The EU's PRIIPs regime has the potential to mislead investors due to the relatively short term nature of the projection of investment returns contained in the Key Information Document (KID).
The KID provides information on investment products in a prescribed format and includes information on the types of investors a product is intended for, the cost investors will bear investing in the product, the risk/reward profile of the product including a risk indicator, the possible maximum loss of invested capital and appropriate performance scenarios of the product.
It is this last point, on performance scenarios, that Society of Actuaries in Ireland (SAI) says the current rules around the information in the KID should be changed as they 'may understate the risk attached to certain products for new investors'.
'A primary reason for the shortcoming of the new disclosures is that the projection of potential future investment returns is derived solely from consideration of investment returns in the previous five years,' the SAI said in a statement. 'Not only is this period likely to be too short to contain a full investment cycle but it currently only references the rising markets from 2013 to 2017 for many asset classes, ignoring the fact that markets can experience periods of prolonged weakness. For this reason, the projection of what are labelled favourable, moderate and unfavourable future investment scenarios may be unduly optimistic for certain investment funds, and this may mislead consumers as to the risks they are exposed to and the investment returns they are likely to achieve.'
The SAI ‘urges significant changes in the methodology for projecting future investment returns under the European PRIIPs disclosure regime when next reviewed.’