The implementation of the EU’s Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation hit some unexpected turbulence this past autumn. Once again, the implementation date was delayed to 31 December 2017, leaving the industry with the all too familiar feeling of starting the year awaiting the final PRIIPs rules.

The implementation was delayed because in September 2016, the European Parliament rejected the European Commission’s proposed rules for the PRIIPs Key Investor Document (KID). The purpose of the KID is to provide retail investors a standardized disclosure document that will allow them to easily compare investment products offered by banking, insurance, or asset management firms.

Parliament rejected the PRIIPs proposal over concerns with the formulas recommended to calculate future performance. Parliament believed the formulas could result in overly optimistic forecasts, which would be detrimental to investors. In response to the Parliament’s criticism, the Commission proposed changes to its PRIIPs KID rules. The new proposal added a fourth performance scenario, for a “stressed” market, and enhanced the comprehension alert to advise retail investors that the product may invest in complex asset classes.

ISSUES REMAIN

Despite the proposed changes by the Commission, industry concerns remain. The three key concerns are around:

  • Future Performance Projections: This is a departure from the current practice of disclosing past performance and the industry believes that the new prescribed methodology underestimates upside potential whilst overestimating losses in most cases.
  • Transaction Cost Methodology: Asset managers will be required to estimate transaction costs using what is known as an “arrival price,” which is calculated as the bid/ask midpoint price at the time a trade order is submitted. In general, asset managers do not use the arrival price for anything else in their business.
  • Regulatory Conflict: The final point of contention is that the rules in PRIIPs are not aligned with other pieces of EU regulation. One example is that arrival price is not a metric required for MiFID 2 transaction cost calculation. Another example is that UCITS funds are required to disclose past, not future performance.

WHAT’S NEXT?

The Commission is expected to finalize its new PRIIPs proposal and then resubmit to the Parliament for approval in the first half of 2017. In the meantime, there will be a substantial amount of lobbying by the industry to address their key issues.

For asset managers, this means remaining in a holding pattern for a bit longer. However, since PRIIPs was supposed to be live already, most managers should be relatively far along in their PRIIPs preparations. Once the final rules become clear, it will be a matter of kick-starting their projects to complete the necessary work of building out their PRIIPs KID capabilities. Though, given the short timeframe and competing regulatory priorities, it is safe to say it PRIIPs will have a rocky landing.

KID REQUIREMENTS

The proposed rules included a common template that is prescriptive in the texts and layouts to be used. Regardless of investment product, the PRIIPs KID is limited to three A4 pages and includes:

  • Information on the investment product manufacturer (asset manager)
  • An explanation of the product’s objectives and the means of achieving them
  • A compression alert for complex products warning investors the product may be difficult to understand
  • A risk indicator that summarizes market and credit risk on a 1-7 scale
  • A reward section that outlines four “performance scenarios”
          - Stressed
          - Unfavorable
          - Moderate
          - Favorable
  • Cost disclosures are broken into two categories:
          - Costs over time: Summary of the total annual costs of the PRIIP
          - Composition of costs: Breakdown of portfolio transaction costs

The KID must be republished annually and be provided with enough time for a retail investor to be able to take its contents into account when making an investment decision.

This article was originally published in the 2017 Regulatory Field Guide. The guide features insights from a number of our experts on key regulatory developments that will have the greatest impact for asset managers in the year ahead – and beyond. Visit bbh.com/regulatoryfieldguide to explore the guide.