The long-running Priips disclosure saga has resulted in a fragmentation of rules. Ayal Leibowitz of LPA attempts to explain crucial differences between differing regimes.
Financial supervisory authorities across Europe wanted to create a single system to provide a system on financial investment products. Unfortunately, they wound up with three.
The European Union and United Kingdom were unable to agree on a format to provide information on investments. The UK’s Treasury decided to extend the Ucits funds exemption from Priips [packaged retail investment and insurance products] for five years and the FCA decided to create a UK-specific version of Priips Key Investor Information Document (KIID).
This means manufacturers of Ucits and Priips that distribute products both in the EU and the UK will need to create EU Priip KIIDs for all Priips distributed in the EU, Ucits KIIDS for Ucits distributed in the UK, and UK Priip ‘KIDs’ for Priips (other than Ucits) distributed in the UK.
The three systems have things in common, but they contain meaningful differences that need to be accounted for by those looking to operate in both jurisdictions. Let’s look at the differences across three main areas.
Risk – a risky outcome
Methodologies for calculating risk in Ucits KIIDs and Priip KIDs both use the same one-to-seven scale – but with different results. Last year in a sample exercise, we found values frequently differed between the methodologies; sometimes there was a two-point difference between the two.
The EU and UK Priips use the same methodology for the Summary Risk Indicator calculation – which usually returns a lower risk class than the Ucits Synthetic Risk and Reward Indicator. Both EU and UK Priips allow manufacturers to increase the Summary Risk Indicator in case they believe it should be higher. The industry has been reluctant to exercise this option, as it would lead to incomparability with other Priips.
Having two different risk classes for the same fund – one when distributed to EU investors and another one when distributed to UK investors, both on the same one-to-seven scale – is a risky outcome and a likely cause of investor confusion.
Performance – systems differ
The systems notably differ around performances. The Ucits KIID provides no future scenarios. Both UK and EU Priips do. In the EU there is a methodology for calculating and presenting five possibilities – minimum, stress, unfavorable, moderate and favourable. The UK requests narrative description of positive and negative factors affecting future turns, only with detail about what to expect under adverse market conditions.
Reviewing past performance is also different. For Ucits KIIDS, past performance is presented in a bar chart. For EU Priips, Ucits, AIFs and unit-linked insurance products, a reference to past performance can be made on a different document or website. No past performance information is available for UK Priips.
Cost disclosure – some confusion
Cost disclosures are quite different between the three systems, so much so it is worth dealing with each one by one.
For Ucits KIIDS, the cost methodology is shown as raw costs. Cost impact on returns are not required, nor are tables showing the costs over time, nor are composition-of-costs tables. Costs should be presented as a table of raw costs with additional narrative where required.
For EU Priips, raw costs and costs’ impact on returns must be shown. Cost impact on returns should be applied on a zero-return scenario for a holding period of up to one year and on a moderate scenario for a holding period of greater than a year. Two tables – one for costs over time and one for composition of costs – must be shown.
The number of holding periods shown differs on the recommended holding period – one for less than a year, two for between one and ten years and three for greater than ten years. Both raw costs and cost impacts of returns are shown on the composition of costs table.
Finally, UK Priips show methodology of cost impacts on returns only. Cost impact of returns are supposed to be shown on a moderate performance scenario but this is confusing. (For the calculation of cost impact on returns, there needs to be a scenario, based on which the cost impact is calculated. Since the UK Priips dropped performance scenarios from the performance section, the use of the Moderate Scenario is not relevant anymore. The amended UK Priips RTS then requires the use of “a moderate performance scenario based on reasonable and robust assumptions and methodology”. Is this the same scenario as the EU Priips’ Moderate Scenario? Unclear.)
Cost over time and composition of cost tables must be shown. The number of holding periods shown again differs on the recommended holding period – this time one for less than a year, two for between one and three years and three for greater than three years. Cost impacts on returns must be shown on composition of costs table.
We can only hope…
The future of disclosure is both more complicated and confusing than intended. The rest of this year will be challenging for manufacturers and distributors.
Manufacturers need to update their systems and disclosures to support the new regulatory amendments. Distributors need to train their personnel on the changes. We can only hope this disclosure fragmentation doesn’t lead to too many retail investment losses.
Ayal Leibowitz is chief innovation officer at technology firm LPA.
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