Earlier this year we saw the introduction of two major pieces of European legislation – Mifid II and Priips – that have some overlap, but are also quite different from each other in many ways.
Mifid II relates to the transparency of investment markets, trading and client communications, while Priips covers pre-sale product disclosure to retail customers by means of a heavily-prescribed, standardised Key Information Document (KID).
Very sensibly, the regulators wanted consistency between the two pieces of legislation where there was overlap, such as calculating expected costs.
But anyone who thinks that the rules around Priips KIDs are set in stone for many years will be disappointed.
The regulation included provision for a review “by 31 December 2018”.
The one-year delay before Priips KIDs were implemented should have no effect on this, as any change to the date of the review would require the approval of the European Parliament and it needs to take place soon enough for Ucits managers to plan their expected transition to Priips KIDs in December 2019.
So after just one year of operation, we can expect a review covering at least the following subjects:
1) A general survey of the operation of the comprehension alert
The Priips regulation requires any product that is “not simple and may be difficult to understand” to put an alert to that effect on the KID.
Which products are included has been the subject of much discussion, not made easier by the following criteria in the regulation:
- If it invests in underlying assets in which retail investors do not commonly invest.
- If it uses a number of different mechanisms to calculate the final return of the investment, creating a greater risk of misunderstanding on the part of the retail investor.
- Of if the investment's pay-off takes advantage of retail investor's behavioural biases, such as a teaser rate followed by a much higher floating conditional rate, or an iterative formula.
While the regulation avoided equating “not simple” with “complex” (a term with other regulatory connotations), the more detailed Regulatory Technical Standards (RTS) said that only products linked to non-complex instruments and those instruments themselves could avoid an alert.
And the three criteria – which don’t necessarily result in a Priip being complex – still need to be considered.
To add to the confusion, the definition of complex products isn’t as straightforward as it might be, as the Financial Conduct Authority (FCA) and the European Securities and Markets Authority (ESMA), the European regulator, disagree over which funds are complex.
ESMA says only Ucits are non-complex, but in the UK, many non-Ucits retail schemes (Nurs) and investment trusts may also be non-complex.
The lobby groups that originally campaigned for the alert had hoped that quite a small number of complicated products would be forced to carry the alert, which would scare retail investors enough for those products eventually to disappear.
With most funds across Europe that aren’t Ucits now carrying a comprehension alert, it’s unlikely to have as much impact.
Likely impact: We can expect lots of debate on this around the review, while advisers get used to explaining what the presence of a comprehension alert on a KID really means. To complicate matters, all complex products need a comprehension alert, but not all Priips with an alert are complex.