We strongly encourage policy-makers to improve the methodology to calculate the performance scenarios and costs. In our opinion, new changes should also be subject to consumer testing, meaning that the effects that the amendments will have on consumers’ behaviour and understanding should be assessed.

Furthermore, 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.

The European Supervision Authorities (ESAs) have not been able to agree on a concrete proposal that would address the immense problems deriving from the current legal framework. We doubt that the remaining 15 months until funds will fall in the scope of the PRIIPs regulation will suffice to implement legal requirements that would solve the existing problems and really improve the KIDs.

The intense work by the ESAs, that has not led to a concrete proposal has clearly shown that more time is needed for a thorough review that will lead to comprehensible KIDs. Therefore, the European legislator should prolong the exemption period for funds.

If the European legislator should decide against a prolongment, it should quickly explain the will to abolish the requirement to provide a UCITS KIID for funds so that all market participants know that they only have to set up and provide the PRIIPs KID as the single product information. At the moment, there is the risk that from 1 January 2022 there will be both documents for funds, the UCITS KIID and the KID for funds.

Identified concerns

ESBG believes that there are still open issues in the PRIIPs, in particular in the following areas that need further examination in the review process:

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 five-year 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 five-year historical trend points upwards: all three standard scenarios show over-optimistic returns – which make no sense
For some underlyings like EUR/CHF FX rate, whose current five-year 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.

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’. Policy-makers need to tackle these issues before the PRIIPs regulation will apply to funds which is currently foreseen on 1st January 2022.

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. The European Commission was supposed to issue a review of the PRIIPs regulation by year-end 2021 in order to address implementation issues. In the meanwhile, the ESAs have been working on a review of the PRIIPs Delegated Regulation in order to analyse necessary changes in the performance scenario, in the differentiation between different types of PRIIPs and in the costs. In this context, in July 2020, the draft Regulatory Technical Standards (RTS) was adopted at the EBA and ESMA Boards but at the EIOPA Board it did not receive the support of a qualified majority. Hence, the three ESAs were not in the position to present a proposal to the Commission. This clearly indicates that a thorough review that will improve the current KIDs needs more time so that the exemption for funds has to be prolonged. At this point, the Commission could restart the review of the PRIIPs regulation at level 1.