The European Securities and Markets Authority (ESMA), the Brussels-based financial regulator, is reported to be at odds with the EU's executive arm over proposed reforms to the regulator's oft-criticised rules governing packaged retail investment and insurance products (PRIIPs).
According to the Financial Times, the contention specifically arises with regard to performance forecasts, which have often been wildly inflated.
Introduced in 2018, PRIIPs regulation requires investment product providers to publish projections of future performance in different market conditions. These projections have been widely derided since introduction owing to their capacity to be unreliable and at times overly optimistic.
In a letter to ESMA, the EC expressed "serious concerns" as to the legality of the regulator's proposals."
According to today's report in the FT, one provider using the existing rules forecast an annualised return of 523bn%.
In an effort to correct some of the failings in PRIIPs, ESMA recently proposed allowing funds to publish historical scenarios based on past performance data instead of forecasting future returns.
The EC has, however, dismissed these proposals, arguing that they go against the objective of the regulation to enable investors to compare performance of financial documents.
In a letter to ESMA, the EC expressed "serious concerns" as to the legality of the regulator's proposals. Noting that forward-looking performance assessments are a fundamental part of the original PRIIPs legislation, it warned against employing historical scenarios "even if such scenarios could allegedly better apply to the reality in the market and avoid procyclical effects."
In January 2022 PRIIPs legislation will be extended to encompass all UCITS funds. The current rules apply only to Accredited Investment Fiduciary (AIFs), including investment trusts and property funds.