Following the European Parliament's rejection of the PRIIPs KID regulatory technical standards (RTS) last week, Tim Mortimer, managing director at Future Value Consultants, asks whether the 31 December implementation date can possibly remain unchanged.
On 14 September, the European Parliament (EP) confirmed its rejection of the PRIIPS RTS, which had been developed and proposed by the European Commission (EC).
The vote confirmed the EP Economic committee's rejection from two weeks earlier, which threw a major spanner in the works of the whole PRIIPS timetable, threatening the implementation date of 31 December 2016 which was determined by the 'Level 1' legislation passed two years ago.
'Level 1' explained in broad terms what the PRIIPs regulation is supposed to achieve and how it should do so, primarily through the creation of the Key Investor Document (KID).
By regulatory standards, this legislation document was relatively short and high level, and therefore actually remains clear when read on a standalone basis. However, it required the existence and passing of more detailed Regulatory Technical Standards (RTS, or 'Level 2') to progress. It is this Level 2 regulation which has now been rejected by Parliament.
Logically, there are three scenarios from here. The first is that the implementation date is pushed back in order to allow revised RTS to be developed and agreed.
This would appear to be the most sensible outcome and certainly the one hoped for by most in the investment industry to improve the quality of the RTS, while allowing sufficient time for preparation. However, this requires amendments to the Level 1 legislation.
The second is to keep the timetable intact but make a last minute revision to the RTS, probably with some implied consultative or informal status but this seems extremely unlikely as Parliament would have no chance to approve it and in any event it would leave firms very little time to prepare.
The third scenario - which even six months ago would have seemed utterly inconceivable - is that Level 1 is left to come into force with no agreed and operational Level 2 RTS in place.
Essentially, this means firms would have to comply with the regulation without any clarity of what is required yet with the threat of regulatory action or investor claims in the event that KIDs are non-existent, misleading, not updated sufficiently, or otherwise inadequate.
Could 'Level 1' really go it alone?
In this third scenario, the first key question is what investment firms will be likely to do in such a situation once January 1 2017 passes, and PRIIPS has come into force?
It would seem that the logical and prudent thing to do would be to issue KIDs in line with the RTS as they are currently prescribed simply because they are "on the table", even if they are the direct stumbling block in this process, and are almost certain to be changed.