Tim Mortimer, managing director at Future Value Consultants, explains how the requirement for asset managers to display future performance simulations on their fund literature under PRIIPs regulations has created problems.
In September 2016, the European Parliament dramatically rejected the regulatory technical standards (RTS) of the Key Investor document (KID) laid down by the European Commission (EC).
This was the cornerstone of the PRIIPs regulation and it happened with barely three months before an implementation date of 1 January 2017 that had been planned for more than two years.
There were many causes for this to happen following on from the significant opposition that the PRIIPs RTS proposals was met with from many in the industry, stretching back at least 12 months.
Insurance companies felt disadvantaged and overburdened by extremely complicated rules for calculating costs and risks, while those in the fund management world found the total abandonment of the use of past performance in favour of simulations to be equally unpalatable.
The structured product sector has also suffered in that the required calculations can prove onerous and complex, with potentially surprising or unreasonable results.
In order to see what has gone wrong it is important to analyse the roots of this process.
In the European investment market, there has long been an emphasis on properly explaining investments to the retail and institutional investor.
Examples of this include the current UCITS requirements, the rules on investor documentation that exist in Germany and UK Financial Conduct Authority's (FCA) guidance to ensure that information provided to investors is "fair, clear and not misleading".
While all regions have strong regulation today, the approach elsewhere can be very different. For example, the US market has an emphasis on disclosure rather than genuine explanation. There, it is common to see long unwieldy prospectuses with many disclaimers on risks and product features.
However, this is generally presented in a way that benefits the lawyers that compile them rather than the investors who are supposed to read them.
This European heritage of accessible and meaningful documentation gave rise to the PRIIPs concept which was supposed to extend and improve investor facing literature. However, it is important to acknowledge the influence of the EU itself, which approaches everything it touches with a strong focus on standardisation, detailed prescription, and regulation.
Whether this is broadly a good thing or not is a matter for debate, but it is undeniable that the EU is set up in this way. The pros and cons of how the EU works were passionately debated in the UK during campaigning around the Brexit referendum.
The end result on PRIIPs is a regulation which requires the generation of prescriptive, standardised documentation for the vast majority of retail investments across the entire EU.
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