There appears to be a fundamental difference of opinion between EU financial sector regulators and the Commission about the controversial Priips regulation’s key information document (KID).
The former broadly would like to see the KID to be introduced by the end of this year, but the Commission and the industry have reservations. Luxembourg’s insurance and fund distribution industries will have to deal with whatever decision is handed down.
‘I have to be very honest…[implementing the Priips KID]… turned out to be pretty challenging… and sometimes made it difficult for some industry sectors to accept the rules, which they considered not fit for purpose,’ said Ugo Bassi, head of European Commission DG for Financial Stability, Financial Services and Capital Markets Union. He made his damning assessment speaking at the 9 February Cross-Border Distribution Conference, an event which is normally held in Luxembourg.
One size does not fit all
The KID introduced under the packaged retail investment and insurance products (Priips) regulation is designed to provide essential information to enable investors to compare investment options. This three-page document was inspired by, and is set to replace, the two-page key investor information document (KIID) introduced under the 4th UCITS directive.
The problem comes with the Priips KID’s requirement for additional information on risk, future performance and costs. Controversially, the two latter metrics are presented after running some one-size-fits-all calculations based on, what critics claim, is relatively simplistic methodology. These can give some highly anomalous results such as financial products appearing to have a negative cost to the investor, and a fund product opening the possibility of three- figure annual investment returns.
These problems were highlighted in a recent European Fund and Asset Management Association (EFAMA) press release. It said that it was not feasible to ‘create a fully homogenised retail investor document involving hugely diverging investment and insurance products while, at the same time, keeping the information both meaningful and not misleading’.
Broad regulator support
Initially intended to be introduced a year ago, the deadline for the introduction of the Priips KID is now 1st January 2022. Yet a stand-off has developed within the EU machinery. On the one hand are the Commission which find the KID to still be deeply problematic. On the other hand are the three pan-EU European Supervisory Agencies (ESAs) – representing the member states’ regulators – which continue to broadly support current arrangements and deadlines.
The ESAs submitted proposals on 3 February, and these made some suggestions for reform of regulatory technical standards of the Priips KID but without changing any of the fundamentals. Thus they maintained their call for the KID to replace the KIID at the end of the year. Not all regulators were in agreement, with this stance only being passed by a qualified majority.
Industry and Commission concerns
This news was met with opposition from the EFAMA. In a communiqué published on 4 February, they called the suggested reform ‘a small step in the right direction’ but there remained a ‘dilemma at the heart of the Priips KID.’ Moreover, with less than 11 months to prepare, they asked for at least the deadline to be extended by another year.
Five days later, the Commission’s Bassi appeared to be leaning towards the latter view. He agreed that difficulties arose largely due to the aspiration to ‘cover a number of very different types of product.’ Nevertheless he was diplomatic, saying ‘the objective remains laudable, but is something that we have to work on together to make work,…to adjust a few things here and there.’
It would fall to Luxembourg fund servicing and insurance players to make the KID work, and local professionals are concerned. ‘Some industry players are still expressing reservations about the capacity of the Priips KID to provide meaningful information to retail investors to make well-informed investment decisions’ noted Clement Welter (pictured), associate partner with KPMG Luxembourg noted that even after the ESA’s suggestions. He cited in particularly ‘controversial performance scenarios.’
Sébastien Schmitt, a director at PwC Luxembourg, also highlighted problems with ‘transaction cost methodology which according to the industry, reflects market movements more than real transaction costs.”
They also agreed that the proposed deadlines are causing concern. ‘In less than 10 months, UCITS asset managers will have to produce PRIIPs KIDs. But without amendments of the UCITS directive, they are facing the risk of having to prepare both the PRIIPs KIDs and the UCITS KIIDs,’ Schmitt noted. When considering next steps, Welter said other challenges facing the industry should be taken into account, citing a regulatory agenda including MMF, DAC 6, AML, SFDR, and more, as well as the challenges of the pandemic. He expressed widespread concerns that ‘maintaining 1st January 2022 implementation deadline may not be realistic and could be detrimental to retail investors.’