Q. 1: Should the PRIPs initiative focus on packaged investments? Please justify or explain your answer.

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1 Submission by the Central Bank of Ireland to the EU Commission Consultation on legislative steps for the Packaged Retail Investment Products initiative 2. Scope of the PRIPs Regime Q. 1: Should the PRIPs initiative focus on packaged investments? Please justify or explain your answer. Yes. PRIPS should focus on packaged investments. These products tend to be more opaque as the underlying assets can be numerous and are often not well explained. Such products are aimed at non expert investors. The information provided, especially on the important area of risk is not standardised and so prevents comparison between products. In view of the complexities attaching to the packaged element of such products, a consistent approach across the EU to the regulatory treatment of the providers of PRIPs would be of benefit to the industry sector and the consumer. Q. 2: Should a definition of PRIPs focus on fluctuations in investment values? Please justify or explain your answer. Yes. Where the investment return is derived from market fluctuation, such products should be included in the PRIPs definition. Where investment returns, capital and the specific growth is guaranteed the requirement for information is less. The proposed definition concentrates on the core features of PRIPs and focuses on the economic effect of the PRIP regardless of the legal form it takes a key component of this economic effect is the fluctuation in investment values. Q. 3: Does a reference to indirectness of exposure capture the 'packaging' of investments? Please justify or explain your answer. Yes, the reference to the indirectness of exposure to fluctuations in the market value of assets captures the packaging element of investments. PRIPs should not include directly held assets such as individual shares/stocks and bonds. Individual information on directly held assets is readily available. Indirectly held investments such

2 as investment funds do not have the same level of information available and this hinders the consumer in making product comparisons and in assessing risk. Q. 4: Do you think it is necessary to explicitly clarify that the definition applies to fluctuations in 'reference values' more generally, given some financial products provide payouts that do not appear to be linked to specific or tangible assets themselves, e.g. payouts linked to certain financial indices, the rate of inflation, or the overall value of a fund or business? It would appear that such a clarification result in a greater generalisation of the PRIPs definition by incorporating products dependent on a wide range of investment indicators. Such a definition would result in all similar products falling under the PRIPs regime. This would be a positive development from the level playing field criteria as the definition should be as broad as possible to allow comparisons to be made by consumers between a wide range of products. Q. 5: Do you have any other comments on the proposed definition? If you consider it ineffective in some regard, please provide alternatives and explain your rationale in relation to the criteria for a successful definition outlined above. No. Q. 6: Should simple (non-structured) deposits be excluded from the scope of the initiative? Please justify or explain your answer. Yes. Due to the low risk attached to deposits, particularly short-term deposits, and the lack of complexity of such products, it is not necessary to include them in the proposed comprehensive regulatory regime for PRIPs. Q. 7: Do you consider option 1 or option 2 preferable for achieving this? Please explain your preference, and set out an alternative if necessary, with supporting evidence. We would consider option 1 to be preferable. It is our view that it provides greater clarity on the type of deposit that would be considered to be a PRIP. Q. 8: Should such an exclusion be extended to financial instruments which might raise similar issues as deposits (e.g. bonds), and if so, how might these be defined? Please justify or explain your answer.

3 It is our understanding that plain bonds and shares will be excluded by virtue of the proposed PRIPs definition which excludes direct holdings. Q. 9: Should pensions be explicitly excluded from the PRIPs initiative at this stage? Please justify or explain your answer. In our view Pillar 1 and 2 type pensions should be excluded from the PRIPs initiative. These pension types are most likely to be unique to each Member State and would be subject to specific rules and requirements under the national laws. Their inclusion in the PRIPs initiative would only result in complexities, and possibly delays, particularly in view of the fact that consultations are currently ongoing this area and are at an earlier stage of development compared to the PRIPs project. However, in the case of personal pensions, some pension products such as Retirement Annuity Contracts are just regular savings plans with taxation benefits. Such products are sold to individuals as opposed to trustees. This type of product should be considered under PRIPs. Q. 10: Should annuities be treated in the same fashion? Again, please justify or explain your answer. If the annuity income stream is not guaranteed then it should be considered as a PRIP. Where the annuity payments are guaranteed then it does not have the same level of risk. In addition, annuity products would not generally be readily understood by consumers. As such, they would benefit from the proposed disclosure regime. Q. 11: Do you have any comments on the proposed manner of achieving this exclusion? No. Q. 12: Do you agree that variable annuities might need to be treated as a special case? If so, how should these be defined, and how do you think they should be addressed? It is our view that variable annuities should be considered as a PRIP as the annuity invests in underlying stock and bond funds, the performance of which may fluctuate depending on market conditions, and consequently this poses a risk to the account value and the return that an investor could receive (unless minimum guarantees are built in to the contract). In addition, variable annuity products would not generally be

