Retail Investment Strategy (RIS)

The Retail Investment Strategy (RIS) is a comprehensive framework designed to enhance investor protection, promote financial literacy, and stimulate retail investment within the European Union. It aims to create a level playing field for retail investors across different member states while fostering a more competitive and efficient investment landscape.

One of its primary objectives is to ensure that financial products are designed and sold in a way that is fair, transparent, and appropriate for retail investors. RIS introduces stricter rules for product governance, requiring financial firms to provide clear and concise information about their products, conduct thorough suitability assessments, and identify the target market for each product.

In addition to product governance, RIS also focuses on investor protection. It strengthens rules on conflicts of interest, ensuring that financial advisers act in the best interests of their clients. RIS also improves the transparency of investment advice, requiring advisers to provide clear and unbiased information to retail investors. Furthermore, RIS sets out clear standards for the advice and information provided to retail investors, ensuring that they receive appropriate guidance and support.

Directives, products and entities in scope under RIS:

• MiFID II (Markets in Financial Instruments Directive)
  • Products: Investment funds, structured products, derivatives, and other financial instruments as per Annex 1 Section C of the MiFID II Directive.
  • Entities: Investment firms, credit institutions, and insurance undertakings that provide investment services.
• UCITS (Undertakings for Collective Investment in Transferable Securities Directive)
  • Products: Investment funds, such as mutual funds, ETFs, UCITS, AIFs and unit trusts.
  • Entities: Investment firms managing UCITS funds.
• IDD (Insurance Undertakings Directive)
  • Products: Insurance-based investment products, like investment-linked insurance policies.
  • Entities: Insurance companies and insurance agents & brokers.
• PSD2 (Payment Services Directive)
  • Products: Payment services, such as electronic money and payment initiation services.
  • Entities: Payment institutions and credit institutions offering payment services.

When more retail investors participate, the market becomes more liquid, making it easier to lend out certain securities. On the flip side, a decline in retail interest can tighten liquidity, making these securities less readily available for lending. Additionally, retail investor trends can drive demand for specific assets, like high-demand stocks that short sellers might borrow to profit from potential price drops. Finally, retail investors can contribute to market volatility, which impacts borrowing costs. When markets are volatile, lenders often demand higher collateral or fees due to the increased risk.

The specific retail investment strategy can further influence securities lending and borrowing in several ways:

• Focus on Dividend-Paying Stocks: if retail investors favour dividend-paying stocks, this can increase the supply of these securities available for lending, potentially lowering lending fees.
• Growth-Oriented Investment: a focus on growth stocks by retail investors can lead to increased short selling activity. As short sellers need to borrow these stocks, borrowing demand goes up.
• Index Fund Investing: the popularity of index funds, which hold a diversified portfolio, provides a relatively stable supply of securities for lending.