Priips stalemate risks legal hazards for advisers

Last week members of the European Parliament blocked proposed rules for packaged retail and insurance-based investment products (Priips). But parliamentarians only voted down Level 2 legislation, which includes the proposal to replace past performance figures with “future projection scenarios”. The Level 1 rules – which stipulate that Priips must come into force on January 1 2017 – have already been approved, meaning the implementation date remains the same.

As a result, legal specialists have warned that delaying the start date is not as simple as it may appear. They suggested the alternative of amending existing Level 2 proposals will also take time, meaning the most likely option is for Kids to be introduced without concrete regulatory technical standards (RTS) being in place.

Law firm Ashurst has warned possible implementation of the rules without approved standards, effectively a “soft launch”, could be legally hazardous to both advisers and product providers.

“A soft launch would bring significant legal risk to manufacturers and advisers/sellers of Priips, including, in particular, a greater potential for civil liability on the part of manufacturers, given the lack of detailed rules in respect of the content requirements,” Ashurst partner Michael Logie said.

KPMG regulatory specialist Julie Patterson said the EU had entered “untrodden territory”, with a number of practical issues emerging for the investment industry – despite Ucits products having a three-year exemption from the rules.

Implementation without RTS could create problems because of “divergence” among national watchdogs, Ms Patterson warned. “To help reduce uncertainty, national regulators may decide to issue their own answers,” she said. “We will then begin to see divergences, which would not be helpful for investors, who need clear and consistent information, and would make a mockery of a pan-EU document.”

Vanessa Mock, European Commission spokesperson for financial services, said the body’s best option was to “work quickly” to amend the RTS and have this approved within the deadline.

Ms Mock said the commission still wanted the Kid to be applied by January 1 for the sake of “consumer protection”, and suggested the organisation and its regulatory authorities could provide guidance to cover the interim period.

But Mr Logie said that revising the proposals would “be done under extreme time pressure. This would pose serious challenges to Priip manufacturers to absorb the RTS in such a [short] time frame”.

Ms Patterson added: “Nothing is certain, but we seem likely to end up with the industry having to produce Kids without the detailed rules being agreed.

“And there are a large number of practical questions to which the European Supervisory Authorities promised answers, but which have not yet emerged.”

Commission must act fast to amend rules

Due to the rejection of Level 2 legislation, the European Commission must now work with its supervisory authorities – Esma and Eiopa – to amend the rules before returning them for approval.

The Level 1 details have already been approved by the European Parliament and the Council of the EU – the legislative body that represents the 28 member states.

Some 19 council members had objected to the Level 2 rules, fewer than the 21 required to carry the decision. The council will not formally reject this vote, but will decide on September 29 whether to consider a delay.

A number of MEPs also have called for a delay.

However, the commission remains insistent on the rules coming into force on January 1 next year.