The Financial Conduct Authority has today (26 July) asked investment providers and advisers to share their thoughts on how Mifid II and Packaged Retail and Insurance-based Investment Products (Priips) regulation are working in practice.
The European Union's Priips rules imposed new pre-contractual disclosure requirements on investment providers and distributors that are supposed to be for the benefit of retail investors when they are considering the purchase of packaged retail investment products or insurance-based products.
The 23-page paper, titled Call for Input: Priips Regulation – initial experiences with the new requirements, also revealed a lot about the concerns the FCA has about whether Priips and Mifid II have made investment products clearer and easier to grasp or more confusing to understand for the average investor.
Here are the four key takeaways from the FCA’s Priips paper.
1) Rules could have hampered launches
Apparently despite producing thousands of words on the subject, some investment providers are still unsure what products have to meet Priips rules.
The FCA has previously published a list of products that it considers fall within, or outside, the definition of a Priip such as investment funds (whether regulated or not), structured products and structured deposits, derivatives, certain non-pension annuities and several insurance-based investment products.
However, the regulator revealed reports from market participants suggested despite the existence of this list it may not always be clear whether certain investment products are Priips – in particular, whether certain corporate bonds (such as corporate bonds with ‘make-whole’ clauses or callable bonds) are in or out of scope.
As there are penalties for non-compliance with the legislation, to manage this non-compliance risk, the FCA stated recent bond market data had indicated that investment firms might be avoiding issuing certain corporate bonds to retail investors in the primary market in a bid to avoid the regulator's wrath.
The FCA also found distributors are stopping sales of certain corporate bonds to retail investors in the secondary market due to fears they could run into problems.
As a result the FCA is asking what more it can do to clarify what kind of products are and aren’t covered by the Priips rules.
2) Risks of risk disclosure uncovered
Priips regulation requires the key information document (Kid) to include a section titled ‘What are the risks and what could I get in return?’
A summary risk indicator (SRI), supplemented by a narrative explanation of that indicator, has to be included as well as a standardised risk score between one and seven, which is based on quantitative analysis.
The SRI uses different methodologies to calculate the risk score, depending on the characteristics of the product and whether the product has a performance history.
The main methodologies estimate the risk based on historical changes in the price of the product, or on some other factor on which the product’s return is based or may be assumed to be based.
Firms are also required to describe the other main risks that are not included in the SRI, but this is limited to 200 characters.