We have long been focused on the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation. That’s mainly because out of all the regulatory implementations and revisions of recent years, it stands out as one of the most polarizing. Despite years of debate and tweaking of the technical standards, PRIIPS has never really settled to a point where all stakeholders were happy or even only mildly unhappy. While discord is by no means unusual for a new regulation in the EU, PRIIPs stands out as a particular thorn in the side of compromise.
Once more, this problem child of EU regulation has resurfaced. The latest reform proposals to the controversial PRIIPs Key Investor Document (KID) performance disclosure rules have hit yet another stumbling block. (Refresher: PRIIPs KID is a uniform investor disclosure document which needs to be furnished to all retail investors prior to investment.)
This blockage is thoroughly consistent with the history of PRIIPs to date. The most recent dispute rekindles a discussion which has played out since PRIIPs’ inception: whether forward or backward-looking performance metrics provide investors most value.
As a reminder, PRIIPs was introduced in 2018 and the rules require providers of investment products to publish projections of their future performance in different market conditions. The methodology for such forecasts has been criticized extensively by investor advocates and asset managers since implementation. Currently, these rules only apply to Alternative Investment Funds (AIFs) but after a previously agreed stay of execution, intended to resolve these disagreements, the rules will be applied to UCITS funds from January 2022.
There are two distinct schools in the PRIIPs debate.
On one side, asset managers and investor advocacy groups, now joined by their primary regulator, European Securities and Markets Authority (ESMA), consider a return to past performance disclosure preferable. The other camp, primarily comprised of EU parliamentarians, believe retention of the current predictive and future oriented disclosures is in the best interests of investors. Indeed, the debate has now set ESMA, the EUs main financial regulator, and EU politicians in the form of the EU Commission and EU Parliament, in direct opposition to one another. Not a unique scenario, but one which makes conclusion with an acceptable compromise more difficult. Additionally, there are other elements of PRIIPs such as the calculation method for transaction costs that don’t sit well with asset managers. But it is the performance disclosures where feelings run strongest.
Having been asked to review the ruleset due to the divided opinions across industry, ESMA did make one slight concession by proposing that funds should be allowed to publish historical past performance data instead of forecasting future returns. The return to the classic product caveat of “Past performance is no guarantee of future results” is what industry feel is right and matches more closely similar disclaimers globally.
The proposal, however, was roundly rejected by the European Commission on the grounds that it contravenes both the goal and the existing legal text of PRIIPs to enable investors to directly compare financial products’ performance. Within the complex process and hierarchy of EU rule making, the European Commission retains the power to change or even reject in full proposals that come before them from ESMA.
The recent ruckus has spurred a flurry of activity among some asset managers, investor advocacy groups, and a cohort of EU parliamentarians, all voicing their respective positions through public statements and letters.
On the industry side, the European Fund and Asset Management Association (EFAMA), an asset management industry advocacy group, has urged a prompt conclusion to the PRIIPs review as essential so that investors can continue to invest with certainty and confidence. They cite the relative benefits of past performance over future predictions and while welcoming comparability across products (funds versus insurance products), they assert that the mechanism to compare shouldn’t entail the use of possibly misleading numbers that may be relied upon by investors in making their investment choices. They also stress that even though past performance is quite obviously not a future indicator, there is great value to investors to see how fund values may fluctuate over time.
In the opposing corner are several parliamentarians who believe the proposed changes go against both the spirit and the legal basis of PRIIPs. Remember, PRIIPs committed to a future performance scenario methodology which purposefully moves away from the past performance disclosures which may lead investors to extrapolate such performance into the future.
What both camps appear to agree upon is that the matter should be concluded with urgency and no further delays are warranted. The key question now remains: will the final rules choose to look forward or backward? In the complex dynamic that is EU regulatory implementation, it is now left for the regulators, the European Supervisory Authorities (ESAs), the European Commission (college of commissioners from EU member states), and the European Parliament (705 elected officials from EU member states) to conclude on the matter and out this unruly PRIIPS KID to bed once and for all.