PRIIPs: What’s Been Happening?

In January, ESMA published the responses received to the joint consultation paper of ESAs concerning amendments to the Key Information Document (KID) for Packaged Retail and Insurance-based Investment Products (PRIIPs). The consultation was launched on October 16, 2019 and the comment period ended on January 13, 2020.

ESMA published all 78 responses received in respect of the consultation.

ESAs had proposed to amend the existing rules underpinning the PRIIPs KID. The proposed amendments relate to the empowerment in Article 8(5) of the PRIIPs Regulation about the presentation and content of the KID, including methodologies for calculation and presentation of risks, rewards, and costs within the document. The intention was to address issues that have been identified by stakeholders and supervisors since the implementation of the KID in 2018, and make changes to allow the rules to be applied to investment funds that are expected to prepare a KID from January 01, 2022 onward. In particular, the consultation proposed amendments to the following areas:

• Illustrations of what the retail investor might receive in return from their investment (performance scenarios);
• Information on what the costs of the investment are;
• Specific issues for different types of investment funds;
• Specific issues for PRIIPs offering a range of options for investment (so-called “Multi-Option Products”).

The PRIIPS regulation hasn’t been short of vocal condemnation since its implementation in 2018. At the start of the year, a group of financial associations wrote to the European Commission to warn that the approach being taken to fix problems with the regulatory technical standards (RTS) of the PRIIPs Regulation is fundamentally flawed and will negatively impact consumers.

Although the group is supporting of the overall objectives of the PRIIPs Regulations, they did have concerns with a number of factors, including the timing of the ESA review, the new proposals being tested in isolation rather than the complete information being provided to consumers and the constant changes.

The group also warned that a “one-size-fits-all’ approach will never be able to make the PRIIPs KID work for consumers. The EC and ESAs must instead reconsider the entire PRIIPs framework as part of the official review of the Regulation, and develop solutions that, based on solid evidence, will effectively improve consumer understanding and be workable for all PRIIPs in the different markets.

In February, the European Commission published its final report on consumer testing of the Key Information Document under the PRIIPs framework. The general objective of the project was to test the effectiveness of presented information to retail investors within the PRIIPs framework. An online consumer testing with over 7500 participants in 5 EU countries was conducted using:

• 10 different versions for presenting performance scenarios and past performance information in the PRIIPs Key Information Document, and
• Covering 11 different products

The report concluded that although the results of the consumer test suggest that the final investment decision is not affected by the version of the KID, the results show that the design of the KID can play an important role in aiding consumers’ understanding of the features of the retail investment products and in contributing to better informed financial decision-making.

The Final Report of the High Level Forum on the Capital Markets Union invited the Commission to review the PRIIPs Regulation “as soon as possible, and in sufficient time to avoid a conflict with the expiry of the exemption for UCITS”, in order to address issues regarding the “intelligibility and comparability of information and the coherence with MIFID information rules, in particular for performance and cost disclosures”.

On 21st July 2020, the ESAs informed the European Commission of the outcome of the review conducted by the ESAs of the key information document (KID) for packaged retail and insurance-based investment products (PRIIPs).

ESA considered that the Report contained balanced and proportionate final proposals, which would allow the ESAs to meet their main policy objectives, while remaining in line with the PRIIPs level 1 framework (Regulation (EU) No 1286/2014).

The draft RTS was adopted at the EBA and ESMA Boards on the basis of qualified majority voting. At the EIOPA Board, although a large number of members agreed with the draft RTS, it did not receive the support of a qualified majority.

Those Board members that did not support the RTS, generally argued that a partial revision of the PRIIPs Delegated Regulation is not appropriate at this stage, prior to a comprehensive review of Regulation (EU) No 1286/2014 as envisaged in Article 33 of the Regulation. A number of Board members also indicated that for investment funds, they would prefer the past performance graph from the UCITS key investor information document to be included in the PRIIPs KID itself, rather than in a separate publication.

As a result, the Joint Committee was not in a position formally, to submit its advice to the Commission and its Final Report was published in draft only (i.e. not approved).

At the end of July, HM Treasury published a short policy statement on the proposed approach to bringing forward amendments to the onshored PRIIPs Regulation. The document flags three changes it intends to make:

• An amendment enabling the FCA to clarify the scope of the PRIIPs Regulation, such as with respect to corporate bonds.
• An amendment to replace ‘performance scenario’ with ‘appropriate information on performance’ in the PRIIPs Regulation.
• An amendment enabling HM Treasury to further extend the exemption currently in place for Undertakings for the Collective Investment in Transferable Securities (UCITS) funds.

At the start of August, EFAMA issued a letter to the European Commission on the subject of the PRIIPS draft Regulatory Technical Standards (RTS), calling for an immediate extension of the UCITS exemption, as well as an urgent Level 1 review of the regulation.

In their letter, EFAMA acknowledged the tireless efforts made by the ESAs’ over the last 18 months in trying to find a workable solution to address the current flaws of the PRIIP KID, while staying in line with the Commission’s understanding of the intentions of the Level 1 Regulation.

However, they also agreed with the ESAs, that fundamental issues with the PRIIP KID remain, which cannot be solved through technical changes at Level 2 alone. Together with a growing number of National Competent Authorities, the High-Level Forum on CMU and Better Finance, EFAMA called in its letter to the Commission for an immediate Level 1 review, as legally required by the PRIIPs Regulation. EFAMA stated that this long-overdue review is now unavoidable, and should be initiated with urgency to prevent further harm to the interest of retail investors.

While addressing the existing flaws in the PRIIP KID, the technical review was also meant to provide the legal basis for funds to switch from the UCITS KIID to the revised PRIIP KID on 01 January 2022. EFAMA also believe that the timeline can no longer reasonably be upheld, as the industry must be given sufficient lead time to implement the changes. Therefore, EFAMA called for the current exemption for funds producing a UCITS KIID to be extended until a full PRIIPs review (Level 1 and 2 including a 12-month implementation period) has been completed. To avoid further confusion among investors and preserve the worldwide reputation of the UCITS framework, the well-functioning UCITS KIID should not be replaced with a PRIIP KID before the well-documented flaws affecting the latter are remedied.