On the 14 September 2016 there was a staggering majority vote against the EU Commission’s Regulatory Technical Standards (RTS) for the PRIIPS key information document (KID), at 602 to 4, with 12 abstentions. The rejection by the Parliament of the implementation rules proposed by the Commission is unprecedented in the financial markets, and now it cannot enter into force unless the identified areas are changed.
PRIIPS (packaged retail and insurance-based investment products) are investments in which the amount repayable to the retail client can be affected by the performance of assets that the client did not purchase directly; there are aspects exposed to market fluctuations. For insurance-based investment products, this can be the maturity or surrender value which is either directly or indirectly exposed in this way. This includes some collective investment schemes, derivatives, structured investment products, certain insurance-based investor products and several others. In the PRIIPS regulation, which is currently due to come into force on 31 December 2016, it specifies that a KID must be provided, which should be retail client-friendly, non-misleading, explain the risk, and be comparable with other providers. For this reason the KID will have strict requirements to meet. They must be stand-alone and unconnected to marketing material, a maximum of three sides of A4 and be clearly available to the retail client. There are standardised pieces of information that must be provided including the risks and complaint procedure and other detailed information, along with a sentence explaining that the information is complex in nature. There are also rules about the format of the document. For more about PRIIPS click here.
On the 1 September 2016, the implementation rules for this regulation by the EU Commission was rejected by the Committee on Economic and Monetary Affairs (ECON), stating that their proposed rules were in conflict with the aim of the document of being clear and non-misleading for customers. This was not a binding vote, unlike the Plenary vote on the 14 September which gave the Commission a mandate to review and adapt their rules according to the issues identified by the Parliament. The aim of the KID, and PRIIPS regulation in general, is to increase consumer protection and increase clarity on the products and their risks. It is very important, then, that the KID is not misleading. This, however, is exactly the issue that the Parliament identified with the proposed implementation rules. The information that firms would be providing could mislead the clients on the risks and the probabilities of these risks, which conflicts with the spirit of the regulation.
There are several issues identified in the document. One of the most crucial elements is that the methodology for calculating future performance of the products can lead to the performance looking far better than it is likely to be in some cases. For some PRIIPS, the document explains, it might not even show that the customer could lose money even in the adverse scenarios and for those products that frequently cause losses. This conflicts with the requirement that the information is ‘accurate, fair, clear and not misleading’. This is clearly a critical issue as, not only does it misguide the client about product risk, it is also problematic for comparison across different products and providers as the forecasting methodology is confusing. The products are likely to be aimed at retail clients who may not be as knowledgeable about the products and their risks, therefore it is important, and in fact the aim of the regulation, that the performance of these products is disclosed appropriately.
There were also some areas needing clarification identified by the Parliament. This included the ‘comprehension alert’, which is a sentence included in the KID of some of the more complicated products explaining that the product is complex and may be difficult to understand. The lack of detail provided in the Commission’s delegated regulation about which products are considered complex, could lead to inconsistent implementation of it in the KIDs. This would lead to less clarity for the client and less comparability across providers. The treatment of multi-option products (MOPs), particularly in relation to the explicit exemption granted to UCITS funds, was another aspect identified as lacking clarity. MOPs are problematic for KIDs, as within a single three-page document, all of the relevant information must be included for the main product and also the underlying options. The treatment of this is identified as requiring more clarification. Also the exemption granted to UCITS funds, which already have their own KID-like document and have been allowed to use this at least until a review in 2019, has been identified as a particular area of this that requires further clarification.
The Commission has been instructed to now produce a new version of the delegated act, with regards to the concerns proposed in this document and the adjustments suggested therein. The Parliament has also proposed delaying the implementation past this December, so that this proceeds smoother and without the application of the level 1, without the level 2, as previously suggested. Considering the tight deadline, it seems reasonable and likely that the delay will be taken up in order to allow for a more coherent implementation of the regulation.
The wait is now for the Commission’s response to the implementation extension proposal, and their changes to the rejected regulation. It does seem likely that the KID will have a brief ‘time-out’ for smoother implementation as the kinks are ironed out of its delegated regulation. It seems likely that we will know very soon whether the extension will occur and how the implementation process will move forward.