The Financial Conduct Authority is proposing to scrap the requirement for packaged retail investment and insurance-based products (Priips) manufacturers to include performance scenarios in communications with clients, addressing concerns that consumers could be misled under current disclosure rules.
The watchdog launched its 'Priips - Proposed scope rules and amendments to Regulatory Technical Standards' consultation today (July 20). The aim is to amend the UK version of the EU regulation by the end of this year, before rules come into effect in January 2022.
Currently Priips rules require providers to include performance scenarios in their key information documents (Kids). These scenarios are calculated in line with specific methodologies prescribed in the Priips rules.
They require the use of historical data to calculate the potential returns that an investor may receive under different market conditions.
But industry firms have previously told the regulator that the current methodology can produce misleading illustrations across almost all asset classes, including over-optimistic estimates of future returns.
The FCA is now proposing to scrap the performance scenarios. Instead, the Priips Kid would need to include, in “narrative form”, the factors likely to affect future performance, including factors that could have a material impact on the funds’ performance.
Manufacturers would also need to disclose the relevant index, benchmark, target or proxy, along with an explanation of how the product is likely to compare “in terms of performance and volatility.”
The narrative would include an explanation of three scenarios for the investment performance: favourable, negative, or worst-case.
The regulator added it would not require the use of past performance in the Kid, as some respondents to a prior call for input had proposed. However, it has called for further feedback on whether this would be helpful for consumers.
Sheldon Mills, executive director, consumers and competition at the FCA, said: "Exiting the EU has provided us an opportunity to quickly amend technical standards surrounding key information documents as we know that they are not fully achieving the intended aims.
"We want to ensure that consumers have what they need through transparent information and furthermore through the reduction of potentially misleading information being displayed."
The watchdog is also proposing to amend the technical standards to limit their chance of producing misleading risk scores for certain illiquid products. It plans to permit providers to upgrade their product's summary risk indicator (SRI) if the rating produced by the Priips methodology is too low.
It also proposes that Priips issued by VCTs be given a SRI score of no lower than 6 - following concerns that methodology meant the bulk of VCTs would be misleadingly classified as '3' on the SRI scale.
The FCA also wants to introduce rules to clarify the scope of the regulation to avoid corporate bonds with certain common features being classed as Priips.
The city watchdog is also asking for feedback on introducing guidance that clarifies what it means for a Priip to be “made available” to retail investors.