PRIIPs Regulatory landscape. Where are we?

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1 PRIIPs Regulatory landscape Where are we? September 2016

2 The PRIIPs legislation is undoubtedly amongst the most ambitious regulatory efforts in recent memory and, in some respects, also one of the most innovative pieces of financial services legislation currently under works at a European level. We are also now witnessing how it is becoming one of the most debated legislative works within the finance industry. It has been in the news since last week that its process of adoption has been halted by a group of members of the European parliament. Whilst we have already seen how other pieces of financial services legislation have been delayed in the recent past (MiFID II), it is not yet set in stone that the same outcome will be the case in relation to the PRIIPs legislation. The scope of this brief article is to explain what has already happened and speculate on the possible outcomes for the imminent future of the implementation of the PRIIPs legislation, and how it will have an impact on PRIIPs manufacturers and also UCITs funds and other instruments not directly covered by the regulation. Support from the Econ for the motion of the members of the European parliament In the course of discussions surrounding the final implementation stages and adoption of the level two PRIIPs legislation, a group of members of the European parliament have invoked - allegedly for the first time in the context of financial services legislation - the power to challenge the approval process of piece of legislation deemed as unsatisfactory. As some may already know, a process called Lamfalussy is normally employed when adopting legislation on financial matters. As part of this approach, there is a fourlevel legislative procedure adopted by the European Union for the development of relevant legislation. In the particular case of PRIIPs, whilst there seems to be unanimous consent on the principles - as contained in the level one legislation (Regulation 1286/2104) serious doubt has been expressed at various levels in the industry surrounding the details. Additionally heavy criticism has been expressed in regards to the level two legislation proposed by the European Commission, beginning since its release and has now culminated in the current state of affairs. The motion presented to ECON a Committee on Economic and Monetary affairs of the European Parliament in charge of the Economic and Monetary Union, as well as the regulation of financial services is aimed at challenging the approval of such level two legislation, which has been deemed inconsistent with the scope of protection of retail investors, which is the underlying goal of the entire PRIIPs legislation. The opposition to the level 2 1

3 regulation is based on the tenant that the current makeup of KID for PRIIPs can cause serious misleading effects in relation to retail investors. ECON has supported the complaint and adopted the motion with a majority vote. Now the European Parliament will also have to vote on the same issue and adopt it with a majority. of the actual potential losses they could conceivably incur. More specifically, the proposed future performance scenarios communicate a worst case scenario that is based on historical time series data, and does not take account of potential overall market crashes or additional factors. Concerns about the final draft of the RTS The bone of contention behind the motion to have the RTS rejected is with some of the specific elements of the Key Information Document (KID). Whilst some of its requirements, in the way costs are to be calculated, raised some strong initial criticism by the investment community at an earlier stage (see our previous newsletter), the European Parliament has now expressed their concerns about other elements of the KID. MEPs have in this instance characterized the requirement to use future performance scenarios for the investments as potentially misleading, as this hinders the ability of investors to understand that they might also be incurring the risk of losses on their investment. What could have been considered a landmark departure from the traditional manner in which performance of financial instruments are communicated, is now clearly under the spotlight. The rationale is that the suggested approach may mislead investors and not provide a clear picture Does this mean that PRIIPs legislation will be delayed? It seems likely, even though nobody can be certain, that the European Parliament will vote to support ECON s resolution to reject PRIIPs level two legislation. However, this does not necessarily mean that a delay in the adoption of PRIIPs legislation is the only possible outcome in the event that the level two legislation is sent back to the Commission for revision. In fact, it seems that the view of the Commission, as expressed by one of its very members in the course of the debate leading to the motion to ECON is that, notwithstanding the fact that in an ideal case scenario both level one and level two legislation would be introduced at the same time, it could be a second best scenario to have only the level one legislation introduced within the same deadline. Should this approach be adopted and there shouldn t be any particular obstacles thereto in principle, given that the level one legislation was approved already we could very well end up in a situation where the European Supervisory Authorities could release 2

4 only some sort of guidance to the implementation of the PRIIPs. Whilst such guidance may not have attached any legal binding power thereto, it could be used for what is called a comply or explain approach. In this scenario, member states will be left with the same implementation deadline of December 2016 and would adopt PRIIPs into their national legislation as they deem suitable, leading to further uncertainty and related issues in the market. It is noteworthy to consider that there were already in the recent past some attempts made in Belgium, for instance, to front-run PRIIPs legislation. In fact, for those who remember, back in 2014 there was already a Royal Decree in Belgium - the so called Transversal Decree - which was aimed at introducing new disclosures very similar to the ones envisaged by PRIIPs legislation, when offering a variety of financial products to retail investors. In 2015, in light of the similarities with the PRIIPs legislation and in order to ensure the most accurate alignment possible of the internal legislation with the one at European level, it was proposed to postpone the introduction of such a decree until PRIIPs was completed. We also already see current local jurisdictions making their own interpretations of the level one legislation within the current environment, for example in Sweden and Finland, where UCITs funds are being asked to produce a truncated version of the KID for PRIIPs when the funds are wrapped within unit linked solutions. This approach contradicts the overall European approach, where UCITs funds will be required to provide PRIIPs-compliant data in order to facilitate the production of the KIDs on part of the manufacturers who invest in their products. In other countries such as Denmark, unit linked solutions have received a total exemption from utilizing the KID because they have been deemed to be pension products. From a market perspective, the fast paced approach of the Commission, combined with the conviction that the introduction of PRIIPs legislation was to take place by 31 December this year, regardless of the effort, the technical and issues and the extensive costs that would be incurred has created a series of challenges for a wide range of industry stakeholders. The majority of manufacturers are already looking at KID production and are mostly on time, though they lack appropriate guidance on some of the details, at least until such guidance from European institutions is likely to be expected. Although many of the KID manufacturers seem to be adequately prepared from a document creation point of view, they will still have a significant challenge in collecting and integrating data from wrapped UCITs funds, who are far behind with the data calculations and exchange, as many had the impression that they were out of the PRIIPs game until

5 At this point in time, the industry stakeholders are waiting in anticipation for the European Parliament voting, which will be conducted between the 12th and 15th of September 2016, with the hope that more clarity about what is about to transpire has been achieved. This update is a joint message by Veneziano & Partners Ltd and FundConnect A/S. The Authors FundConnect A/S is a European data infrastructure working within the areas of automated document production and distribution, web solutions and customized data and document collection for financial institutions. Anthony Miranti am@fundconnect.com Veneziano & Partners Ltd is an international consulting boutique specialised in European regulatory affairs for the asset management and hedge fund business and provides a number of services within this area, including assisting in the evaluation of which products are in scope for PRIIPS, content and translation management, and notification/distribution services. Attilio Veneziano attilio@venezianoandpartners.co.uk 4