Amid Rising Criticism of ‘Misleading’ PRIIPS, EIONA Promises Amendments

UK regulator the Financial Conduct Authority criticized pan-European regulator the European Securities and Markets Authority’s inability to act rapidly and make timely adjustments to rules when necessary—in particular, its approach to regulation relating to Packaged Retail and Insurance-based Investment Products (PRIIPs)—during a recent speech championing cooperation with European regulators and calling for UK equivalence (the process by which the EU deems a nation’s regulatory regime to sufficiently follow its own rules) and for Esma to uphold fair rules for UK financial institutions post-Brexit.

“The aim of transparency and comparability of investment products is important, and we share it, but PRIIPS doesn’t work as well as it needs to,” said FCA CEO Andrew Bailey in a speech on October 25. “It’s why we have launched a call for evidence on PRIIPs—to get a more extensive picture of the issues. But, we have also included in the call for evidence some quite stern language that we do not support any attempt to undermine the overall objectives, and we will not act on the basis of weak evidence.”

The shortfalls of PRIIPs, a regulation designed to aid investors in understanding risk, rewards, costs, and key features of products, are a contentious topic at the moment, with several industry groups speaking out against key aspects of the regulation, and calling on regulators to make amendments.

European Supervisory Authorities (ESAs)—collectively, Esma, the European Banking Authority, and the European Insurance and Occupational Pensions Authority (EIOPA)—have  found core components of PRIIPs flawed. On October 1, the ESAs issued a response to the European Commission’s request for guidance on investment funds, stating that the PRIIPs Key Information Documents (KIDs) and Undertakings for Collective Investment in Transferable Securities (UCITS) KIDs are “not satisfactory and risk undermining the aims of PRIIPs,” and “may not provide consistent information due to technical differences in the methodologies underpinning the presentation of risks, performance and costs.”

‘Actively Misleading’

Industry body the Association of Investment Companies (AIC) has been outspoken in its criticism of PRIIPs, calling for a complete suspension of KIDs. The AIC also decided in May not to publish KIDs at all. AIC CEO Ian Sayers says the group is advocating for the KIDs suspension because the documents are “actively misleading to consumers.”

One of the main problems with the KIDs is the calculation process, Sayers adds, which is designed to calculate five-year projections rather than eight- to 10-year projections that more accurately reflect market cycles. AIC reviewed the documents over a 22-month period and concluded that half were incorrect, projecting a profit but resulting in a loss for investors.

“It’s very important. We don’t want people buying shares [in our funds] in the belief that they can get double-digit returns at low risk, because it’s not true,” he says. “There’s a broader question about trust in financial services and how other information will be viewed. What happens if they read these documents and pick and choose investments based on these figures? … They are actually telling you the exact wrong thing.”

Targeted Amendments

Timothy Walters, conduct policy expert at the European Insurance and Occupational Pensions Authority (EIOPA), says that the regulatory body intends to propose targeted amendments to the PRIIPs rules by the first quarter of 2019.

Walters says PRIIPS KIDs are contributing to increased transparency and comparability of investment products through short-form disclosure documents, but acknowledges the challenges raised by industry bodies. He says problems arise when any new, broad regulation is implemented, adding that PRIIPs is no exception to this.

“We are analyzing, in particular, evidence as to whether the performance scenarios are providing reasonable expectations of possible returns, and issues relating to transaction costs,” he says. “Based on this, we publish guidance on PRIIPs on an ongoing basis using the ESAs’ regulatory Q&A process to clarify the application of the rules and to promote common supervisory approaches.”

A frequent criticism of the PRIIPs regulation is the uncertainty surrounding the scope of coverage for certain products. Walters says a lack of detailed guidance on scope has led to negative consequences for certain products, such as corporate bonds, which are now less accessible to retail investors, according to EIOPA data.  

“In writing to the European Commission, we have expressed our readiness to address this issue from the regulatory side,” he says. “However, these market consequences are also the result of the steps taken by financial services providers, which have restricted retail investors’ access to these products.”

The European Commission is set to review PRIIPs by year-end, though many believe there could yet be a year-long delay. So for now, the future of PRIIPs remains uncertain.