With all signs indicating that the revised PRIIPs rules will be approved by Parliament, asset managers can emerge from their holding pattern and implement their PRIIPs solutions.
After several twists and turns, it appears that the EU’s PRIIPs (Packaged Retail and Insurance-Based Investment Products) rules have been finalized. Initially set to go live in January, the implementation of PRIIPs was delayed in September 2016 because the European Parliament rejected the European Commission’s proposed rules for the KID (Key Investor Document). The purpose of the KID is to provide retail investors a standardized disclosure document that will allow them to easily compare investment products offered by banking, insurance, or asset management firms.
Parliament rejected the PRIIPs proposal over concerns with the formulas recommended to calculate future performance. Parliament believed the formulas could result in overly optimistic forecasts, which would be detrimental to investors. In response to the Parliament’s criticism, the Commission added a fourth performance scenario, for a “stressed” market and enhanced the comprehension alert to advise retail investors that the product may invest in complex asset classes.
Not Everyone Is Happy
While the Commission’s revised proposal will likely satisfy the critics in the Parliament, the industry’s concerns remain unaddressed. The three key concerns are:
- Future Performance Projections: This is a departure from the current practice of disclosing past performance and the industry believes that the new prescribed methodology underestimates upside potential whilst overestimating losses in most cases.
- Transaction Cost Methodology: Asset managers will be required to estimate transaction costs using what is known as an “arrival price,” which is calculated as the bid/ask midpoint price at the time a trade order is submitted. In general, asset managers do not use the arrival price for anything else in their business.
- Regulatory Conflict: The final point of contention is that the rules in PRIIPs are not aligned with other pieces of EU regulation. One example is that arrival price is not a metric required for MiFID 2 transaction cost calculation. Another example is that UCITS funds are required to disclose past, not future performance.
The Commission has submitted its new PRIIPs proposal to the Parliament for approval. With all signs indicating that the revised PRIIPs rules will be approved by Parliament, asset managers can emerge from their holding pattern and implement their PRIIPs solutions. Since PRIIPs was supposed to be live already, most managers should be relatively far along in their PRIIPs preparations. It will be a matter of kick starting their projects to complete the necessary work of building out their PRIIPs KID capabilities.
Even though the rules have been finalized, this doesn’t mean that we’ve heard the end of the PRIIPs debate. The industry remains dissatisfied with the final rules and, even though the rules will likely be approved by Parliament, many members of Parliament think there is still room for improvement. For example, some have argued there should be more explicit disclosures of performance fees. With UCITS set to adopt the PRIIPs KID in 2020, it’s quite possible there may be a PRIIPs 2 battle looming on the horizon.
Part of this article was originally published in the 2017 Regulatory Field Guide. The guide features insights from a number of our experts on important regulatory developments for asset managers in the year ahead. Visit bbh.com/regulatoryfieldguide to explore the guide.