In the face of its greatest social and economic challenge, last week the EU managed to agree on a historic spending package worth €750 billion to curb the catastrophic economic impacts of the coronavirus pandemic. After almost five days of grueling and intense negotiation, consensus eventually was reached across EU member states on a recovery deal. However, such solidarity and consensus building unfortunately is not always possible across the whole of the EU policy-making spectrum, as the latest flare-up over the packaged retail investment and insurance-based products (PRIIPs) regime testifies. PRIIPS has long been a thorn in the side of European regulatory bodies.
Last week, the European regulators and the European Commission (the commission) locked horns once more as the controversial rules jumped to the forefront of the financial regulation agenda. The European Supervisory Authorities (ESAs) are a triumvirate of EU regulators who oversee the entire EU capital markets. They are composed of:
1. European Banking Authority (EBA)
2. European Securities and Markets Authority (ESMA)
3. European Insurance and Occupational Pension Authority (EIOPA)
Here’s what happened: last week, the ESAs co-signed a letter to the European Commission (the EU’s political Executive branch) on PRIIPs informing them that they had collectively failed to reach an agreement on a compromise solution aimed at rectifying long standing problems with PRIIPs. The EBA and ESMA had managed to achieve qualified majority support (though not without dissent) but EIOPA didn’t approve the standards at all. Therefore, they were “not in a position to formally submit” a final proposal to the Commission.
With the entire PRIIPs regime in limbo, the question whether a full rewrite of the rules is needed – rather than tinkering at the edges – once more rises to the fore. This is the first time the ESAs have failed to endorse their own suggested technical standards and it puts the PRIIPs ball well and truly back in the Commission’s court. Throughout the PRIIPs review process, and in the face of vocal industry feedback regarding performance disclosures, the Commission has to date staunchly defended the regulations and resisted calls for a more comprehensive overhaul. These circular arguments, however, cannot continue indefinitely, and with PRIIPs due to be applied to UCITS funds across Europe, the issue must be concluded at some point whether through Level 1 amendments (a total legislative overhaul of PRIIPs) or through targeted concessions by the Commission. The stalemate must be broken by one of these means.
The outstanding bones of contention are not new: issues relating to currently prescribed forward-looking projections as opposed to historic performance disclosure at the center of the disagreement. The current and proposed rules require fund providers to publish projections of future performance in different market conditions. Opponents claim the projections are unreliable and suggest excessively optimistic outcomes. As a result, there is a strong preference to also use historic performance disclosures, since the formula used for the future projections have created much uncertainty and anxiety already across industry and with investors.
There remains a cohort of ESA Board members who have stated that they would prefer the past performance graph currently utilized within UCITS key investor information documents (KIID) to be included in the PRIIPs Key Investor Document (KID), rather than in a separate publication. The ESA letter strongly reiterates the historical performance point. This remains the primary stumbling block preventing a PRIIPs consensus. A previous ESA proposal to allow funds to publish historical scenarios based on past performance data was already rejected by the European Commission who felt such a move was fundamentally opposed to the original objective of the PRIIPs legislation.
Consensus, Stalemate, or Start Again?
This is where I would normally suggest what the next steps are, or the most likely outcome. As alluded to above, however, this is PRIIPs – the real problem child of EU regulation – and it’s difficult to ascertain what comes next. The commission must now consider the letter carefully before discussing once more with the ESAs. The options at their disposal appear to be threefold (with one not really an option at all):
- Row back on the Commission’s prior position on historic performance disclosures and bring the PRIIPs saga to an end;
- Concede that consensus is not possible through revision of existing technical standards and request a full legislative overhaul of PRIIPs through Level 1 legal revisions.
- Request the ESAs once more reconsider the Regulatory Technical Standards – which leaves PRIIPs in limbo.
The only thing that appears certain about PRIIPs is that I will at some point be doing another blog on this seemingly never-ending regulatory saga.