The introduction of PRIIPs has not been plain sailing for investment product providers and even after a lengthy gestation period, there are still a number of uncertainties in how PRIIPs should be applied in terms of scope and also in terms of the content of the Key Information Document. In recognition of these industry concerns, the FCA has issued a Call for Input on the workings of the PRIIPs Regulation which recognises that certain difficulties exist with how the Regulation is being interpreted and asks those in the industry and consumers alike to share their experiences.
At the same time as perhaps offering a listening ear to those using PRIIPs, the FCA notes that it is in the process of bringing forward further initiatives in response to the Asset Management Market study, and is also carrying out a thematic supervision project which will include an assessment of compliance with PRIIPs, all as part of a broader approach to improving the market for investment products. However, it seems clear that the FCA recognises that the implementation of PRIIPs has caused some genuine issues which regulators should be looking to address and which should prompt engagement at the European level. The outcome will be a Feedback Statement early in 2019 and perhaps just as important, the response will inform the FCA’s future engagement with European supervisory bodies and national competent authorities.
The Call for Input recognises two main areas of concern. The first concerns scope. The FCA notes that it has published non- exhaustive lists of products which they consider fall within, or outside, the definition of a PRIIP but recognise that some uncertainty remains. The FCA focus on corporate bonds where the FCA seem to recognise that the uncertainty as to the application of PRIIPs to corporate bonds, is having a detrimental effect on the market and to some extent shutting out retail investors from the market for corporate bonds. Particular concerns arise where the corporate bond has a “make whole” clause which may apply on early redemption or pre-payment, and the value of bond is exposed to fluctuation of a reference asset or value. The FCA notes that this issue has been brought to the attention of the European Commission and no doubt await developments. The FCA also mentions some uncertainties around real estate investment trusts and certain foreign exchange contracts.
The FCA has also picked up in some detail on the calculations behind the KID itself. The FCA had already published a statement in January this year, which recognised the difficulty some product providers were having with performance scenarios and noted that if manufacturers believe that some of the content of the KID could mislead investors, they could and indeed should provide additional information to put calculations into context.
In the Call for Input, FCA has focussed in particular on transaction costs and the difficulties that some firms have in applying the PRIIPs methodology to their KID. As a result of the approach to this by some firms, they are disclosing negative transaction costs. While the FCA accept this is conceptually possible, they also note that they have found through their supervisory work that some providers have made calculation errors and the FCA set out the most common application errors that they have found. There seems to be a view that where negative transaction costs have been disclosed, there may have to be further work carried out to make sure the methodology is correct but the FCA have asked firms to share their thoughts on this issue.
The FCA have also noted the issues that have been arising in relation to Risk disclosure. In particular, that the standardised methodology for calculating risks does not adequately capture the risk inherent in particular products. They also note that the methodology used may be particularly problematic in the case of real estate investment trusts and venture capital trusts as the lower price volatility inherent in these products may produce a misleading impression as to the level of risk. Again the FCA are looking for industry feedback.
Finally, the FCA note issues with the performance scenarios and the fact that some manufacturers are concerned that these scenarios, based as they are on previous performance returns, can be misleading to investors. In particular, the favourable climate for equities of the last five years, as the world has returned to more normal financial conditions after a serious period of disruption, may not be the best indicator of future returns. Concerns have also been expressed at the relatively short term nature of returns used.
As noted above, the FCA seems to appreciate that PRIIPs has issues that need to be addressed and wants to have a strong and realistic understanding on the issues experienced by industry as they engage with Europe and other regulators. However it may still be some time before we see any changes in the PRIIPs regulation. Responses have been requested by 28 September.