4 readily understood by consumers. As such, they would benefit from the proposed disclosure regime. Q. 13: Do you see benefits from such an indicative list being developed? If not, please provide alternative proposals and evidence for why these might be effective. Yes. An indicative list would be useful for providing a greater level of clarity and certainty to product providers and supervisors on the scope of the definition of a PRIP. However such a list would need to be updated regularly to keep up with product innovation. The list would not be exhaustive and the general principles surrounding the definition of a PRIP would still apply. Some firms could try to circumvent the definition of a PRIP by changing product names. There could be a problem where product names and categories differ across member states and so some level of standardisation might be required. Therefore, the Commission should ensure that any products not cited on an indicative list, but falling within the scope of the definition of a PRIP, would not be excluded from the PRIP regime merely by virtue of their absence from the indicative list. Q. 14: Do you have any suggestions on the possible contents for such a list, including on how to define items placed on the list? Suggested possibilities: Investment funds, unit linked funds, investment bonds, with profit bonds, unitised with profits, tracker bonds, tracker funds, index linked funds. 3. Legislative approach to be taken in delivering the PRIPs regime Q. 15: Should direct sales of UCITS be covered by means of including the relevant rules within the UCITS framework? We do not have a view on this matter at this time. Q. 16: Do you have any comments on the identified pros and cons of this approach, and any evidence on the scale and nature of impacts (costs as well as benefits)? No.

5 4. A new pre-contractual product disclosure instrument Q. 17: Should the design of the KIID be focused on delivering on the objective of aiding retail investment decision making? If you disagree, please justify or explain your answer. Yes. We agree that the design of the KIID should focus on aiding the decision making process of the retail investor. The KIID will be the first piece of information a potential investor will be presented with when considering an investment. It is of great importance that it is designed in such a way that it has a positive impact on the investor s decision. Q. 18: Should the KIID should be a separate or 'stand alone' document compared with other information that might be necessary, e.g. background information, other disclosures, or contractual information? Please justify or explain your answer. Yes. The KIID should be a stand alone document provided separately to any other information about the product. If a lot of information is provided to the investor in a lengthy document there is a danger that the KIID could get lost in the noise of the other product documentation (brochures/terms and conditions) if kept separate. The KIID could be sold to the consumer as an important document, one that the consumer needs to read and understand and as a document that can form the basis for discussion with their financial adviser. However, the KIID could also make reference to other important information that the consumer should read. We currently require firms to give terms of business documents to consumers on a stand-alone basis to ensure that the consumer is presented with this information separate to any other information which the firm may wish to provide to the consumer. Q. 19: What measures do you think will be necessary to ensure KIID remain streamlined and focused solely on key information? A harmonised standardised template for the KIID will have to be developed and attached to the relevant legislation to ensure that it remains streamlined and focussed solely on key information. In addition, any allowances for variations to the template will have to be set out in the legislative requirements. The Report on Consumer Decision-Making in Retail Investment Services: A Behavioural Economics Perspective found that simplification and standardisation of product information

