The Financial Conduct Authority (FCA) is proposing a raft of changes to the PRIIPs regulations under its new post-Brexit powers, including the removal of “misleading” performance scenarios and exemptions for certain bond products.
Proposals published today (20 July), as part of a consultation paper, seek to provide more clarity to consumers about what PRIIPs products are, the risk presented and information to help understand likely future performance.
Executive director of consumers and competition at the FCA Sheldon Mills said the changes aim to "ensure that consumers have what they need through transparent information and furthermore through the reduction of potentially misleading information being displayed".
Under the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation, providers of retail investment products are required to produce Key Information Documents (KIDs). PRIIPs KIDs have been the subject of investment industry ire since their introduction.
Under current regulations, the past performance of a fund is not included on a PRIIPs KID as it is on UCITS KIDs, and is replaced instead with a range of future performance scenarios. These future performance scenarios have drawn criticism from fund groups and campaigning organisations for being hard to understand and potentially misleading.
The FCA proposals would see performance scenarios replaces with information about "the main factors upon which returns depend, the underlying assets or reference values, and how the return is determined".
Firms will also be expected to explain the relationship between the PRIIPs' return and that of the underlying investment asset or reference values.
There would also be a requirement for PRIIPs manufacturers "to describe, in narrative form, the factors likely to affect future performance", according to the consultation paper.
In addition, the regulator has proposed changes to address concerns about KIDs' "misleading summary risk indicators".
However, the FCA stopped short of proposing the addition of past performance in the KID, as is required under the UCITS regulation, contrary to the wishes of some investment firms.
Separately, the rule changes include the exemption of non-retail products from the regime. Where a product is not specifically for retail investors but may be accessed by such investors on secondary markets, for example, the FCA has proposed a raft of clarifications as to what clarifies as in scope in this respect.
The regulator is also proposing some amendments and clarifications to disclosures about costs and charges.
Another key issue with the implementation of PRIIPs has been a "lack of clarity… over the corporate bond market", the FCA said, noting that these issues are what led HM Treasury to confirm that the UK will diverge from EU PRIIPs regulation.
"We are very concerned about the apparent impact of the PRIIPs legislation on choice and liquidity in retail corporate bond markets, which may be limiting the ability of retail investors to sell, reinvest, or make new investments in this sector while reducing the diversity of corporate bond funding sources," the consultation paper reads. "These are serious unintended consequences of the uncertain application of the definition of a PRIIP as set out in the regulation."
In order to overcome issues associated with fixed income and PRIIPs, the FCA is proposing clarifications as to what qualifies as a product regulated under the rules.
Under the proposals, a debt security must come between the retail investor and an ultimate investment asset, which is not purchased by the investor, in order to be a PRIIP.
A debt security issued is not a PRIIP if the overall return for the investor is determined by the economic performance of the commercial or industrial activities of the issuer.
However, a debt security would be a PRIIP where the returns to the investor are materially determined by price movements or the investment performance of assets other than the debt security itself, including reference assets and indices or benchmarks relating to assets or a class of assets.
For example, a variable rate corporate bond will not be a PRIIP.
Commenting on the proposals, director of policy, strategy and research at the Investment Association Jonathan Lipkin said they mark a "welcome step forward". adding that it is "encouraging to see the removal of the misleading performance scenarios".
"However, we believe more can be done to give retail investors more accurate measures of transaction costs, especially by tackling the root cause of the problem - slippage," he added. "We look forward to working further with HM Treasury and the FCA, as they build a new UK retail disclosure regime to help all savers make better informed investment decisions."