The UK financial regulator said it would bring more clarity to investors about the future performance of investment products that are currently designed to comply with the EU’s ‘Priips’ rules.
The Financial Conduct Authority (FCA) proposals are to change disclosure documents provided to retail investors for corproate bond funds that were designed under the EU's Priips – or Packaged Retail and Insurance-based Investment Products - regulation.
Performance calculations within Priips funds have long-since drawn criticism from fund bodies and other commentators for being misleading.
The FCA said the post-Brexit Financial Services Act 2021 allows the regulator to specify whether a product can be classified as a Priip under the Priips Regulation as well as allowing the FCA to define what is meant by ‘performance information’.
In the EU, Priips fund providers are required to provide a key information document (KID) about the product they are selling - but methodologies used in producing performance scenarios and summary risk indicators could produce misleading figures, the FCA said.
FCA changes would provide more clarity to consumers about what the products are, the risk presented and information to help understand likely future performance, the regulator said.
“There has also been a lack of clarity within the Priips regime over the corporate bond market. This has led HM Treasury to confirm that the UK will diverge from EU Priips regulation to better protect its consumers,” the FCA said.
Sheldon Mills, executive director, consumers and competition at the regulator, 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.”
Among proposals is a requirement to amend the Priips regulatory technical standards to: require written explanation on performance in the KID; combat the potential for Priips being assigned an inappropriately low summary risk indicator in the KID; and address concerns over applications of the “slippage methodology” when calculating transaction costs.
Any changes made will come into effect on January 1, 2022.
Alexander Dorfmann, senior product manager, financial information at SIX, said in the run up to Priips, too many financial institutions adopted a "whatever it takes" approach to keep the "prying eye" of the regulators away. But he suggested they now had to opportunity to re-think how Priips dovetails with MiFID II regualtions.
"These suggested amends from the FCA show that the original ‘do whatever it takes to comply with Priips regardless of the cost' approach was simply not sustainable. Firms now need to adopt longer-term thinking when it comes to compliance. There is significant crossover between Priips and other regulations. While the same level of detail may not be required, a lot of information market participants distribute for MiFID II is reflected under Priips."
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