Despite the Respite, PRIIPs Continues to Vex the Industry

At EFAMA’s recent Investment Forum in Brussels, the European asset management industry shared perspectives on the regulatory landscape and PRIIPs was the topic that stirred emotions more than any other.

The European asset management industry recently gathered in Brussels for the annual EFAMA (European Fund and Asset Management Association) Investment Forum. The mood of attendees matched that of the November weather; that’s to say a little subdued and at times frosty. The general demeanor of those in attendance could be attributed to the current levels of market uncertainty, linked primarily to heightened geopolitical risk.

As expected, both Brexit and Trump got plenty of air time. However, surprisingly, the topic that actually stirred the most emotion was the ongoing saga with the EU’s PRIIPs (Packaged Retail and Insurance-Based Investment Products) rules.

Following the EU Parliament’s rejection of the proposed PRIIPs rules in September, on 9 November the European Commission formally delayed the implementation date to January 2018.  Along with the delay, the EU Commission also proposed changes to its PRIIPs rules, which included the addition of a fourth performance scenario and enhancement to the comprehension alert to advise retail investors that the product may invest in complex asset classes.

Despite the postponement, the industry still has serious concerns with the PRIIPs proposals. Those gathered at the EFAMA event were very disappointed that three points of concern were left unaddressed.

Future Performance Projections
Perhaps the most hotly contested issue with PRIIPs is the requirement that product providers must disclose future performance projections.  The future projections are based on a prescribed formula for favorable, moderate, unfavorable, and stressed market conditions. The new methodology is a departure from the current practice of disclosing past performance and costs, along with a disclaimer warning investors that past performance may not be indicative of future returns. The industry believes that the new prescribed methodology underestimates upside potential whilst overestimating losses in most cases. A particular concern is that if there is a material divergence between the PRIIPs furcated performance and the actual performance that asset managers will be exposed to investor complaints or regulatory action.

Transaction Cost Methodology
Under PRIIPs, asset managers will be required to estimate transaction costs using what is known as an “arrival price”. The arrival price is calculated as the bid/ask midpoint price at the time a trade order is submitted and takes into account an assigned level of market risk.

The key issue for the industry is that, generally speaking, asset managers don’t use the arrival price for anything else in their business and will need to recalibrate their internal systems or buy new systems exclusively for PRIIPs reporting. The industry also argues that using the prescribed methodology can result in negative transaction costs for a certain product which, in reality, is impossible.

Regulatory Conflict
The final point of contention is that the rules in PRIIPs and MiFID are not aligned. For example, arrival price is not a metric required for MiFID 2 or any other trading regulation, for that matter. Asset managers are generally bemused as to why transaction costs for the same product will be so different under different regulations. The industry believes the conflicting rules could actually make it harder for investors to understand things, which runs counter to PRIIPs’ primary goal of increasing investor protection.

What’s Next?
Overall, those gathered at the EFAMA event were most concerned about the unintended consequences that PRIIPs may cause. There was full agreement that PRIIPs is a well-intended piece of regulation. Its goal of increasing investor knowledge and allowing for comparisons of different product types is supported by the industry. However, the concern is that as currently written, the PRIIPs rules may ultimately lead to conflicting disclosure standards and reduced product choice for consumers. The next steps are that the European Supervisory Authorities (ESMA, EIOPA, and EBA) must draft and submit revised proposed rules to the European Commission, who will then resubmit to the EU Parliament for approval. Based on the conversations at the EFAMA event, we can expect a full court press from the industry to try, one last time to influence the outcome.