6 enables consumers to make better quality investment decisions and that providing directly comparable relevant information about investments enables better choices between dissimilar products e.g. across product classes. We would also suggest the following measures: There should be an explicit definition of what should be included in the KIID The KIID should be subdivided into separate sections Road test the KIID on consumers The KIID should be subject to regulatory inspection post-production Q. 20: While the same broad principles should be applied to all PRIPs, should detailed implementations of some of these principles be tailored for different types of PRIP? Please justify or explain your answer, and provide examples, where relevant, of the kinds of tailoring you might envisage. The same broad principles should be applied to all PRIP KIIDs. However, given the range of PRIPs there could be a section in the KIID for additional information, where that information is essential, or references to where additional information can be accessed. Q. 21: Do you foresee any difficulties in requiring the KIID to always follow the same broad structure (sequence of items, labelling of items)? Please justify or explain your answer. No. The objective of the proposed PRIPs regime is to ensure that any product with PRIPs features which comes within the scope of the definition of a PRIP is regulated using the same approach so the principles should be applied consistently to all products which have the key components of a PRIP. Q. 22: Do you foresee any difficulties in requiring certain parts of the key information and its presentation (e.g. on costs, performance, risks, and guarantees) to be standardised and consistent as possible, irrespective of tailoring otherwise allowed? Please justify or explain your answer. The level of detail required in the KIID is not yet known and so potential difficulties are impossible to speculate on. However, in the case of risk, its presentation and its measurement will be extremely difficult to standardise. An independent third party

7 may be required to set criteria for how investment risk will be measured and also independent monitoring to ensure compliance would have to be carried out. However, any difficulties for product producers in producing a standardised KIID would be outweighed by the advantages to the consumer as it is our view that over time consumers will become familiar with a standardised broad structure. Q. 23: Can you provide examples and evidence of the costs and benefits from your experience that might be expected from greater standardisation of the presentation and content in the KIID? No. Q. 24: Should the content of the KIID be controlled so that there is no possibility for firms to add additional information unless expressly allowed for? If firms believe that certain additional information is essential to assist the consumer in making an informed purchasing decision then it should be allowed to a limited extent and be tightly monitored otherwise the integrity of a standardised KIID would be threatened. Q. 25: Do you foresee any difficulties in applying these broad principles to the KIID for all PRIPs as the building blocks on content and format for a 'level 1' instrument? Please justify or explain your answer. Difficulties may arise in defining some of the General Requirements. For example, defining costs of the product will be difficult to standardise should the cost of distribution be included etc. Similarly providing information on possible performance scenarios will require a defined structure for how these scenarios will be generated. The KIID should be limited to two pages without either leaving out important information or resorting to the use of small print. Q. 26: Are there any other broad principles that should be considered on content and format? The KIID could include a general requirement that a statement on who the particular product is suitable or unsuitable for is included in the content of the KIID. For instance some investment products without guarantees may not be suitable for retired or

8 elderly individuals. In addition, a general requirement that no small print or footnotes are to be used in the KIID could also be included. Q. 27: Should product manufacturers be made generally responsible for preparing a KIID? Please justify or explain your answer. Yes. As the designer of the product, we believe that the product manufacturer is best placed to prepare the KIID and comment on risk and performance scenarios. The information contained in the KIID will come straight from the source. This should remove room for possible errors in the dissemination of information from the manufacturer down to the distributor. We are currently undertaking a review of the conduct of business rules set out in our Consumer Protection Code. We believe that the level of product disclosure needs to be improved and we are proposing new provisions setting out the information that must be provided to consumers about products. We are proposing new requirements for product producers to identify a target market of consumers when designing investment products. The target market must comprise the types of consumer for which the product is likely to be suitable (or not suitable). When determining the target market, the product producer should take account of the nature of the product and its general risk profile. We believe that product producers should have stronger obligations regarding the information they provide to intermediaries about their product s design and risk features. The following proposed requirement is set out in our consultation paper: PRODUCT PRODUCER RESPONSIBILITIES 43. When designing a new investment product, a product producer must identify the target market for the product, the nature and extent of the risks inherent in the product and the level, nature, extent and limitations of any guarantee attaching to the product and the name of the guarantor. The target market must only comprise the types of consumer for which the product is likely to be suitable. The product producer must also identify the target market for which the product is not suitable. 44. A product producer must ensure that the information it provides to an intermediary about its investment products is clear, accurate, up to date and not

