Germany-based investment funds association BVI is seeking what it calls “urgent corrections” to important key elements of the Priips regulation before it becomes applicable to all retail funds in Europe and has urged for a further two year’s delay to rectify what it calls “serious and complex flaws”.
So far private investors only receive a Priips Kid (Packaged Retail and Insurance-based Investment Products – Key Investor Information Document) when purchasing unit-linked policies.
“It would be irresponsible towards consumers to replace this well-established key investor information by an inadequate Priips Kid in the future,” said Thomas Richter, chief executive officer of BVI. ‘The Pripps information sheets need to be revised, especially the information on costs and performance. The EU Commission should use the review of the Priips rules scheduled for the end of 2018 for this purpose.”
In view of what it calls “serious and complex flaws,” BVI said that it would anticipate an extended revision phase. Moreover, the European Parliament elections in May 2019 will probably delay the process. BVI therefore suggests allowing enough time and the postponement of the start date for the new Priips Kid by 24 months to January 2022. In the past BVI has repeatedly criticised the following points:
Investment funds are to set out three scenarios for an investment fund’s performance – however on the basis of past data this would give rise to distortions. For example after a bull run of several years on the stock market followed by plunging prices the resulting scenarios will be too positive and take insufficient account of current negative developments.
“This entails the risk of funds actually being obliged to provide investors with misleading information,” BVI said in a statement on the matter.
Calculation of transaction costs
The EU Commission has adopted the approach of the European financial supervisory authorities and thus a method of calculating transaction costs that is not customary in the market. It seeks to define the difference between the actual price when buying or selling a financial instrument and the ‘average market price’ as transaction costs (“arrival price methodology“).
In less liquid markets, as in the case of debt instruments (bonds), this regularly leads to incorrect or even negative transaction costs. This is indicated by cost data according to MiFID II which can be calculated in accordance with the arrival price methodology.
“Even though only a fraction of funds follows this approach, roughly three percent of all funds available for sale in Europe currently report negative transaction costs,” BVI said. “This share is likely to become much higher should the arrival price approach become a binding standard.”
‘Lack of consistency’
Private investors currently receive four different documents, depending on the distribution channel: the new information provided in accordance with MiFID II, the Priips Kid for unit-linked policies, a special product information sheet for Riester savings schemes (offering special subsidies and tax incentives) and finally the established Ucits Kiid (Undertakings for Collective Investment in Transferable Securities – Key Investor Information Document).
The latter contains “clear and comparable “information for investors on such matters as costs, performance and the risks of investing in the proposed fund, but is to be replaced by the Priips Kid from the end of 2020, BVI concluded.