Response to joint Discussion Paper on Key Information Documents (KIDs)

Go back

2: Do you agree with the description of the consumer´s perspective on risk expressed in the Key Questions?

In general, consumers are not interested in information provided by investment firms at all. Provision of any information is perceived by them as annoyance. Consumers generally prefer to rely on investment firms recommendations and they do not like to study any information provided.
In addition, we believe that consumers are able and willing to understand only simple and easy information. Since structured products are complex ones per se, simplification of information on them will inadvertently lead to distortion.
We do not understand why the Discussion Paper deals with consumers. PRIIPS Regulation is applicable to retail clients, which is a broader group than consumers.
The list of KQs covers all consumer´s concerns regarding the single product. There is another question what if s/he is going to combine more PRIIPs in the portfolio.

3: Do your agree that market, credit and liquidity risk are the main risks for PRIIPs? Do you agree with the definitions the ESA’s propose for these?

We agree that market, credit and liquidity risks are the main risks for PRIIPs. We do not believe that operational risk should be taken into account in the PRIIPS KIDs. We have doubts about how the complex structures of the products and their diversity might be able to show their true likely return and risks, to avoid any potential liability for the damage, therefore we are of the opinion that the operation risk should not be taken into account as a risk for PRIIPs.
Table on page 23f. Questions “How much can I win?” & “How much am I likely to win?”: Terms like “win” evoke images of gambling. The term “gain” should be used.
We do not believe that inflation risk should be included into the market risk. Inflation is a general economic concept and it influences all economic activities not only investments in structured products. Taking into account also inflation could be misleading for clients. In addition, inflation is difficult to estimate and it influences both returns and costs at the same rate. Inflation has the same impact on all PRIIPs. The only exception is the security with its return linked to inflation itself. So we recommend deleting inflation from the risk definition and to show its influence via scenarios only for mentioned securities.

4: Do you have a view on the most appropriate measure(s) or combinations of these to be used to evaluate each type of risk? Do you consider some risk measures not appropriate in the PRIIPs context? Why? Please take into account access to data.

In general, not all measures are appropriate for PRIIPs. It has to be taken into account the specification of various types of investment products, in fact that the scope of the PRIIPs regulation is wide. All kind of risks have different impacts on the assessment of the risk of the PRIIPs. Some of the risk characteristic might be assess on the daily basis or infrequently. It is necessary to take into account different factors of each product.
We are also of the opinion that the number of applicable measures for each type of risk should be reduced. Each type of risk should be measured by not more than 2 – 3 measures.
VaR allows easy combination of all risk components and its concept is easy to understand. Inclusion of maximum return/ loss would provide the full information. RTS would provide guidance which components would be used. Values would be then scaled by RTS table like for SRRI.
Credit rating is easy to measure if the scale is available. But some issuers need not to have international rating. The producer should be able to present robust transformation system to the international scale. RTS would provide the scale.
Liquidity risk is difficult to measure ex ante. Scale might be derived from the verbal description provided by RTS.

5: How do you think market, credit and liquidity risk could be integrated? If you believe they cannot be integrated, what should be shown on each in the KID?

Contingent or performance related costs should be included in costs/ scenario performance calculation as the part of total costs. Roles for performance related costs, if any, would be explained, where applicable, separately.

6: Do you think that performance scenarios should include or be based on probabilistic modelling, or instead show possible outcomes relevant for the payouts feasible under the PRIIP but without any implications as to their likelihood?

Performance scenarios should not be based on probabilistic modelling, because estimation of future developments is in fact impossible. Performance scenarios should show possible outcomes without any implications as to their likelihood.
Another solution may be, if presentation of each scenario provides information about its likelihood at least verbally. The customer should be sure that some scenarios were not intentionally omitted by the producer as they do not look nice. RTS should give the guidance how to cover the most likely outcomes.

7: How would you ensure a consistent approach across both firms and products were a modelling approach to be adopted?

Scenarios should be used on models, which are used by each PRIP manufacturer for internal risk assessment and daily value estimates for the balance and risk management purposes. These models are easy to be checked and understood by the regulator. It is for the benefit of the manufacturer to use the best available model.

