The little regulation that could

PRIIPs is facing challenges from all directions, but the industry is behind the KID and, with a little work, it will grow up to be a success

A plucky little legislation that has been a long time in the making, the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation is finally getting its time in the limelight, even if not necessarily for the right reasons.

Designed to help retail investors better understand and compare the key features of investment products, PRIIPs mandates the use of a key information document (KID) that must be provided to the investor in good time, before any transaction is finalised. A standardised three-page document, the KID is obliged to disclose the costs, risks and potential return of the product in question, as well as detail of the investor’s rights should things go sour.

However, with the proposed implementation date of 31 December 2016 looming, there are still some fairly major issues up in the air. On 14 September, the European Parliament rejected the draft regulatory technical standards (RTS) with a vote of 604 to four and 12 abstentions. In the parliament plenary session, the RTS were branded ‘inadequate’ and sent packing back to the European Commission for re-writing.

This outcome supported the decision of the European Parliament’s Economic and Monetary Affairs (ECON) Committee, which initially requested a revision to the RTS, citing concerns around the methods of creating the KID.

One committee member, Sven Giegold suggested that the proposed formula for the document could potentially make products appear that they would perform better than they are actually likely to.

“People must know when they take a risk, but this information is misleading,” he said.

PRIIPs, and the European Commission, have since come under even more pressure as the Council of the European Union issued a letter calling for a delay to implementation. While supporting the ethos of the regulation as a whole, suggesting that it could contribute to efficient capital markets and help fund EU economic growth, the council specifically requested a 12-month postponement.

The letter said: “In light of the rejection of the PRIIPs RTS by the European Parliament, we call on the commission to consider postponing only the application date of the PRIIPS Regulation.”

It added that this is “in order to provide sufficient time to clarify open questions and reach the goals of the PRIIPs Regulation”.

Throughout the turmoil, the industry has largely stood behind the decisions of the government bodies. John Dowdall, managing director of Silverfinch, came out in support of the decision to reject the RTS, saying: “[We] look forward to the revised standards to ensure that these are better fit for purpose.”

The Association of the Luxembourg Funds Industry (ALFI) also welcomed the decision and voiced its encouragement for a delay to the implementation, with Marc-André Bechet, director for legal and tax, saying this would “ensure that the fund industry can implement the regulations for the benefit of retail investors”.

But there is now significant pressure on the European Commission to pay heed to the advice. Mario Mantrisi, senior adviser to the CEO at KNEIP, explains: “The European Parliament rejected the regulatory technical standards and asked the commission to change specific points on them, however they only recommended a delay in implementation. The European Council was not specific on the RTS, but was very specific in requesting a delay.”

“The European Commission now faces a lot of political pressure from both the parliament and the council. That means they will probably re-visit the RTS, and they will have to consider giving the industry more time.”

Anticipating some negotiation, Mantrisi suggests that we may see a delay of, for example, six month. Although this would still pose a challenge, he says, it would prove to be manageable. However, he says the industry should keep working towards the 31 December deadline, even if this means making some assumptions on the final standards.

“It is important to move forward based on what we understand from the RTS today, to make sure that we’re prepared for whatever deadline comes out of these negotiations.”

And Mantrisi is not alone in urging industry players against complacency. Dowdall also points out: “It is important for the industry to realise that the PRIIPS regulation has not yet been delayed and so we urge asset managers and insurers to continue to push ahead.”

Despite the potentially minute implementation time, those calling for changes to the RTS are sticking to their guns, with some arguing that the KID could in fact be detrimental to the aims of the regulation, making things more opaque for retail investors.

After the ECON vote, one committee member, Syed Kamall, commented: “We are not rejecting the principles behind this regulation, as clear and accurate guidance to investors is crucial. However, we want legislation that will deliver, not tokenistic legislation that is more concerned with meeting a deadline than protecting consumers.”

At the time, Andrew Watson, product manager for Figaro software products at JHC, also commented, saying: “Unfortunately, while the spirit of the regulation was (and remains) worthy and desirable, it would appear that the European regulatory authority took this much further and was requiring investment product manufacturers to predict the future.”

“This information does not help investors make sound decisions and could lead to accusations of mis-selling when investment products fail to meet the predictions.”

Mantrisi agrees, suggesting that the information included in the KID is not necessarily helpful for comparing products or for investors to understand what they are buying. He says: “There are certain things that don’t appear to be truly in the spirit of giving good information to the investor.”

However, he maintains that PRIIPs is heading in the right direction. “It is a good thing for the industry to be transparent, because it will level the playing field in the market,” he says.

“There are definitely benefits that will come out of PRIIPs, it just has to be implemented in the right way.”

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