The European Supervisory Authorities (ESAs) have unveiled a series of reforms to the key information document requirements under the proposed Packaged Retail and Insurance-based Investment Products (PRIIPs) regulations and are looking for industry feedback.
The ESA, which link the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority (EIOPA), has proposed a series of changes which in many cases will bring the requirements into line with current Ucits key investor information document (KiiD).
For example, the ESAs proposes to include information on past performance in the Kid whenever it is available.
The ESA is also proposing to continue the system of requiring information on possible future performance scenarios for all PRIIPs.
European authorities want opinions on:
– Proposals to change the approach for performance scenarios as well as a description of several other options that were identified;
– Potential amendments on a limited number of other specific issues based on the information gathered by the ESAs since the implementation of the KID; and
– Possible changes in view of the exemption in Article 32 of the PRIIPs Regulation being due to expire and the possible use of the PRIIPs KID by UCITS and relevant non-UCITS funds from 1 January 2020.
The ESA has opened a consultation on the changes which will run until 6 December 2018.
Ian Sayers, chief executive of the Association of Investment Companies said: “Given that it took over 10 years to get where we are today, it is unrealistic to expect that the problems with Kids can be resolved in 10 weeks.
“The proposals may be a step in the right direction but fail to address the fundamental flaw of using past performance to predict the future. The proposed changes look too technical for ordinary investors and do not address our concerns about the understatement of risk.
“The proposals demonstrate why the Kid rules should be suspended to allow time to fix the problems properly and permanently. Otherwise, we will just be back here again in 12 months’ time.”
The ESAs said the main issue that has been raised is that the performance scenarios risk providing retail investors with “inappropriate expectations” about the possible returns they may receive.
It added: “It has been stated that the scenarios can provide an overly positive outlook of potential returns, where a product has experienced positive returns over the previous five years, that is above the longer-term norm.
“Given the positive performance of many asset classes over the previous five years, this issue pertains to a wide range of PRIIPs13.
“These concerns have been stated by both representatives of PRIIP manufacturers and sellers, as well as from associations representing retail investors.”
Rationale for change
The overall rationale of the proposed changes for the ESAs is that “the presentation of the information is key to reduce the risk of the information in the performance scenario section of the KID being misinterpreted”.
The ESAs said “the challenging timeframe to which amendments need to be finalised significantly limits the extent to which new approaches or methodologies can be developed”.
It intends to submit the Regulatory Technical Standards and cost benefit analysis to the European Commission for endorsement during January 2019. It will also publish a final report including feedback on the consultation at this time.
It is intended that these amendments would be applicable from 1 January 2020.