8: What time frames do you think would be appropriate for the performance scenarios?

KID has low information value without recommended holding period. So RHP is the inherent feature of each PRIPR. Basic scenario should therefore be always based on this RHP. For the sake of comparability, standardized lengths like 1, 3, 5 years could be also used.

9: Do you think that performance scenarios should include absolute figures, monetary amounts or percentages or a combination of these?

We suppose that performance scenarios may include both absolute figures and percentages. Another possibility would be to present only percentages.
In general, monetary amounts provide the easiest information to understand for ordinary customers. Very often they do not care about present value and the concept of discounting may be difficult for them to grasp. However, calculation of return in % should be also clearly prescribed by RTS. Sometimes time weighted return suitable for assessment of portfolio managers is used instead of money weighted return relevant from the point of view of the investor. For the sake of comparability, standardized volume of investment should be used for different scenarios.
In this regard we would like to express our astonishment on your conclusion on page 33, that consumers do not understand percentages and that it can be better to presented in terms of frequencies, such as “10 out of 100”. Yes, some consumers surely do not understand percentages, and some of them are even illiterate. However, we believe that the law should be based on the presumption of average reasonable person.

10: Are you aware of any practical issues that might arise with performance scenarios presented net of costs?

Presentation of both gross and net of costs scenario is a good tool for provision of joined information both on the return and on the costs side. Provided that summary costs are to be compulsory information to be revealed we are not aware of any practical issues with presentation net of costs.

11: Do you have any preferences in terms of the number or range of scenarios presented? Please explain.

We prefer two or three scenarios (positive, neutral or negative scenario). Their selection should be, however, based on the assessment of probability as discussed in the Q5.

12: Do you have any views, positive or negative, on the different examples for presentation of a summary risk indicator? Please outline advantages and disadvantages, and provide any other examples that you are aware of that you think would be useful.

The packaged investment products should provide clear benefits for retail investors, such as spreading investment risks to many different economic sectors or many underlying assets. RTS should aim at providing risk indicator which can be understandable for investor to make informed decision in order to promote transparency and a better understanding of risks linked to PRIIPs.
However, three risk dimensions create big challenge. Disadvantages were mentioned in the Q5. Simultaneous presentation of scaling seems to be the optimal solution. It is easy to understand and good for PRIIPs comparison.
Generally, it seems that the best example is the multi-risk scale on page 39.

13: Do you have any views, positive or negative, on the different examples for presentation of performance scenarios? Please outline advantages and disadvantages, and provide any other examples that you are aware of that you think would be useful.

Each scenario should be accompanied by concise explanation of assumptions and by the comment on their feasibility. So we prefer separated chart presentation of gross and net value development for each scenario. Cumulating of the periodic investments should be clearly distinguished from the lump sum investment scenario.

14: Do you have any views on possible combinations of a summary risk indicator with performance scenarios?

We do not agree with the combination of risk and performance indicators. It would be difficult to produce such combination to proper reflect the risk / performance profile of any product. In addition, such combination would be with high probability misleading for the clients.
We consider following features as the most important for the assessment of the investment products:
• the information from multiply internal sources of manufacturer,
• the accurate and consistent information of the product documentation,
• the ability of manufacturer to ensure that the distributor of the investment product acting on their behalf systematically provide the KID to the investors in due time before the investment is made,
• the ability of manufacturer to avoid the potential risk of miss-selling the investment product to the consumer, who does not meet the condition under the “identification consumer group” (pursuant to the MiFID II requirements).

15: Do you agree with the description of the consumer´s perspective on costs expressed in the Key Questions?

In general, consumers are not interested in information provided by investment firms at all. Provision of any information is perceived by them as annoyance. Consumers generally prefer to rely on investment firms recommendations and they do not like to study any information provided.
In addition, we believe that consumers are able and willing to understand only simple and easy information. Since structured products are complex ones per se, simplification of information on them will inadvertently lead to distortion.
We do not understand why the Discussion Paper deals with consumers. PRIIPS Regulation is applicable to retail clients, which is a broader group than consumers.
In addition, we consider comparing costs, such as comparison based on (i) which of the product is less or more expensive, (ii) the payment of the same costs, (iii) the investor expectation of better return of the investment as a sufficient way of cost presentation. On the other hand we are of opinion that all above mentioned comparison must take account all features of financial which might affect the resultant costs.

