Karl Murray
It is hoped that the European Commission, which is tasked with drafting the legislation, can quickly revise the rules to the satisfaction of MEPs. Once agreed, the PRIIPs regulations will require firms and their sales intermediaries to provide a prescribed pre-sale Key Information Document (KID) to retail investors buying financial products such as mutual funds, investment-linked savings accounts, insurance-based investments and so-called structured products. Product providers will have to describe their products in clear, understandable and consistent language.
Product disclosure
There is currently a myriad of disclosure rules throughout the EU across different Member States. Even within Member States products with similar features but different legal forms can have different disclosure rules. Additionally, information requirements often vary depending on who is selling the product. It is intended that the PRIIPs regulations will replace the existing mix of approaches with a consistent set of rules. This should improve comparability of products across the range of manufacturers and sales channels covered and promote cross-border selling. From an Irish consumer and industry perspective both are positive, although firms selling from Ireland on a cross-border basis may well be faced with varying interpretations of the rules by regulators in other territories.
Motives for the Parliament’s rejection of the detailed PRIIPs rules include dissatisfaction with the calculation of future performance scenarios (saying they have the potential to mislead investors), a lack of clarity around the rules for products offering multiple underlying investment options and a shortage of time for industry to prepare for the new requirements.
The rejection followed on the heels of strong industry lobbying. Nonetheless, industry representatives and the European regulatory authorities and politicians are still expressing a firm commitment to resolving the current stalemate, which could lead to the potential delay in implementing the PRIIPs regulations beyond the planned introduction at the start of 2017. There is near universal acceptance that the aim of providing key information to consumers is a good one. However, there is no agreement on how to do it.
One area that has been particularly problematic is the projection of future investment performance of PRIIPs. Investment firms regularly prepare financial projections for their shareholders and regulators but those involved in making such forecasts know the inherent difficulties in estimating future returns and the probabilities of achieving a certain level of return. This is the crux of the current PRIIPs impasse, with differing views about the exact methodology to be used in projecting investment performance.
When it comes to illustrating potential performance for customers the problem comes more into focus, not least because of the contractual nature of the commitment made between a PRIIP provider and its customers. Firms fear that by providing projections of performance they might expose themselves to future claims of liability from disgruntled customers if the actual performance fails to match the projections.
Other initiatives
The PRIIPs requirements need to be seen in context alongside other initiatives aimed at bolstering consumer protection, such as the regulations relating to the revised Markets in Financial Instruments Directive (MIFID II) and the Insurance Distribution Directive (IDD). The latter will apply to all types of insurance products including PRIIPs and non-PRIIPs life insurance products (such as term insurance), as well as non-life insurance cover like motor and property.
Contained within these regulations (which are due to take effect over 2017 and 2018) are requirements focused on product oversight and governance (POG), which require investment firms to identify suitable target markets for their products, as well as requirements for financial intermediaries assessing an individual customer’s needs and characteristics when offering and advising on products for sale.
The changing regulatory environment may result in a consolidation of the array of investment products available in the market as firms attempt to make their products more transparent and to avoid the cost overhead of managing a very diverse product range in the context of the PRIIPs and POG requirements. More competition would likely arise on the smaller range of products remaining on offer, with a greater focus on the cost rather than the historical outperformance of funds - which is often dubiously assigned to better investing as opposed to the consequences of volatility. Nevertheless, there is always room for product innovation that meets consumers’ needs.
Customer engagement
No one-size-fits-all regulatory key information document can fully serve customers’ information needs on a standalone basis. But used in the right way it could be a highly valuable tool in improving customers’ outcomes and their understanding of investment products and in growing their trust in an industry that ultimately serves a key function in society.
Embedding a culture of good product oversight and governance should lead to better products, less conduct risk, greater customer loyalty and more opportunities for cross-selling, thereby building a resilience against competitors and delivering superior returns to shareholders.