EU legislators to start a review of PRIIPs immediately
The German Investment Funds Association BVI calls on EU legislators to start the review of the regulation on Packaged Retail and Insurance-based Investment Products (PRIIPs), foreseen for the end of 2019, at once. Recent months have shown that the obvious shortcomings in the provisions for performance and calculation of costs in the PRIIPs key information document (KID) can only be effectively corrected by amendments to the original regulation. A revision of the regulatory technical standards (RTS) will not be enough in itself to meet this need. The BVI calls for the exemption for retail funds, currently until the end of 2021, to be further extended until new detailed requirements are adopted. ‘We need the extension of the exemption because the European Commission has failed to submit proposals for the revision of the PRIIPs Regulation in good time,’ says BVI’s CEO Thomas Richter. ‘Instead of tackling the text of the regulation, the Commission asked the European authorities to revise the technical regulatory standards. But that failed spectacularly. Now it is unlikely that the process can be completed in time until 2022.’ It would not make sense to provide fund savers with defective PRIIPs KIDs in the meantime, Richter added. Until the revision has been finalized fund companies should therefore be allowed to continue to use the proven key investor information documents (KIIDs) for UCITS.
The European Commission and the European supervisory authorities (ESAs) recently spent months trying to get rid of the flaws in the PRIIPs KIDs that have been criticised by the financial sector and consumer protection groups alike by way of changes to the RTS. Criticism notably focused on forward-looking performance scenarios that could lead to absurd results. However, the European Commission rejected the ESAs' proposal to include past performance in the PRIIPs-KID for retail funds. Members of the European Parliament also rejected the ESAs' proposal, as the text of the regulation only allows for forward-looking performance scenarios, and does not allow the inclusion of past performance in the PRIIPs KID. For this reason, the ESAs informed the European Commission in July 2020 that they were unable to propose new RTS to correct the flaws in the PRIIPs KID. The ESAs also referred to the planned PRIIPs review by the legislator.
The BVI has been campaigning for many years to eliminate the flaws in the PRIIPs KID. Among other things, it calls for the currently provided performance scenarios in the PRIIPs KIDs to be supplemented by reference to past performance. This is a proven method and the only objective method of informing investors about performance. The European Commission itself discovered from a consumer study that savers feel better able to assess the future performance of products if the forward-looking scenarios are supplemented by information on past performance. In addition, the BVI calls for the defective calculation method ("arrival price method") for transaction costs to be corrected. This method includes market movements in the costs, which leads to distortions and causes inconsistencies with MiFID II, which excludes market movements as costs. The BVI advocates a solution of allowing alternative calculation methods, such as using standardised tables, provided that certain qualitative requirements are met. Furthermore, there is a need for clarification in the cost calculation for PRIIPs that invest in property and other real assets. Only costs related to management performance should be considered in this context. The EU authorities took most of these proposals into account in their recommendations to amend the RTS.