16: What are the main challenges you see in achieving a level-playing field in cost disclosures, and how would you address them?

Yes, we agree with the outline of the main features of the cost structure for above mentioned products.

17: Do you agree with the outline of the main features of the cost structures for insurance-based investment products, structured products, CfDs and derivatives? Please describe any other costs or charges that should be included.

We take for sure that all investment companies and majority of structured product providers have already developed their own systems and procedures for measurement of market risk, scenario assessment, product approval processes and they have their own information systems, templates and web pages. PRIIPs initiative may bring all these systems closer. Insurance companies may be less experienced.

18: Do you have any views on how implicit costs, for instance costs embedded within the price of a structured product, might be best estimated or calculated?

To establish common parameters and assumptions for calculating aggregate cost. As a main challenge we see resolution on how to deal with ex post/ex ante problem.
Because of different cost and fee structures for different groups of PRIIPs, only total costs figures are comparable. There is no full comparability of PRIIPs without full “fair” costs calculation (neither costs nor performance).
To evaluate the cost is need to be known the internal manufacturer information. The cost assessment of each of the investment product depends on the respective analysis.

19: Do you agree with the costs and charges to be disclosed to investors as listed in table 12? If not please state your reasons, including describing any other cost or charges that should be included and the method of calculation.

The best measure of implicit costs to be collected with the least effort is probably the difference between the purchase price and the internal evaluation of the product (the fair value).

20: Do you agree that a RIY or similar calculation method might be used for preparing ‘total aggregate cost’ figures?

We prefer the Fair value method. It seems to be the easiest for calculation. However, RIY is probably the second best and probably the best for simultaneous description of costs with the performance of scenarios.

21: Are you aware of any other calculation methodologies for costs that should be considered by the ESAs?

We are not aware of any other suitable method.

22: Do you agree that implicit or explicit growth rates should be assumed for the purpose of estimating ‘total aggregate costs’? How might these be set, and should these assumptions be adjusted so as to be consistent with information included on the performance scenarios?

If the growth rates are to be used it is necessary to set up some prescribed growth rate assumptions so as different scenario are comparable. Zero growth assumption might be one of them.

23: How do you think implicit portfolio transaction costs should be taken into account, bearing in mind also possible methods for assessing implicit costs for structured products?

Transaction costs = Broker Commissions + Entry charges + Exit charges

24: Do you have any views on possible assumptions that should be made, and how these might be calibrated or set?

Only the total cost figures p.a. are comparable for different sorts of PRIIPs. See also Q19. Options 8 and 9 seem to be very suitable because they enable easy comparison of different scenarios and are general enough to be used for all PRIIPs.

25: What do you think are the key challenges in standardising the format of cost information across different PRIIPs, e.g. funds, derivatives, life insurance contracts?

Q25 + Visualization with the scale is good for comparability. Performance/ cost chart shows nicely all components but is more suitable for cumulative investments. Options 4 and 5 suite UCITS. It is not as suitable for structured products as ongoing costs may be of marginal or no importance. But their big advantage is clear visualization of exit costs.

26: Do you have a marked preference or any objection for any of the presentational examples? If so, why? Please provide any alternative examples which you believe could be useful.

See Q25, 26.

27: In terms of a possible breakdown of costs, are you aware of cost structures for which a split between entry or exit costs, ongoing costs, and costs only paid in specific situations or under specific conditions, would not work?

We suppose that integration of market, credit and liquidity risk into one indicator is impossible, or such indicator would not reflect the product risk profile appropriately and correctly. We prefer a multi – risk indicator. We suppose that the multi-risk scale on page 39 is the most likely to be meaningful for the majority of retail clients.
There is also a question if all three dimensions have the same weights or importance. Possible correlation was also mentioned. So perhaps showing separate scaling in one table or chart is the solution. Overall Italian Risk example or similar also would do. Three dimensional charts might be also informative.

28: How do you think contingent costs should be addressed when showing total aggregated costs?

