22 December 2017

EFAMA alerts that the new PRIIPs rules will confuse and mislead investors

On 3 January 2018, the new PRIIPs rules will go live. These rules are designed to enhance investors’ understanding of retail investment products whether bank, insurance or fund-based. They do so by adapting existing UCITS disclosure rules (the UCITS Key Investor Information Document, or KIID) into a PRIIP Key Information Document or KID. 

Like the UCITS KIID, the PRIIP KID is intended to provide meaningful, comprehensible and comparable information in order to make investors feel confident in their investment decisions. 

EFAMA continues to fully support the initiative to provide to investors with transparent, comparable and understandable information through a PRIIP KID. 

Unfortunately, it is becoming clear, as firms apply the new EU rules in practice, that they will not achieve the desired objective. Instead, the new rules are threatening to cause serious investor detriment by mandating figures, particularly in relation to performance and costs, that will at best confuse investors and at worst mislead them. 

In short, the PRIIP KID risks forcing manufacturers to make claims for products that breach the fundamental principle that investor communication must be ‘clear, fair and not misleading’. The new methodology for calculating transaction costs will also produce confusing and unreliable figures.

Over the past years, the European asset management industry systematically alerted EU policymakers throughout the rule-making process of these risks. Industry communicated repeatedly on the likelihood that the proposed rules would prove to be badly calibrated and on the negative consequences that they would have on PRIIPs investors. Industry did this jointly with investor representative associations. The industry also remodelled calculation methodologies and provided practical solutions to get the rules right for investors. 

Regrettably, their concerns and proposals were ignored in the final rules. 

This is clearly a problem for PRIIPs investors who will be presented with misleading PRIIP KIDs from 3 January 2018. However it is also a problem for UCITS investors because the Commission may choose to scrap the UCITS KIID for the PRIIP KID in 2019. EFAMA considers this a serious retrograde step - indeed, a step back from the clarity of UCITS disclosure to the misleading obfuscation of PRIIPs. Asset managers are already committed to complying with the PRIIPs rules either as managers of AIFs or in the service of PRIIPs manufacturers invested into their UCITS. As firms are putting systems in place and calculating figures to produce or contribute to PRIIP KIDs, real data will evidence that our concerns with some of the new disclosure rules and their negative effects on investors will materialise. 

Specifically, the methodology for calculating transaction costs and the new rules around future performance scenarios are fundamentally flawed. This in turn drastically challenges the ability of the PRIIP KID to assist investors in making good investment decisions  - given both the value proposition (the fund’s projected performance) and the cost proposition are seriously skewed. 

Full statement

© EFAMA - European Fund and Asset Management Association