RegTech Intelligence

What is “moderation”? ESA comments on the Commission’s changes to the rejected PRIIPs’ RTS

In April 2016, European Supervisory Authorities (ESA) submitted a draft Regulatory Technical Standards (RTS) for Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, focusing on the requirements of key information documents (KID).  Despite the KID RTS being endorsed by the EU Commission, the European Parliament – in a surprising move – rejected the draft.  It stated that some of the proposed rules would violate the basic premise behind the KID as a clear, comparable, understandable and non-misleading information tool allowing retail customers to easily compare products and service providers.

In particular, the Parliament found problems with the methodologies used for the calculation of future performances and risks associated with the investment, which produce results that are misleading to investors.  Additionally, the guideline on how to create comprehension alerts was lacking, and the Parliament feared this would lead to inconsistent implementation approaches between different firms and, therefore, run counter to the major aim of the document.  Collectively, the Parliament stated that the RTS violated the spirit of the legislation.

The lack of level two sparked a debate on whether it was feasible for firms to introduce all necessary changes in order to comply with PRIIPS by its original implementation deadline – 31 December 2016.  The regulators worried the lack of further guidelines would inevitably result in inconsistencies of application between different firms.  As the timeframe did not allow for a new document to be published in 2016, the deadline for PRIIPS implementation was postponed by 12 months.

On 10 November 2016, ESA, consisting of the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA), received a letter outlining what amendments to the draft RTS the European Commission intends to introduce.  The proposed changes were supported by the EBA and ESMA, but EIOPA had concerns with the treatment of multi-option products.

However, all three boards agreed that the proposed treatment of performance scenarios could potentially be misleading.  The “moderate scenario” was to indicate no gain or, when taking costs into account, losses.  ESA found this approach to be unreliable and, instead, suggested the methodology from the original draft of using historic returns over five years in order to reflect different assets, classes, costs and product features.  Recognising that the Commission may not want to carry on with the original methodology, ESA suggested the use of another method – the mean of the distribution of risk-free returns, adjusted for dividend yields – as this approach would also distinguish between asset classes.

Even if we see the draft RTS approved by the EU Commission in the next couple of months, there remains concern about whether Parliament may reject the proposal for the second time.  In the last quarter of 2016, we were assured that the new RTS would go through the entire approval process in the first half of 2017.  This could leave just 6 months for firms to carry out necessary implementation processes.

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