Cumulative costs would be presented together with relevant scenario as a part of total costs. Divergences from general cost calculation would be explained separately.

29: How do you think should cumulative costs be shown?

For the sake of clarity, simplicity and comparability only total costs should be presented. Above it the main costs for different PRIIPs groups should be defined and presented for the sake of comparability between PRIIPs within the particular group (e.g. portfolio management costs, sales fees and transaction costs for UCITS, structuring fees for structured deposits etc.).

30: Do you have any views on the identity information that should be included?

As concise as possible so that the space of KID is not exhausted: Formal name of the manufacturer, formal name of the distributor and his website. In case of a telephone number, perhaps only the Call center of the distributor.

31: Do you consider that the criteria set out in recital 18 are sufficiently clear, or would you see some merit in ESAs clarifying them further?

The recital 18 is too soft to set generally valid and applicable criteria. Some investors may be more familiar with the underlying asset than others, greater risk of misunderstanding, or taking advantage of behavioral biases is ambiguous without further explanation. In general, all PRIIPs may be difficult to understand for some investors. We would prefer clearer hard criteria like link to derivatives, more than three different asset classes etc.

32: Do you agree that principles on how a PRIIP might be assigned a ‘type’ will be needed, and do you have views on how these might be set?

We agree that some common principles are needed to be established, nevertheless due to a variability of PRIPs, we believe that these principles should be used only for basic categorization. This standardized classification should be based on legal form of the contract or instrument. The detailed classification should be left to individual manufacturers.
In addition, we suppose that product classification should not be left to the manufacturer. We prefer legal form classification at level one and standard typology generally used for particular group of products at level two.

33: Are you aware of classifications other than by legal type that you think should be considered?

In general, we agree to classify the PRIIPs according to the legal type; another type of classification might lead to an extra cost for the IT system and products system.
However, there are common names for different structures. They are used by SRP analysts in their statistics and databases both in Europe and in the USA. This would be suitable basis for the second level classification as the structure type is embedded in their name. Another classification of mutual funds is used for UCITS.

34: Do you agree that general principles and as necessary prescribed statements might be needed for completing this section of the KID?

We agree that basic common principles are needed to be established in order to standardize various KID for different PRIIPs and to enable their comparison. UCITS KIID should be used as a starting point.
Although general principles and prescribed statements would be helpful, they should provide sufficient space for newly invented PRIIPs.

35: Are you aware of other measures that might be taken to improve the quality of the section from the perspective of the retail investor?

A short summary of the most important information at the beginning of the KID may increase the interest of the consumer to read further and to find out the details.

36: Do you have views on the information PRIIPs manufacturers should provide on consumer types?

We believe that the fundamental in this context is to parallel consumer types under PRIIPs and the concept of target market under MIFID II.
We also suppose, that the types of consumers should be given by a common classification. But it is not only the type of the investor but also his investment goal he is looking for. While the type regards mainly the risk propensity of the investor the objective is linked to the particular features of the PRIIP. Both these dimension of suitability should be expressed together.

37: What is the key information that needs to be given to the retail investor on insurance benefits, and how should this be presented?

No answer.

38: Are you aware of PRIIPs where the term may not be readily described, or where there are other issues?

No answer.

39: Are you aware of specific challenges arising for specific PRIIPs in completing this section?

While the credit risk description regards the general assessment of the risk this part of KID would explain the specific procedures regarding the particular issuer.

40: Are you aware of specific challenges arising for specific PRIIPs in completing this section?

This part overlaps the explanation of liquidity. It may be mentioned here why there are redemption fees and that it is not a penalty but rather (very often) the mean for cost coverage of early redemption at the side of the product manufacturer of even at the side of other investors.

41: Are you aware of specific challenges arising for specific PRIIPs in completing this section?

This section regards again each particular product manufacturer or product distributor. They simply describe their standard complain systems and procedures.

42: Do you agree that this section should link to a webpage of the manufacturer?

Yes, we agree with above mentioned.

43: Do you agree with the assessment of when PRIIPs might be concerned by article 6(3)?

