The European Fund and Asset Management Association (Efama) has urged the European Commission to extend the Ucits exemption for key infomation documents within the new Priips regulation in order to protect consumers.
Efama’s intervention follows a letter issued last week by the European Supervisory Authorities (ESMA, EIOPA and BA) to the European Commission urging it to bring forward solutions, including legislative changes, to resolve the situation.
Under the current regime, retail investors will receive two types of Key Information Documents (Kids) – the documents that are to be provided to consumers before purchasing a Priip as of 1 January 2020 – and Efama claims this is “not satisfactory, and risks undermining the aims of the Priips Regulation”.
The Priips regulation provides for a transitional regime for Ucits until 31 December 2019 which leaves the current Ucits key investor information document (KIID) system in place and means Ucits management companies are not required to produce a Kid under the Priips regulation.
But by December 2018, the European Commission must decide whether to either prolong these transitional arrangements, require Ucits management companies to produce a Priips KID instead of a Ucits Kiid, or consider making the Ucits Kiid equivalent to the Priips Kid.
For Efama the whole issue highlights the problem of overlapping disclosure documents which it warns could deter investors rather than facilitate informed investment decision-making.
Andreas Stepnitzka, senior regulatory policy adviser at Efama, said by extending the current Ucits exemption, European fund selectors will likely disregard much of the information in the Priip Kids – such as performance scenarios and transaction cost disclosures – which could be misleading.
“We have to keep in mind that the switch from Ucits Kiids to the Priip Kids is a large undertaking due to the sheer size of retail funds out there. We’re talking about more than 32.000 Ucits funds alone and each share class having to produce a Priip Kids. Overall, we see a clear risk that it will become harder for them to select the right products for their fund offerings,” he said.
Stepnitzka added that other fund documentation, such as marketing materials will also become much more important in the fund selection process as information such as past performance is missing from the Kid and replaced by future performance scenarios (with dubious value).
In addition, he said, since the standardised presentation of past performance will disappear – because it is tightly regulated in the Ucits Kiids, it will be important for fund selectors to be able to have comparable information going forward to make their assessments.
Efama argues that if the Priips review is delayed, the Ucits exemption should be extended to ensure investors do not receive confusing and misleading information in the meantime.
The association also argues it would be counterproductive for the European Commission to replace the Ucits Kiids with the Priips Kids before a comprehensive review and thorough consumer testing have been conducted on PRIIPs. Failure to do so would have negative consequences for retail investors.
Efama believes that only when conducting the Priips review should the Commission assess the future of the Ucits exemption, as is mandated in the law.
Peter De Proft, director general of Efama said: “The Commission’s actions in failing to delay the Ucits exemption means that retail investors buying Ucits will be presented with a flawed Priips Kid instead of a well-functioning Ucits Kid. This has a very real potential to mislead investors.
It will also have serious consequences, not only for European retail investors, but also for the credibility of the global Ucits brand, which is a success story that the European Commission has taken pride in,” he said.
“The industry has repeatedly pointed out that the Priips Kids has major flaws. There is a complete lack of understanding as to why the Commission has not taken onboard the industry’s concerns – and is now intending to extend the regulation to Ucits products, apparently because the review cannot happen in time. This is legally questionable and contradictory with the spirit of the law and the mission of European legislators.”
Peter de Proft continued: “The regulation should not be applied to Ucits until the fundamental flaws of the Priips Kids have been appropriately resolved. The negative impact of the Priips rules on retail investors and consumers, the people it vowed to protect – is very real. We are calling again on the European Commission to take urgent action to avoid hindering retail investors’ trust and understanding of Ucits around the globe. This would be an extremely counterproductive legacy for them to leave.”
Efama said it had produced an evidence paper providing both real data and evidence supporting the fact that the Priips Kids is causing serious detriment to retail investors and concrete suggestions for solutions to some of the main flaws of the legislation, including the calculation of transaction costs and the disclosure of future performance scenarios.