9 misleading, and includes the information outlined in Chapter 4, Provision 32*. This product information must be sufficient to enable those who sell the product to understand it so as to be able to determine whether it is suitable for a consumer. 45. Within the first year of launching an investment product, and annually thereafter, a product producer must check whether the product is continuing to meet the general needs of the target market for which it was designed. Where the product producer establishes that a product no longer meets the general needs of the target market, the product producer must: a) reassess the product to identify the consumer type for which it is suitable; b) immediately update the information it provides under Provision 44 above; and c) notify the Central Bank. *Chapter 4, Provision 32 - Investment Products 32. Before offering, arranging or recommending an investment product the regulated entity must provide the consumer, where relevant, with information about: a) capital security; b) the risk that some or all of the investment may be lost; c) leverage and its effects; d) any limitations on the sale or disposal of the product; e) restrictions on access to funds invested; f) restrictions on the redemption of the product; g) the impact, including the cost, of exiting the product early; h) the minimum recommended investment period; i) the risk that the estimated or anticipated return will not be achieved; and j) the potential effects of volatility in price, fluctuation in interest rates, and/or movements in exchange rates on the value of the investment. Q. 28: Are you aware of any problems that might arise in the distribution of particular products should responsibilities for producing the KIID be solely placed on the product manufacturer? No. Distributors do not generally have the expertise to produce KIIDs therefore the production of the KIID by the manufacturer should not cause problems for the

10 distribution of products. Allowing distributors to produce KIIDs could pose the risk that two distributors develop a different KIID for the same product. Q. 29: If intermediaries or distributors might be permitted to prepare the documents in some cases, how would these cases be defined? In our view, intermediaries or distributors should not be permitted to prepare the KIIDs under any circumstances. Q. 30: What detailed steps might be taken to improve the transparency of the social and environmental impacts of investments in the KIID for PRIPs? The inclusion of such information is not critical to the suitability of the product and could take away from more important information. Q. 31: How might greater comparability and consistency in product labelling be addressed? The issue of how to label a product as being green should be looked at on a wider plain than just the PRIPs. Such green investment products are often targeted at pension products sold to trustees and so may not actually be within the PRIPs framework. We would also suggest avoiding the use of the word green for the purposes of highlighting socially responsible investments. Unless it is crystal clear to investors that the word green is being used in that context they may confuse it with an indication that the investment is safe/guaranteed or low risk. Q. 32: Should the summary prospectus be replaced by the KIID for PRIPs? Please outline the benefits and disadvantages you see with respect to such an approach. Until the further work related to risk disclosure discussed in Section 4.4 is completed, this question cannot be answered. Q. 33: Should Solvency II disclosures provided prior to the investment decision be replaced by the KIID for PRIPs? Please outline the benefits and disadvantages you see with respect to such an approach.

11 Yes. It would promote legal certainty and eliminate any duplication in requirements and the associated risk of regulatory arbitrage. The findings contained in the Report on Consumer Decision-Making in Retail Investment Services: A Behavioural Economics Perspective, support the view that standardising and reducing the amount of information provided to consumers helps them to identify the optimal choice between similar investments. In addition, the Solvency II disclosures contain information on the Insurance Undertaking itself as opposed to the actual product being sold. The KIID could make a reference to where this information is available but should not attempt to summarise or restate it. Q. 34: Do you agree with the suggested approach for UCITS KIIDs? Yes. Q. 35: Are there any disclosures, e.g. required by the existing regimes, which you believe the PRIPs KIID should not include, but which should still be disclosed, e.g. separately to the KIID? Do you have any practical examples for such elements? Commission disclosure is required for life investment products in Ireland. This is part of the existing Life Assurance Disclosure of Information Regulations. If it is the case that commission will not be disclosed in the KIID as part of the costs of the product, it should be disclosed separately. Q. 36: What in your view will be the main challenges that will need to be addressed if a single risk rating approach is to work for all PRIPs? We support the disclosure of risks attaching to products to consumers to assist them in the decision making process. However, we believe that it will be very challenging to devise a single risk rating approach that will cover all types of PRIPs. In particular, we have identified the following obstacles: Establishing the rules for defining the particular risk categories How the risk would be communicated (graphically, table, etc) Verifying compliance with the risk ratings Explaining the risk rating system to ordinary consumers

