The EU Parliament has rejected the EU Commission’s proposed PRIIPs rules, so what happens next?
Last month the EU Parliament overwhelmingly rejected the European Commission’s proposed PRIIPs (Packaged Retail and Insurance-Based Investment Products) rules, which are designed to create a common disclosure framework for retail investors to easily compare investment products across the EU. The rejection was the first of its kind in the history of European financial regulation and means that the EU Commission must go back to the drawing board and redraft a new set of proposals.
Despite the historical nature of the rejection, it came as no surprise. There has been a steady drumbeat of discontent from investor advocates, the EU Parliament, and the asset management industry over the performance disclosure proposals of the PRIIPs KID (Key Investor Document). Banking, insurance, and securities firms must provide projected performance of all non-UCITS retail products under three theoretical market conditions, based on past performance. Critics of this proposal argued that the formulas proposed would result in overly optimistic forecasts which would be detrimental to investor protection. Additionally, others argued that forecasting future performance conflicts with the approach taken by the UCITS KIID (Key Investor Information Document), where only past performance is disclosed, and could lead to an uneven playing ground between various investment products.
While it may seem like celebration is in order for asset managers, the rejection is also a cause for concern. Despite the EU Parliament’s dismissal, PRIIPs is still scheduled to go live on 31 December 2016. The EU Parliament and Commission are now in a staring match over the implementation date. Parliament wants the implementation to be delayed, whilst the Commission is insisting that PRIIPs should go live as scheduled, partially due to concern that a delay in the implementation date will lead to a surge in lobbying to change other parts of the PRIIPs regulation.
Realistically, it is unlikely (to put it mildly) that the EU Commission will be able to redraft the rules ahead of the current live date. However, the industry does face the very real prospect of having to comply with the PRIIPs regulation despite the obvious handicap of not having the final rules, which is, frankly kind of bananas. This would not only be a challenge for the asset managers, but for the local regulators as well. Absent any formal guidance from the Commission, the local EU regulators will be forced to interpret the regulations, which will invariably lead to deviation in the approach to the regulation between the various EU regulators.
Faced with this uncertainty, what’s an asset manager to do? Well, to borrow a time worn phrase, asset managers should be hoping for the best and preparing for the worst. In this case, that means firms should continue to prepare for the implementation of PRIIPs by 31 December. Given that the Parliament’s objection was limited to the performance disclosure, the industry can reasonably assume that the rest of the EU Commission’s proposed rules will remain unchanged.
There is reason to believe that the implementation of PRIIPs will be delayed. If delayed PRIIPs would mostly likely align with the implementation of another key piece of EU investor protection regulation, MiFID 2. It would give the industry more time to prepare and avoid potential regulatory discrepancies between EU states, which will ultimately be most beneficial to the investors. Given the short timeframe, any decision to delay the implementation is likely to come at the eleventh hour. So, just in case, asset managers would be wise to keep moving forward with their PRIIPs plans.