Just weeks before the 31 December 2016 live date for Key Information Documents for Packaged Retail and Insurance-based Investment Products (Priips KIDs), the European Commission conceded there is too much to do in too little time.
After the European Parliament rejected its regulatory technical standards (RTS), with details of what goes in a KID, the Commission proposed a year’s delay.
The Commission has given the three European Supervisory Authorities (ESAs) the following list of areas it wants changed in the RTS:
(1) The treatment of Multi Option Priips (MOPs) with direct investments in UCITS;
(2) The performance scenario calculations, as the unfavourable scenario may be over-optimistic;
(3) The application of the comprehension alert for ‘complicated’ products; and
(4) The disclosure of any insurance costs and benefits.
To give product providers time to prepare once the RTS are adopted, there is no indication in the timetable of a consultation period on the changes. The ESAs need to submit revised RTS by 21 December, the Commission said it expects to adopt them by February and the Parliament is expected to endorse them by the middle of 2017.
Assuming there will be no formal consultation, Michael Holland, managing director of the data solutions provider FE, wrote to the chairmen of the ESAs to explain the practical issues thrown up by the draft revisions and provided suggestions to overcome them. As a data company, his letter focused on the first two areas above.
Multi Option Priips
MOPs are products, such as life bonds, that offer a range of underlying investment options. The issue with MOPs investing in Ucits funds arises from an exemption allowing Ucits funds to continue to issue Key Investor Information Documents (KIIDs) until 2019 and the differences between Ucits KIIDs and Priips KIDs.
The risk indicator (below) from a Ucits KIID is also planned to be used in Priips KIDs, but with a very different scale, to include the wider range of products covered by Priips. Two funds with similar price volatility could have risk levels up to two classes apart, giving very different impressions of their risks.
MOP KIDs need to show the range of risk scores of all available options. But when applied in practice, you will show a combined range of scores using completely different scales.
A similar problem arises with cost disclosure. The charges on a Ucits KIID don’t include transaction costs, but those on a Priip KID do. So showing the range of underlying costs of Ucits funds and Priips funds on the same MOP KID is like comparing apples and pears.
The solution proposed in the letter is two-fold. First, to avoid confusion, the Priips risk indicator should go beyond 7 and the thresholds between each level should be the same for Ucits and Priips.
Second, showing the range of risks and costs on a MOP KID does nothing for consumer protection, so should be dropped. As is already the case in the returns section, a statement that the risks and costs will depend on the choice of investment fund(s) should suffice.
The performance calculations for a Priips have been found to be over-optimistic in some cases, with even the ‘unfavourable’ scenario showing positive returns, because they are based on data from the last five years, while most markets have risen strongly from their lows in 2008/9.
The proposed revised formulae, however, result in the ‘moderate’ returns for almost all funds being completely flat. Whatever the intention, retail customers will regard the ‘moderate’ scenario as an indication of what they might get back in the absence of unusually positive or negative market events, so this is no more “accurate, clear, fair and not misleading” than the rejected version.
The letter suggests reverting to the previous formulae, but using historical prices over a full market cycle, e.g. 10 years. There should also be scope to incorporate past performance on a KID, as EFAMA (the European fund industry trade body) and Better Finance (the finance consumers’ federation) jointly called this 'an extremely valuable piece of factual information for investors in their investment decision'.
Time is short for anyone to add their voice to the ESAs’ deliberations, but we encourage everyone to make their views known as soon as possible, as there won’t be another chance once this door is closed. The Commission is clearly proposing only those changes it feels are needed to get the RTS through the European Parliament, but it doesn’t take too long to realise that the quick fixes simply won’t work in practice.
Mikkel Bates is a consultant at FE Kii Hub and is a director at Belmont Marketing Services. He previously held positions at GLG Partners UK and Societe Generale Asset Management.