​​​​​Packaged retail investment and insurance products (PRIIPs) review: get the performance scenarios right

Updated: October 2019

PROPOSED SOLUTIONS AND ACTIONS 

The review of PRIIPs should be a key priority for the new Commission. After two years of implementation, it is crucial to ensure a consumer-friendly KID and to tackle the challenges raised above. ESBG believes that the scope of the Regulation should be reviewed in order to provide legal clarity and certainty on which products fall in the scope and to exclude OTC derivatives (as in most cases they are not investment products) from the scope. 

We would encourage the ESAs to review the Delegated Acts in order to improve the methodology to calculate the performance scenarios and costs as this is creating major problems. In our opinion, new changes in the Delegated acts should be subject to consumer testing, meaning that the effects that the amendments will have on consumers’ behaviour and understanding should be assessed. 

BACKGROUND 

The EU has adopted a Regulation on packaged retail investment and insurance products (PRIIPs) which obliges those who produce or sell investment products to provide investors with key information documents (KIDs). A typical KID will provide information on the product's main features, as well as the risks and costs associated with the investment in that product. Information on risks aims at being as straight-forward and comparable as possible, without over-simplifying often complex products. The KID is intended to make clear to every consumer whether or not they could lose money with a certain product and how complex the product is. 

The PRIIPs Regulation entered into application on 1 January 2018, following a one-year delay. As for an amendment of Art. 33, the European Commission should issue a review of the PRIIPs regulation by year-end 2019 in order to address implementation issues. In the meanwhile, ESAs is working on a review of the PRIIPs Delegated Regulation during 2019 in order to analyse potential changes in the performance scenario, in the differentiation between different types of PRIIPs and in the costs.

IDENTIFIED CONCERNS 

ESBG believes that there are still open issues in the PRIIPs, in particular in the following areas: 

Calculation of the performance scenarios in the KID: 

For some products the outcomes of the calculation of the performance scenarios are absurd. KIDs that are drafted in full compliance with the legal requirements could contain information that can be false and misleading for investors The following issues have been identified: 

• Extravagant short-term results beyond 10 000%; 
• Misleading procyclical anticipations: such extrapolation from historical data lead to suggest that the short-term trend will most likely continue indefinitely. On the contrary, it would be wiser to counter this naïve view and remind the non-professional client that economic cycles entail unforeseeable mean reversions 
• For some underlyings like interest rates, whose current 5Y historical trend points downwards: - All 3 standard scenarios show nearly identical results – which is absurd - The stress scenario may present the best return, which is counter intuitive 
• For other underlyings like equities, whose current 5Y historical trend points upwards: all 3 standard scenarios show overoptimistic returns - which make no sense • For some underlyings like EUR/CHF FX rate, whose current 5Y historical trend entails sudden jumps: the stress scenario present absurd returns 
• The Interim Holding Period show better returns than the Recommended Holding Period. 

ESBG is very concerned that this information is misleading and goes directly against the obligation to present information to the client that is fair, clear and non-misleading. This creates the situation that manufacturers are urged to provide false information in order to comply with the legal requirements. 

SCOPE 

The scope of the PRIIPs Regulation is not fully clear for some products (especially foreign exchange derivatives and corporate bonds), which creates legal uncertainty. ESBG also believes that OTC derivatives– or at least products that obviously hedging products – should not be within the scope of PRIIPs since in most cases they are not investment products. 

WHY POLICYMAKERS SHOULD ACT

The Key Information Documents (KIDs) that are drafted in full compliance with the legal requirements contain information that can be false and misleading for investors. Manufacturers and distributors of PRIIPs are confronted with many questions regarding the contents of the KIDs. The European supervisors have already stated that some of the legal requirements to draw up the KIDs can be misleading for clients. They recommended to manufactures to include a warning statement for the retail investors: ‘in view of the potential risk that the performance scenarios may provide retail investors with inappropriate expectations about the possible returns they may receive, it is recommended to include a statement in the KID warning the retail investor of the limitations of the figures shown’. The ESAs should tackle these issues for the review of the Delegated acts in 2019.​