EuropeOct 19 2016

With draft legislation rejected, is it RIP Priips?

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With draft legislation rejected, is it RIP Priips?

A total of 602 MEPs voted against introducing the measure, with only four in favour, 12 abstaining and the European Parliament declaring the legislation so "flawed and misleading" that, contrary to the legislation's aims, it could actually lose consumers money.  

This is the first time the parliament has rejected RTS and the European Commission must now propose a new RTS to implement Priips.  

However, with Priips due to come into force on 31 December and industry, the parliament and the European Council urging the commission to postpone the implementation date, it is uncertain if this strict timetable is now feasible.

Priips was introduced to boost consumer confidence in financial markets and investment products and to make it easier for consumers to navigate the retail investment market. The legislation is designed to provide consumers with information about investments to give them a better understanding of the product purchased and to harmonise rules relating to disclosure and distribution of products across member states. 

The definition of a Priip is not concerned with the legal form of the product, but rather with the function it performs for retail investors. The definition catches products considered investments where amounts repayable to the retail investor are subject to fluctuations because of exposure to reference values or to the performance of one or more assets that are not directly purchased by the retail investor; or an insurance-based investment product that offers a maturity or surrender value wholly or partially exposed, directly or indirectly, to market fluctuations.

A Priip therefore includes investment funds, insurance-based investments and retail structured products, in addition to private pensions.

The idea of drafting legislation on the transparency and distribution of retail investment products to protect retail investors was introduced in October 2007, as part of a commission consultation designed to assess whether there was a real and significant risk to investor protection given that EU rules on the disclosure and distribution of different types of retail investment products vary across member states.

In April 2009, as the impact of the financial crisis on consumers became more evident, the commission pledged to resolve the inconsistencies in the rules regarding retail investment products, which it believed to be detrimental to investors and had the potential to lead to competitive distortions in the retail investment market.

A Priips consultation was released at the end of 2010 and Priips was introduced as part of a "consumer-friendly" legislation package that included revisions to the Insurance Mediation Directive and a proposal to tighten rules on investment funds. Priips entered into force at the end of 2014, but will not come into effect until 31 December at the earliest.

The centrepiece of the Priips proposal is the introduction of a key information document (Kid). Under Priips, those who "manufacture" investment products, such as investment fund managers, insurers, credit institutions and investment firms, will have to produce a consumer-friendly document for each investment product offered to consumers, outlining the main product features and risks of any investment.

 Kids should be drafted by manufacturers so consumers can compare products side by side and select the investment(s) most suited to them. Kids should be published on a manufacturer's website and present the key features of a product simply, using clear and understandable language, removing jargon, but without oversimplifying the products.

Manufacturers must produce a Kid, which advisers or distributors of products must then provide to investors in good time before the product is sold. The Kid should set out the type of product sold, its objectives and the means for achieving them; a description of the type of retail investor to whom the product is intended to be marketed; the term of the product; associated costs and risks; and important conditions. It should also cover how an investor can reclaim money from the investment and complain about it.

The information provided in a Kid is seen as pre-contractual information and therefore must be fair, clear, presented in a standardised format and kept up to date. The Kid must be written in a concise manner, on a maximum of three sides of A4 paper and presented in a way that is easy to read.  

The consequences of manufacturers violating the legislation are far reaching and serious. The European Insurance and Occupational Pensions Authority (Eiopa) and competent authorities can prohibit or restrict the marketing, distribution or sale of products and intervene if the products give rise to significant investor protection concerns. 

Eiopa and competent authorities may also release a public warning indicating the person responsible for, and the nature of, any infringement, order the publication of a new version of the Kid and impose fines of up to €5m (£4.4m) or up to 3 per cent of the total annual turnover for legal entities or a €700,000 fine for a natural person (or in both instances fines of up to twice the amount of profits gained or losses avoided because of the infringement).

PRIIPs states that the commission will adopt RTS drafted by the European Supervisory Authorities (Esas). These RTS implement the provisions set out in PRIIPs and both PRIIPs and the accompanying RTS will take effect in national law once they come into force.

A joint committee of the Esas submitted its RTS for consideration by the commission in April, although neither the parliament nor the council were consulted first. These RTS relate to the presentation, content, review and provision of the Kid, including the methodologies underpinning calculation of the risk, rewards and costs information. The commission adopted the RTS in June 2016, giving the council and the parliament two months to scrutinise the rules.

The parliament objected to the rules on several points. It said it was misleading to investors to remove credit risk from the calculation of risk categorisation of insurance product, the treatment of multi-option products needs to be clarified and there are flaws in the methodology for future performance scenarios and a lack of detailed guidance in relation to a 'comprehension alert', which alerts investors that a product may be difficult to understand. 

It warned that the rules set out in the RTS go against the spirit and aim of the legislation: to provide clear, comparable, understandable and non-misleading information on PRIIPs to retail investors. 

The parliament instructed the commission that the RTS cannot enter into force and that a new RTS should be drafted that takes into account its concerns. Given the parliament's objection, the council no longer needs to comment.

The commission will therefore send the RTS back to the Esas for revision and then send the revised draft to the commission for its endorsement. The parliament and the council will then be able to reconsider the draft.  

As this is the first time the parliament has formally rejected an RTS, it may be possible for the institutions to reach a compromise on a far more accelerated timetable given the end of 2016 deadline. The parliament has also asked the commission to assess whether implementation of Priips should be delayed, a move that has the backing of council and industry groups including the European Fund and Asset Management Association. 

For now, however, the deadline remains in place. Without further information regarding the timetable for implementation, firms should continue their preparations for implementing Priips. The Financial Conduct Authority is likely to release more information on how the rules will be implemented in the UK over the next couple of months as Brussels reviews its options in relation to future steps.

Mark Compton is a partner and Lauren Smith is an associate in the Financial Services Regulatory & Enforcement practice at Mayer Brown 

Key points

602 MEPs voted against introducing the Priips in September.

The centrepiece of the Priips proposal is the introduction of a key information document.

The Parliament said it was misleading to investors to remove credit risk from the calculation of risk categorisation of insurance products.