EU Priips investment disclosure rules could be delayed

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European disclosure rules for retail and insurance-based investment products could be delayed as calls grow for linked legislation to be pushed back.

Last week a senior European policymaker raised concerns about the timeline for Mifid II, which is due to be implemented in January 2017.

After delays in the EU consultation process, European Commission official Martin Merlin told European Parliament the legislation should be delayed by a year to give firms sufficient time to prepare.

This has raised questions over the timescale for the packaged retail and insurance based investment products regulation, or Priips, which is due to come into force on 31 December 2016.

Priips aims to extend Mifid II standards on consumer protection to insurance-based investment products.

Independent regulatory consultant Richard Hobbs says: “Priips is a joining up piece of legislation that goes with Mifid II. The big question is what happens to the timing of Priips if Mifid II is to be delayed?

“Why press ahead with a harmonising directive if that would temporarily create disharmony? That would be illogical.”

DLA Piper partner Michael McKee adds: “If Mifid II is delayed in its entirety, then one could certainly argue it would make sense to delay the implementation of Priips to the same date. However, a delay to Mifid II has not yet been agreed.”

Last week a joint committee of European Supervisory Authorities – which includes Esma, Eiopa and the European Banking Authority – set out details of what must be included in Key Information Documents under Priips.

Each KID must comply with a mandatory three-page template.

The KID sets out total product costs for the investor, including entry costs, recurring costs and exit costs.

It must give a single figure for the aggregated costs of the product over time, given in both monetary and percentage terms.

Recurring costs are payments deducted from the assets of a fund, and include all costs incurred in its operation, or the remuneration of any party connected with or providing services to it.

Product providers will also be required to disclose transaction costs under the new rules. The paper proposes that transaction costs should be calculated based on an average of the past three years.

The Investment Association says it will continue to encourage regulators to use the ongoing charges figure in their disclosure requirements.

IA senior adviser Mark Sherwin says: “We are pleased to see that transaction costs and product charges will be given separately, but would like to see the OCF used and primacy given to what the fund manager earns.”

The consultation paper says the KID must also contain a section on risks and potential returns.

This includes a risk rating for the product on a scale of one to seven – where one is the lowest risk and seven is the highest – and an indication of three performance scenarios: one unfavourable, one moderate and one favourable. These scenarios must be produced net of costs.

Where the risk of a product rises significantly if it is not held to maturity, the provider will be required to give investors an additional risk warning.

Expert view

We have supported use of the ongoing charges figure for a number of years. The issue is that when you combine everything into a single figure and over simplify, that works against transparency. Investors need to be able to see the amount that the manager and the people operating the fund are earning. If you overlay transaction costs on top of that, it becomes more opaque.

The good news is the Priips consultation recommends product charges and transaction costs are reported separately.

Our concern is they have not used the term ongoing charge. They refer to the charges taken out each year as ‘recurring costs’, which they split into transaction costs and other recurring costs. We would like to see primacy given to what the manager is earning, and for them to use the OCF.

We support the use of a three-year average to calculate transaction costs. We encouraged our members to publish transaction costs on that basis in 2012, so the fact that European regulators are taking that path is a positive step. Three years is a short enough period to be practical but long enough to smooth out the anomalies of any one given year.

There is still some work to do on how the transaction costs are calculated, but now we have more certainty on what this will look like, firms have something to work with.

Mark Sherwin is senior adviser at the Investment Association