In mid-2012, the European Commission proposed a regulation to boost consumer confidence in the financial sector by making information about structured products more comparable and understandable via a standardised key information document (or “KID”). Consumers should be able to compare financial investments and understand what they invest in. To help them do this, a Regulation on Packaged Retail and Insurance-based Investment Products (“PRIIPs”) was approved in April 2014. The new European rules require product manufacturers to draft a short information document which must be given to consumers before they invest.
The Commission initiated the Level 2 process in July 2014 with a request to EIOPA for technical advice on possible delegated acts. In November, the European Insurance and Occupational Pensions Authority (EIOPA), with its sister European Supervisory Authorities, the European Banking Association (EBA) and the European Securities and Markets Authority (ESMA), issued a discussion paper on draft Regulatory Technical Standards via the European Supervisory Authorities (ESA) Joint Committee.
Finance Watch argued intensively from late 2012 to April 2014 for a wider scope and warning label, among other things. We published a blog article on PRIIPs in December 2012 and we organised a Webinar in January 2013 in order to explain what PRIIPs was all about. We stepped up these efforts at the end of 2013 during the Parliament compromise meetings and in early 2014 trilogues, against the risk that key elements could be lost as the deadline for the end of the Parliamentary term approached. After highly-contested negotiations, the inter-institutional agreement reflected several wins for consumers and Finance Watch issued a press release on 1 April 2014 to acknowledge them and commit to protecting them during the Level 2 process. This formally started in November 2014 with the first Discussion Paper on the first set of Regulatory Technical Standards.
In February 2015, we published our response to the first ESA discussion paper on PRIIPs Level 2. In August 2015, we published our response to the second ESA Joint Committee’s consultation on PRIIPs. On 29 January 2016, we published our response to the third ESA Joint Committee’s consultation on PRIIPs.
Finance Watch believes that retail investors should not be offered unsuitable investment products. We made several recommendations for the KID:
- enlarging the scope so that packaged products, insurance products, pension products, and even shares and bonds would require a KID;
- introducing a health warning (“complexity alert”) to reduce miss-selling cases and encourage more suitably-designed products. The purpose of the health warning is to alert retail investors when structured products embed features known to have detrimental effects;
- ensuring that the underlying methodology and disclosure format of the summary risk indicator enable retail investors to understand the risks attached to the product;
- improving disclosure of fee structures. Fees can be disclosed transparently or embedded in the product, in which case they are not paid upfront but translate into lower potential returns, and the investor is never aware of them; and
- summarising in one sentence the implicit view taken by an investor purchasing the product. The purpose is to ensure that investors fully understand the market view that they are taking.
Research shows that retail investors are far from rational when it comes to buying investment products: their decisions are often affected by cognitive and emotional biases and they rely a lot on advice from salespeople who themselves do not always understand the risks in the products they sell.
A properly implemented KID should help consumers to understand the risks and costs of investment products and avoid products that are unsuitable for them.
- Response to third ESA Joint Committee’s consultation on PRIIPs (29 January 2016)
- Response to second ESA Joint Committee’s consultation on PRIIPs (17 August 2015)
- Response to first ESA discussion paper on PRIIPs Level 2 (17 February 2015)
- PRIPs agreement should help to reduce mis-selling of financial products to consumers, says Finance Watch (press release, 1 April 2014)
- Finance Watch welcomes Parliament vote on protecting retail investors, calls for KID proposal to be fast-tracked (press release, 20 November 2013)
- Financial reforms since Lehmans are not enough – a new approach is needed(press release, 11 September 2013)
- Finance Watch response to the IOSCO consultation on the regulation of retail structured products (12 June 2013)
- Discussion paper on product rules for retail investment products (19 April 2013)
- Webinar on PRIPPS (January 2013)
- Buying complex retail investment products (Blog article, 21 December 2012)
- “Towards suitable investment decisions?” (Position paper, October 2012)
- “Investing, not betting” (Position paper on MiFID II, April 2012)
- Response to Commission call for evidence on the regulatory framework for financial services (1 February 2016)
PRIPs/KID Key Issues
The Commission proposal (see below) provides a very good basis for the introduction of a Key Information Document (KID), although in our view it can be improved significantly. The Council has remained rather close to the Commission proposal in its General Approach adopted in June 2013. The European Parliament has voted on rapporteur’s final report on 20 November, 2013. Its position contains many improvements over the initial Commission legislative proposal, which echoes a number of suggestions made in Finance Watch’s position and discussion papers on the KID in recent months.
Key issues for trialogue negotiations are:
- potential enlargement of the scope to extend the KID requirement beyond packaged products only. This would enable a consumer to better compare financial investments within and between asset classes (such as packaged products, insurance products, pension products, or even shares and bonds);
- the introduction of a health warning or product design rules which would guide manufacturers to create products that are better suited to consumers, and lead to less misselling cases and scandals;
- improving the content of the two- to four-page Key Information Document itself. Many amendments tabled by MEPs modify Article 8 which defines the content of the KID, and the addition of all this useful information needs to be traded off against keeping the KID short and simple;
- removal of the summary risk indicator to replace it with a multifactor scenario analysis. This would “force” consumers to look beyond the risk summary indicator (a number between 1 and 7) and better understand the best- and worst-case performance of a fund; and
- improved disclosure of fee structures. Fund distributors can take fees upfront or annually, but also through in a hardly visible way, through biased distribution of profits (e.g. the fund bears all the losses but only receives only 90% of the gains.)
The European Commission proposed a regulation on “Key Information Documents for Investment Products”, requiring that product manufacturers provide retail investors with a synthetic information document using plain language before they invest. The aim of this regulation is to make financial information easier to understand and to increase product comparability. We refer to this dossier as “PRIPs” (Packaged Retail Investment Products), as we feel this better covers its content.
In response to decreased consumer confidence in the financial sector and increased complexity of financial services, the European Commission identified information disclosure to retail investors as one area where action is needed: financial information is often full of technical jargon, too long, not understood by investors, and different across products.
The scope of the proposal is packaged investment products, which include UCITS funds (undertakings for collective investment schemes), non-UCITS funds, insurance products linked to financial markets and other types of structured retail investment products.
Under the proposal, product manufacturers are required to set up a short synthetic Key Information Document (KID), summarizing the key information of a financial product. This document must be distributed to retail investors before they invest.
The KID design is based on a similar document already in use for UCITS, the biggest category of investment vehicle covered by the proposal.
The new KID would help consumers to better understand and compare the risks and costs of products and make more informed and suitable investment decisions.