12 Ensuring that a consistent basis for comparison is used across all PRIPs as any information asymmetries will undermine the use of risk indicators Establishing who will be responsible for determining the risk rating of a PRIP if responsibility is assigned to the regulatory authority it may face potential liability if a risk rating allocated to a PRIP does not adequately reflect the riskiness of that product. If responsibility is assigned to industry how will consistency be ensured? For example, two product providers might develop a similar PRIP but allocate a different risk rating to their respective products. Q. 37: Do you consider there are any other techniques that might be used to help retail investors compare risks? We do not currently have in place a technique that can be used to compare risk. However, as mentioned above, we are currently undertaking a review of the conduct of business rules set out in our Consumer Protection Code and are proposing new provisions that will require a regulated entity, before offering a product to a consumer, to provide information about the main features of a product, including the risks attaching to a product and the extent of any guarantee. The following proposed requirements are set out in our consultation paper: INFORMATION ABOUT PRODUCTS 27. Before offering, arranging or recommending a product, a regulated entity must provide information about the main features and restrictions of the product to the consumer, including where relevant, the nature and extent of the risks inherent in the product and the level, nature, extent and limitations of any guarantee attaching to the product and the name of the guarantor. Investment Products 32. Before offering, arranging or recommending an investment product the regulated entity must provide the consumer, where relevant, with information about: a) capital security; b) the risk that some or all of the investment may be lost;

13 c) leverage and its effects; d) any limitations on the sale or disposal of the product; e) restrictions on access to funds invested; f) restrictions on the redemption of the product; g) the impact, including the cost, of exiting the product early; h) the minimum recommended investment period; i) the risk that the estimated or anticipated return will not be achieved; and j) the potential effects of volatility in price, fluctuation in interest rates, and/or movements in exchange rates on the value of the investment. We are also seeking views on the possibility of a traffic light system of risk disclosure for investment products, perhaps based on key product design characteristics such as whether capital is at risk, the strength of guarantees, the extent of leverage and the riskiness of underlying assets. There are challenges associated with this approach, such as the concern that there may be a lack of consistency if the risk categories are determined by individual firms and the difficulty in developing a system that would take account of consumers different attitudes to and understanding of risk. In this regard, we have raised the following questions in our consultation paper: 1. Do you have any ideas about how to disclose risk in the case of investment products in a way that would be consistent enough to be useful for consumers? 2. In a system such as a traffic light system, how do you think the different categories or risk, i.e., red, amber and green, should be determined? The consultation period closed on 10 January We expect to publish a revised Code by mid Q. 38: What in your view will be the main challenges that will need to be addressed in developing common cost metrics for PRIPs? Some challenges: i) what costs should be included? ii) would the cost of distribution be included or would the costs shown be only the costs incurred by the product manufacturer? Q. 39: How can retail investors be aided in making 'value for money' comparisons between different PRIPs?

14 By showing the consumer the expected end result of an investment over a number of years, from a set rate of expected investment growth the consumer can make comparisons on the costs in the different investments based on the expected surrender/encashment values. Q. 40: Do you consider that performance information should always be included in a KIID? Where available, past performance information should be included in a KIID, but only where the performance was relatively recent and achieved under normal standard conditions. For instance, if a fund has changed its investment objectives or philosophy then it is questionable whether past performance is relevant to how it will perform in the future. Under Irish rules indications of past performance must be accompanied by a statement that Past Performance is not a reliable guide to future performance. Q. 41: What in your view will be the main challenges that will need to be addressed in ensuring performance information can be compared between different PRIPs? Disclosure of past performance is only meaningful if the past performance is a predictor of future performance. Therefore past performance should only be used where the specific investment processes used in the past by the product provider (fund manager, fund objectives, investment processes and philosophy) are maintained in the future. This will be very difficult to independently evaluate. Q. 42: Do you agree that a consistent approach to the description of guarantees and capital protection in the KIID should be sought, e.g. through detailed implementing measures, for different PRIPs? Yes the terminology for guarantees should be standardised where possible to prevent any confusion between the different types of guarantee. Also the provider of the guarantee should be clearly disclosed. As referred to above, we are currently consulting on proposals to improve the level of information on products provided to consumers. One of our proposals includes the requirement to provide information on any guarantee attaching to a product and the name of the guarantor.

15 The following proposed requirement is set out in our consultation paper: INFORMATION ABOUT PRODUCTS 27. Before offering, arranging or recommending a product, a regulated entity must provide information about the main features and restrictions of the product to the consumer, including where relevant, the nature and extent of the risks inherent in the product and the level, nature, extent and limitations of any guarantee attaching to the product and the name of the guarantor. Q. 43: What information should be provided to retail investors on the cost of guarantees? Information on the cost of a guarantee should be included as part of a list of a breakdown of charges to provide clarity to the consumer on the overall costs of the product.