New rules governing the way packaged retail and insurance-based investment products (PRIIPs) are sold in Europe are due to come into force at the end of December. They have been criticised by some, including the European Fund and Asset Managers Association, as being in need of more work; and by others, such as the Federation of European Independent Financial Advisers, as unworkable in their present form, and likely to lead to less investment choice for consumers.
Chris Lean, a Czech Republic-based international pension specialist with the UK-based Aisa advisory group (pictured), takes a different view. Here, he explains why many of those who support the ideals of “best practice” financial advice are actually welcoming the introduction of the proposed PRIIPs regulations.
Whatever one may think about the European Union, and its often-criticised volume and detail of regulations, there will always be some EU legislation that is of such clear benefit to consumers that it is to be heartily welcomed by all sides of the debate. And in our opinion, the pending packaged retail and insurance-based investment products rules are a perfect example of such incontrovertibly fit-for-purpose legislation.
These rules dictate how investment platforms and insurance bonds, among other investment packages, are to be sold to EU investors, and stipulate that Key Information Documents, or KIDs, must be provided for each chosen or recommended underlying investment fund or entity.
As set out under the new PRIIPs rules, KIDs will be uniform disclosure documents that provide standardised information about PRIIPs in a way that is designed to give retail investors sufficiently clear, comparable information on the range of products available.
This is good for competition – allowing consumers to compare investment products on offer throughout the EU, which is surely a good thing – while also increasing transparency.
It is clear as well that regulators will be on the lookout for non-compliant behaviour.
Many EU-based firms, such as those in the UK, already operate in an environment (thanks, in the case of the UK, to RDR) that is similar to the one being brought in Europe-wide by PRIIPs, and thus are already providing their retail investor clients with KIDS.
The ability to offer clients KIDS gives EU adviser firms, as opposed to sales firms, an opportunity to stand out from the crowd, by providing clients with clear, transparent information about any fund recommendation they make.
As set out in the new regulations, the EU PRIIPs legislation will cover:
* Investment funds, including UCITs funds, following a five-year transitional period
* Insurance investment products
* Structured products, such as deposits and securities
Directly-held shares and bonds, however, will not be subject to the new rules.
While the planned EU PRIIPs rules may be popular with consumers, there are some in the investment industry who have concerns. We think these concerns have to do, at least in part, with the highly specific format the KID rules set out.
For example, each KID must contain mandatory content and sections, and be limited to just three A4-sized pages, to make it easy to follow.
In addition, the rules state that PRIIPs KIDs must include:
* Information on the manufacture of the product and its regulator
* An explanation of the product’s objectives, and the means it is planning to rely on of achieving them
* A risk/reward section, including a risk indicator composed of seven simple classes for risk, and a reward section that outlines three “performance scenarios”: “unfavourable”, “moderate”, and “favourable”
* Information costs must also be disclosed, and are broken into two categories: “Costs over time,” a figure that summarises the total costs of the PRIIP, and “Composition of costs,” which breaks down costs such as those resulting from portfolio transactions
* A comprehension alert for complex products, including derivatives and structured products governed by the current Markets in Financial Instruments Directive (MiFID) regime
* A section headed “What are the risks, and what could I get in return?”, setting out the risk-reward profile of the product, using prescribed information
* A section headed “What happens if the PRIIP manufacturer is unable to pay out?”, containing details of guarantee schemes or other cover
* A section headed “How long should I hold it, and can I take money out early?”, containing details of recommended holding periods, and the consequences of cashing in one’s investment early
* Complaint redress information
* A section headed “Other relevant information”, detailing other information documents required from the investor.
What this may mean in practice
What this level of detail could mean in practice is significant, in the case of products that have traditionally been marketed as something other than they really are.
For example, I’ve been looking at a particular “capital-protected product” that is often sold to investors as being “low risk”. However, as described in the product’s KID, under the EU PRIIPs rules, a prospective investor would see that the product’s risk level is actually above average, for various reasons.
Such a KID, therefore, might prevent many investors from opting for this product, as they would be making an informed decision based on facts, rather than an uninformed decision based on a poorly-thought-out recommendation.
Transparent platforms should have no great difficulty in applying the EU PRIIPs rules; and our view is that advisers with an investment licence will also welcome this new development.
As we see it, the PRIIPs rules aren’t some superfluous piece of regulation that is no more needed by the marketplace than a much-derided, and eventually rescinded, 1995 EU directive governing the shape of bananas sold in the bloc. Instead, they are part of an inexorable move, around the world, towards more fair and transparent marketing of financial services and products.
And just as King Canute wasn’t able to turn back the tide, we don’t believe those wishing to prevent legislation aimed at bringing best-practice advice and marketing to the financial services marketplace will succeed, in the end.
The pending EU PRIIPs legislation is surely for the benefit of consumers, and thus it must prevail.
This column originally appeared on the website of TailorMadePensions.eu, a news and information website run by the Aisa advisory group for its clients and would-be clients.