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PRIIPs: The Long and Winding Road

The implementation of PRIIPs has been a bumpy journey. The main goals of the regulation are to increase standardization and transparency for retail investors. However, industry concerns remain and recently there were more pleas from product providers to policymakers for more time and respite from certain elements of the rules.

We have been discussing the packaged retail and insurance-based investment products’ (PRIIPs) regulation for a number of years now. It also looks like this particular regulation will remain under discussion for a while more as industry advocacy groups and regulators look to frame the final rules. The key remaining issue and point of contention relates to the requirement to include future performance predictions to prospective investors. Such projections represent a significant departure from the age-old practice of disclosing past performance of products within a Key Investor Document (KID). As a reminder, the PRIIPs KID is a mandatory document to be provided to all consumers before they purchase a PRIIP.

Late last year, EU regulators (the three European supervisory authorities) wrote to the European Commission expressing concerns relating to duplication of information requirements (between UCITS’ KIIDs & PRIIPs’ KIDs) for investment funds starting 1 January 2020. They also suggested a review of the regulation was warranted. Subsequently, EU regulators published a consultation paper focused particularly on the performance scenarios.

Then, on 8 February, regulators published their final recommendations on the rules relating to the KID for PRIIPs. This followed vocal feedback from multiple stakeholders who after years of debate, still had some concerns. Previously, EU policymakers had granted an exemption on the application of the KID to UCITS schemes from 2020 to 2022. In the latest revision, the EU regulators decided to not make any material amendments immediately; but rather commit to some comprehensive revisions to the regulation when the consultation period opens in 2019.

At the same time, the EU regulators issued additional detail regarding the PRIIPs performance scenarios. They incorporated edits that addressed industry concerns around the forward-looking performance figures. Regulators acknowledged a risk that the projections may result in retail investors having inappropriate expectations about the possible returns investors could receive from a product. As such, regulators recommend PRIIPs providers include an explicit warning within the KID to ensure that retail investors are fully aware of the limitations of the figures provided in the performance scenarios. They suggested managers write “Market developments in the future cannot be accurately predicted. The scenarios shown are only an indication of some of the possible outcomes based on recent returns.”

Then on Valentine’s Day, 14 February, two of the less romantic letters sent that day were delivered by two industry associations to their primary regulators. The jointly signed letters came from Insurance Europe and the European Fund and Asset Management Association (EFAMA) and were addressed to the European Commission and the European Insurance and Occupational Pensions Authority (EIOPA), the primary insurance regulator in Europe.

For a subset of products known as multi-option products (MOPs), the industry bodies requested that EIOPA confirms that key investor information documents (KIIDs) currently used under the UCITS Directive were also acceptable under the PRIIPs regulation. If that’s the case, they asked regulators to extend implementation to 2022 to ensure consumers can continue to receive pre-contractual information about these products.

Currently, where underlying funds of an insurance-based product are UCITS funds or other funds where a UCITS KIID is produced rather than a PRIIPs KID, the PRIIPs rules allow insurers and asset managers to produce a generic PRIIPs KID for the overall product and to provide investors with the existing UCITS KIID for each of the underlying funds. This rule was linked to the temporary exemption of UCITS from PRIIPs, which was due to expire in December 2019. However, a recent agreement extended this exemption – but, the rules on disclosure are still due to expire in December 2019.

Without granting this exemption, EFAMA and Insurance Europe suggest that such KID requirements create significant compliance burdens for both insurers and asset managers, who will need to produce entirely new data set to populate the PRIIPs KID. They went on to say the rules make it impossible to comply and as such managers will need to withdraw products will need to from the market to the detriment of investors.

The ball is once more in the EU policymakers’ court as the industry waits to see if they address the MOP concerns raised in the February 14 letter. The regulators have been pragmatic thus far in recognizing there are some unintended consequences that have bubbled up within the PRIIPs implementation process. The industry hopes that they are granted one last wish to ensure that the long and winding PRIIPs road ultimately ends at the preferred final destination.