A case study of how EU and UK financial sector regulations will diverge is in the shifting rules around the Key Investor Document (KID), part of the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation. There will be no big-bang moment, but the details are about to begin to change gradually. And influential voices are calling for more divergence.
The EU’s PRIIPs KID seeks to present standardised information in an easily digestible format, so that retail investors are better able to compare investment products from fund managers, banks, and insurers. This will eventually replace the Key Investor Information Document which has been published alongside UCITS funds since the early 2010s.
Controversial rules
Some aspects of these documents have been controversial, particularly the requirement to use historical data to calculate potential returns that an investor may receive under different market conditions. On occasions, the standardised formulas set out in the regulations that are used to derive these figures can give extreme scenarios of high potential gains and losses. These problems were central to the long delays in the implementation of the Priips KID.
Protests from the industry led to a review by the EU. The result were modifications published at the end of this year that have received broad acceptance by the industry, if rarely garnering enthusiastic support. There is also a generous implementation deadline of the end of this year.
However, the Financial Conduct Authority (FCA), the UK regulator, chose to go further, abolishing the requirement to include future performance scenarios for KIDs used in the UK market. “It remains unclear that the underlying methodology could be sufficiently improved to ensure illustrations of potential future performance are informative to investors and not misleading across the full range of products within scope of the Priips regime,” said the FCA in a communiqué.
Winners and losers
“While conceptually the industry will be happy to see the UK scrap the future performance scenarios, practically speaking it will create an additional administrative burden for cross-border asset managers that sell their UCITS in both Europe and the UK,” said Sean Tuffy, a director with Citi in Dublin. This is not a concern for purely UK-focused businesses.
Richard Stone, chief executive of the UK’s Association of Investment Companies, told the Financial Times: “the FCA has made some welcome steps in this round of changes.” Yet he then went on to call for more action. He noted that the regulator has only been given limited room for manoeuvre by the UK government, and that he would like to see more being done. “The FCA has done all it can to reform KIDs without being given further powers. Now is the time to get started on the Treasury’s promised wider review of the regime,” he said.
EU’s rethink
Meanwhile last week, the European Supervisory Authorities (ESAs) published technical advice to the European Commission on further review of the Priips directive. This will be key input as the Commission develops its Retail Investment Strategy. “The ESAs recommend significant changes to the PRIIPs regulation and encourage the Commission to consider a broad review of the PRIIPs framework,” said their press release. In particular, they mentioned how the KID could be adapted to the digital age and asked for consideration to be made regarding extending these rules to other products.
Thus it can be seen that the industry, regulators and legislators have the desire to tinker with this regulation. It is unlikely that such changes would have a significant impact on the ability of financial services to market their products, but the temptation is there to try to perfect current arrangements. Human nature being as it is, it would not be surprising if changes were made to prove a Brexit point.
Each change will require systems to be recalibrated and staff to be trained, particularly within distribution networks. And little by little the UK and EU regulatory regimes will diverge. This is ultimately a key aspect of what it means to be “within” the EU single market. Access to consumers and service providers is a major part of it, but so is also the requirement to make the best of sometimes imperfect rules that are acceptable across multiple jurisdictions.
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