From the end of next year, a key information document for packaged retail and insurance-based investment products (Priip) will be required for a wide range of investment product, as the regulator attempts to make it easier for retail investors to compare products.
These will include funds, structured products, unit-linked and with-profits life insurance contracts, while pensions and pure protection business are out of scope.
Chris Hannant, director general at the Association of Professional Financial Adviser, told FTAdviser that advisers need to make sure clients receive and understand the information that is given out with investment products, but the challenge with Priips is to squeeze a lot of information into a small space, particularly giving a coherent single measure of the costs that clients will actually pay.
The key information document is a mandatory three-page A4 document provided before the retail investor enters into any commitment, with consumer testing by the European Supervisory Authorities (ESA) on Priips due to finish in August and a public hearing expected later this year.
Mr Hannant said: “Advisers have to be able to explain what any numbers actually mean, which can be a real headache, given there are many possible differences between products and prices,” he stated, adding that there are currently blurred boundaries between what advisers and providers are expected to do.
Apfa is campaigning for more clarity on what is expected from them between now and the start of 2017.
Zak de Mariveles, managing director for UK IFA sales at Societe Generale and chairman of the UK Structured Products Association, warned the regulation was a key challenge for a financial industry with such varied types of investments as the paper is seeking responses on the potential methodologies that can be used to determine risk ratings for investment products and how they can be displayed.
“Firstly, there are a wide range of methodologies that could be adopted, each with their own set of benefits and considerations. Secondly, there needs to be agreement on whether displaying a single risk rating is preferred over a more granular approach.
“For example, is it really the best approach to show a single rating for a structured product, or should the rating be broken down into component parts to measure market risk separately from counterparty risk?
Regarding complexity, Mr de Mariveles noted that in EU parliament changes to the Priips’ text last year, neither in the regulation nor in the implementation was there any talk of banning complex products.
“The debate appears now to be on the potential inclusion of a comprehension warning for certain products as yet undefined.”
Steven Cameron, regulatory strategy director at Aegon, agreed that a “comprehension alert” will feature if the product is deemed overly complex for ordinary retail investors to fully understand.
It appears derivatives and structured products will be classified as complex, although there is still uncertainty as to what Priips should be excluded from the comprehension alert, Mr Cameron added.
“We expect the ESA to provide further guidance in this area as part of the ongoing consultation,” he added.
The ESA expects to follow the current technical discussion paper - published last month - with a final consultation paper setting out the draft regulatory technical standards in the autumn.
“It remains to be seen if the methodologies that are being developed for Priips could lead regulators in the UK to makes changes to other aspects of the disclosure regime not currently within the scope of Priips,” said Mr Cameron.
“We don’t need to produce Kids at present as the earliest we will need to issue these is by December 2016, once we know more from the detailed rules on what is required we will formalise our programme of implementation,” he continued, adding that the advantages and disadvantages will depend on how the rules are drafted.
peter.walker@ft.com
