few categories expressly defined as “simple”. In this sense, both MiFID II and IDD single out product categories that are considered, by default, non-complex. Further, EU law created an additional residual category (“other non-complex products”) which prescribes certain criteria to be met in order to qualify as a simple product, which enables product manufacturers to design and sell more products (aside from those expressly listed in MiFID II and IDD) through execution-only services.

BETTER FINANCE analysed the applicable frameworks to better understand what makes a product complex under EU law. Our analysis concludes that product complexity is seen through two alternative lenses: either the likelihood to be understood by the average retail investor, or its unusual or increased risk. This leads to situations where riskier, but straightforward (in light of their functioning) products are considered complex – such as alternative investment funds – and less risky, but complicated products – such as hybrid insurance-based investment products – are considered non-complex (for example “products with a range of underlying investment options, products where it is possible to select multiple asset management strategies at different times during the duration of the contract, or products which provide a leveraged exposure to underlying investments” ).

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