We agree with ESA´s criteria. Even if the general description of a product may be suitable for better comprehension, these criteria do not exclude that 6(3) would be used for all UCITS managed by one fund manager, e.g. This concept seems to be in contradiction with the concepts of single PRIIPs.

44: In your market, taking into account the list of criteria in the above section, what products would be concerned by article 6(2a)? What market share do these represent?

No answer.

45: Please provide sufficient information about these products to illustrate why they would be concerned?

No answer.

46: Do you have views on how you think the KID should be adapted for article 6(3) products, taking into account the options outlined by the ESAs?

The option given in Article 6(3) should be limited to the specified groups of PRIIPs only.

47: How do you consider that the product manufacturer should meet the requirements to describe and detail the investment options available?

General information would be only some general information that the group of individual PRIIPs have some common features and that the investor may opt for some specific one. It is also the place where the options can be compared.
On the other hand each particular specification should follow the same structure as any KID for a single PRIIP. It should not be vice versa that the generic description would replace single PRIIPs.

48: Are you aware of further challenges that should be taken into account?

The purpose of both general and specific PRIIPs should be clearly explained. Otherwise their different purposes would be mixed and comparability of PRIIPs would be endangered.

49: Do you agree with the measures outlined for periodic review, revision and republication of the KID where ‘material’ changes are found?

We agree that UCITS KIID should be used as a starting point. UCITS rules are flexible enough for all sorts of PRIIPs. However, it should be mentioned that these rules provide also some hard criteria when the change is supposed to me “material” (e.g. change of risk group). Similar principles should be given in RTS as well.

50: Where a PRIIP is being sold or traded on a secondary market, do you foresee particular challenges in keeping the KID up-to-date?

No. The rules would be the same as for PRIPs without secondary market.

51: Where a PRIIP is offering a wide range of investment options, do you foresee any particular challenges in keeping the KID up-to-date?

No. Each particular PRIIP should abide the same rules as other PRIIPs.

52: Are there circumstances where an active communication model should be provided?

We believe that “passive” model is completely sufficient method of informing retail investors about a revised KID. Not mentioning the expensiveness of the active approach, the main reason is, that manufacturer may not know the identity of the end-investors, in the situation where PRIP is traded on a secondary market, or have their contact information.
We would prefer to inform retail investors by publication the revised KID on a website of the manufacturer.

53: Do you agree that Recital 83 of the MiFID II might be used as a model for technical standards on the timing of the delivery of the KID?

Yes, we agree that Recital 83 of MiFID II should be used as a model in this context.

54: Are you aware of any other criteria or details that might be taken into account?

No, we are not aware.

55: Do you think that the ESAs should aim to develop one or more overall templates for the KID?

We believe that it would be useful to develop basic template or templates (for broader groups of PRIPs of similar type) in order to established united visual layout of PRIIPs. ESAs should prepare detailed templates of KID at least one for each PRIIP product group (for each type of level one). This could simplify comparison between different PRIIPs for retail investors. Nevertheless, this template should operate as “safe harbors” for manufactures.
Such templates would also guide product manufacturer to provide the minimum required information. Higher standardization will facilitate higher comparability.
We prefer to specify and clarify the individual obligation set down by the PRIIPs. Therefore, it would be more easily for the manufacturer to lay down the key information containing the following required information under the PRIIPs regulation into the existing internal documents prepared for the investment products which have already been developed.

56: Do you think the KID should be adjusted to reflect the impact of regular payment options (on costs, performance, risk) where these are offered? If so, how?

Yes. Both performance scenarios and perhaps the risk and for sure the costs structures are different for a lump sum and regular investments. By the PRIIPs concept, they would have two different KIDs.

57: Are there other cost or benefit drivers that you are aware of that have not been mentioned? Please consider both one-off and ongoing costs.

No answer.

59: Are you aware of situations in which costs might be disproportionate for particular options, for instance borne by a specific group of manufacturers to a far greater degree in terms relative to the turnover of that group of manufacturers, compared to other manufacturers?

The outlined costs are showing full range of costs on the side of product manufacturers. Benefit drivers are less obvious. It is a big question if such a great effort really brings expected benefits for the investors.

Name of organisation

Česká spořitelna, a.s.