The investment industry has been bought some time to comply with new European disclosure rules, but there remains a lack of clarity around how the rules will be redrafted and the ultimate impact on investment advice.
Fund Strategy revealed last week the European Commission has decided to delay the introduction of regulation for Priips, or packaged retail and insurance-based investments, by one year to 2018.
The European Commission is understood to have announced a 12-month delay of the rules in a meeting with a Council Working Group and is expected to publicly reveal its decision on 9 November.
Pressure mounted on European policymakers after the European Parliament avoted to reject Pirips standards on the grounds they were misleading for consumers.
Many fund groups had already begun the process of implementing the regulation. Despite the delay, experts remain worried about how the European Commission may choose to redraft the rules. They also want to see clear guidance from the FCA in the run-up to Priips implementation. Meanwhile firms are looking for answers on what the delay means for them, how Priips aligns with Mifid II and what Brexit means for financial services regulation overall.
In September, the European Parliament voted to reject the European Commission’s draft regulatory technical standards on Priips related to the presentation and content of the Key Information Documents.
MEPs, echoing many fund groups, called the standards “so flawed and misleading that it could actually lose [retail investors] money”.
Among the main objections to the Commission’s draft rules were the lack of provision of information about past performance of funds in the KID and the question of whether the current proposals put different providers of Priip products on an unequal footing.
This is due to the way insurance products are categorised and how transaction costs are calculated.
Apfa director general Chris Hannant says had Priips been implemented in January as first proposed advisers would have been left with fewer products to advise on.
He says: “Advisers wouldn’t have been able to give any advice because if they were advising on a particular financial instrument that fell under Priips, they would have been required to give the client a KID.
“If the investment company couldn’t provide the KID then advisers couldn’t advise on those products so potentially a whole chunk of the market might have disappeared from being able to be advised on overnight.”
Gbi2 managing director Graham Bentley says advisers’ services would have been “more difficult” to deliver with a misleading KID.
He says: “The KID would have had the potential to mislead, given no past performance was to be included, while projections might appear to be likelihoods. Life companies also had the problem that their reporting of associated funds was expected to equate to the standards applied to asset managers, rather than the current option of signposting to asset managers’ websites.”
Bentley adds many companies would have not been ready to apply the regulation on time.
Hannant says: “I was told quite a lot of fund mangers had things in place for at least some form of KID. Now, if they’ve got another 12 months for that to get it right once the methodology is laid out then they are all well and good.”
But Hannant says there are still “very grave concerns” about the draft standards put to the Parliament.
He says: “Fund managers are concerned the current calculation of risk currently envisaged won’t make a lot of sense, so whether that can be put right in 12 months I don’t know. There is also the question of whether there is any appetite at all from the Commission to look again at the proposals.”
Law firm Dechert partner Richard Frase says while there are plans to improve the standards, “the EU does not move very quickly” on these matters and fund managers may be left under an obligation to make a disclosure without knowing what form that should take.
He says: “This may in turn require some sort of regulatory forbearance but the risk is on firms and it is currently unclear what would be considered adequate steps for a firm to take to deal with this situation.”
Mifid II alignment
The delay to Priips until January 2018 means it will align with Mifid II, which was also recently delayed by one year to allow firms to build data reporting systems.
Hannant says it is important the two regulations do not conflict with each other.
“The KID would have had the potential to mislead, given no past performance was to be included, while projections might appear to be likelihoods”
He says: “The numbers in one don’t really match the numbers of the others so you are producing two different calculations. Doing them at the same time is not ideal.”
He also points out insurance investment firms also have the Insurance Distribution Directive to contend with in March 2018.
Frase says: “It is ironic that while the sale of life products, which are the most complicated retail investment products, is supposed to be regulated under Priips, the heaviest regulation is imposed on the relatively simpler fund products.”
But independent regulatory consultant Richard Hobbs says starting the Priips regime before Mifid II “made no sense”.
He says: “The whole rationale for Priips is to extend Mifid II-style regulation to insurance-based investment products which are close replacements for Mifid-style retail investments. Whenever Mifid II retail measures start, Priips should start the same day.”
Wealth Management Association deputy chief executive John Barrass says firms should continue working on adopting Priips as part of their business.
He says: “The manufacturers of Priips products are the same as the KIDs so in terms of the KID details there’s more time to make out the meaning of those. There are now two big hopes, which are firms doing a good job on preparing for the regulation and secondly a guarantee that clients, which are the big beneficiaries, will have a better deal on information flows.
“The FCA is going to be instrumental in supervising the process and the Treasury might also step in. We are really counting on them to consult on regulatory changes so the delay will give firms more time.”
But Hannant says further uncertainties remain, particularly if the UK decides to opt out of the single market after its exit from the European Union.
He says: “Presumably by the time we see Priips in 2018 the Government will have triggered Article 50. This means the regulation will cease to apply about 15 months later, so you’ve got a situation where they are potentially applying rules only for those same rules not to apply later on.
“While the FCA may think some sort of information coherence on the KID is a good thing, whether it thinks the forms prescribed in the Priips regulation are a good thing is another matter.”
Despite the 12 month-delay to Priips, the difficulty around it remains.
In fact, there are already a lot of costs that have already been absorbed which will be wasted. If there are significant changes in the Priips standards in some areas, which there need to be, then firms have got to reprogram.
Given funds are the underlying investments of insurance products, in order for insurers to be able to produce the Key Information Documents for unit-linked with-profits, they have been asking fund managers for information from October. So there is an issue there already.
Firms have been so desperate to try and get this sorted and had to scrabble together resources just to focus on getting things in place due to the volume of data needed. The production of a three-page document does not sound very much but the underlying data that is needed and the calculation is considerable.
The issue of the KID itself remains significant.
It is more significant for insurers and banking sectors because they have got to produce the documents and sales KIDs.
There is a further problem in that the delay to Priips has not formally been announced. We need a clear statement of intent for the industry at large.
There are some very technical and practical issues that need answers. Delaying the regualation is sensible, but there is a risk we will end up with the same problems, just a year later.
Julie Patterson is head of investment management, regulatory change at KPMG