Markets hate volatility and sudden change. The Brexit vote has introduced these in spades. But below the world events level there are other issues that create operational difficulties when they arise, and generate costs to put them right.
One of these is legislative and regulatory incoherence. Laws and rules that conflict with each other or create friction and the need for mitigation in their delivery can be a nightmare for firms and expensive for consumers. They can lead to confused information and weaken or distort intended regulatory messages.
A recent example of this is in the legislation governing Packaged Retail Insurance-based and Investment Products, or Priips, for retail investors. This new law requires a Key Information Document, or KID, with information about the product to be sent to the investor whenever they invest in Priips.
The law specifies the KID size and content, and aims to assist standardisation in order to help the investor compare products. It also wants the KID to be reasonably comparable with other information documents for retail investors, notably the Key Investor Information Document, or Kiid, for Ucits. This will enable the investor to compare across a number of product categories, and know more about each of them, so as to improve the quality of retail investor choice and reduce consumer detriment.
These are laudable aims. The WMA has strongly supported them in playing an instrumental role in helping the legislation to meet its objectives of informing and protecting consumers while providing an effective business framework for the industry.
It was therefore a surprise to find that the Regulatory Technical Standards (RTS) published by the European Supervisory Authorities, that give detailed effect to the law, contain contradictory requirements. A paper by the European Fund and Asset Management Association (EFAMA) shows that the RTS:
- Fail to show investors the actual costs they will be charged as they enter, hold and exit their investment;
- Undermine the key KID objective of enhancing investment product comparability for consumers;
- Confuse and mislead investors by (a) requiring transaction costs to be calculated in a way that will lead to false outcomes, and (b) requiring two different disclosure documents for the same fund, depending on whether it is purchased via an insurance wrapper or as an UCITS.
The WMA also noted that the Priips RTS will not help distributors meet their obligations for cost disclosure to clients under Mifid II. For this purpose they will have to ask product providers for a different cost data set to that laid out in the Priips KID.
This means that clients will receive a KID showing cost data that are different from the ex-ante cost disclosure from the distributor, and product costs in the annual cost disclosure that are prepared on a totally different basis to that used for the Priips KID.
These conflicting ways of showing costs under two separate pieces of legislation with two different results will confuse clients and contradict the requirement to be fair, clear and not misleading. The industry had assumed that Priips cost data would form the basis for disclosure under Mifid II (while accepting adjustments for Ucits transaction costs), which would have been coherent and provided the client with one set of understandable and full cost information. It would also have been easier and cheaper for industry to produce, thus saving costs to the client.
Finally, the WMA is also concerned about the lack of alignment between the Priips’ RTS and the Ucits KIID requirements. The EFAMA paper highlights the two different results for retail consumers depending on whether they invest in a fund via the insurance wrapper under Priips or take the Ucits route.
So there is yet more confusion for retail investors from this third area of regulatory incoherence. This muddle is not of the industry’s doing, so whatever happened to regulatory demands for simplicity, comparability and clarity of information?
John Barrass is deputy chief executive of the Wealth Management Association.