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BEAMA, The Belgian Asset Managers Association

Anthony Gilsoul
We generally agree with the description of the consumer’s perspective on risk expressed in the key questions. However, we do not favour the use of the terms “win/lose” as this makes investing sounds like a gambling process.

In addition, we do not think the terms “given market conditions” is of added value in the question “What is a reasonable range of projected returns I can get given market conditions?”. We are aware of the fact performance scenarios will have to be produced and that those will require hypotheses. Describing market conditions and assumptions in brief terms within the KID might in the end be misleading for the consumer so we would not favour adding the market conditions element in the document itself.
Yes, we agree with the ESA’s proposal to synthetize the risk of a PRIIP into market, credit and liquidity risk.

However, we are convinced that it will be necessary to ensure that consumers duly understand the meaning of those risks. As an example, for credit risk, it is essential that consumers do understand that credit risk is the credit risk of the obligor. BEAMA would thus recommend that some educational material, such as providing a lexicon, is developed by the ESA’s. We would then suggest that a link to an ESA website (or a page on the NCAs websites) containing explanations how those risks (and the risk indicator) should be understood is made available.

It is also essential that departing from that definition, off-balance products such as funds are able to consider they bear no or little credit risk as they are set up via segregated accounts which have the effect of making them insolvent-proof from the product manufacturer or any other obligor.
Regarding liquidity risk, BEAMA thinks that the ESAs should also consider the actual surrender value of a PRIIPs at the time of cashing in. Some products may well feature a possibility to redeem at any time. However, this redemption may come at such a high price that this arrangement cannot be considered as actual liquidity.
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BEAMA is strongly against including contingent costs such as performance fees in the total aggregated costs. The aggregation of costs is already based on a set of hypotheses such as an assumed growth rate and it would not be appropriate to make further assumption whether this rate is in excess of a benchmark or hurdle by reference to which outperformance is determined. The only result of embedding a performance fee in an aggregated cost figure would be presenting consumers with misleading fees.

In case the ESAs would still require that contingent costs are shown, it should at least be ensured that those costs are calculated on the basis of historical costs and only shown in the total aggregated costs which are calculated in relation to the performance scenario shown in the performance section.
Performance scenarios are a point of concerns for the members of BEAMA. The first and foremost comment we have on this topic is that any presentation and/or modelling of the performance scenarios should not be misleading, provide customers with wrong expectations regarding the PRIIP or present some PRIIPs in a more favourable way than they actually are.

Regarding the choice between hypothetical scenarios or probabilistic scenarios, we are still convinced that, within a probabilistic modelling, past data remains the only feasible indicator to illustrate/model future behaviour of financial products behave under specific conditions. We also do not think hypothetical standardized return scenarios for all PRIIPs (ex. -10%, +5%, + 20%) would produce a satisfactory illustration as this would lead to giving the impression that all PRIIPs generate the same returns, letting them only differentiate on the level of costs. This approach works to illustrate the functioning of a formula in case of structured products but this does not seem appropriate to illustrate the returns of products featuring no formula. This leads us to think that a probabilistic modelling would be preferable.

For this probabilistic approach, we feel that some standardized hypotheses, calculation methods and parameters should be provided by the ESAs. The performance scenarios (pessimistic, neutral and optimistic scenarios) could then be ranked according to their probability of occurrence according to some defined percentiles of the probability distribution.
Most importantly, BEAMA considers that scenarios should be presented net of costs so that the comparison of different PRIIPs allow retail investors to intuitively assess the impact of costs on their returns.

In order to guarantee a consistent approach across both firms and products, we think the specifications of the modelling should the same for all PRIIPs. For example, it is essential that there is a common approach to the pricing used across PRIIPs. For example, a fund should use the share price or the NAV as both are calculated daily or on each purchase/redemption day. In this case it should be the share price that is used, as this is the price at which the consumer would buy/sell.

Also, a specific issue for funds in Belgium would be the reconciliation of the presented scenarios with the fund comments. In Belgium, it is a common practice that fund managers provide investors with comments on the management and results of their products. As a consequence, there has been an agreement between the FSMA and the sector regarding those “fund comments”. This agreement contains guidance on (i) general principles, (ii) comments on the factual situation, (iii) comments on forecasts for the future and (iv) a lexicon. In consequence. We feel there should be a clear link between these two pieces of information. Some guidance on how the performance scenarios can be explained and reconciled/compared to the actual performance could be developed in a later phase.
We think standardized time frames would be the only way to ensure a consistent approach for all PRIIPs. We would therefore suggest the following timeframes for all products:

- 1 year
- 3 years
- 5 years
- 10 years
- Product lifetime
Consistent with the UCITS approach, we would suggest using percentages based on net valuation at the beginning and at the end of the period. Monetary amounts do not seem to be of added value as they are merely a translation of percentage amounts. The vast majority of investors will be able to translate the percentage to their actual planned investment amount.
BEAMA is convinced that performance scenarios should be presented net of costs. In case performance scenarios are calculated gross of costs, this would require the retail investors to combine the performance scenario section with the cost section, making the whole situation much harder to understand.

In addition, we reiterate our belief that past performance remains the most reliable indicator, using validated and confirmed figures that accurately disclose how the product behaves under specific market conditions. Product costs depend on many factors which cannot be established in advance, e.g. fund volume, performance, trading activities etc. Hence, in line with the recommended use of historical data for the purpose of performance presentation, we are of the view that netting of costs should be conducted on an ex-post basis.

This said, once costs are defined in the costs section, we do not see any specific challenge when it comes to reflecting the calculated costs in the presentation of the performance scenarios. Of course calculation of costs present many challenges, please refer to our comments on the issue under the cost section.
Consumer testing should reveal how many scenarios are necessary for a good comprehension of the PRIIP behaviour.

In addition and as mentioned under question 6, we suggest that the Joint Committee tests whether 3 scenarios (pessimistic, neutral and optimistic) are sufficient.
We favour a simple presentation of risk such as the one already in use in the UCITS KIID. This form of presentation will be recognized by many consumers as it has already been in use for 2 years. Consumers testing performed at that time also revealed that this form of presentation was the most understandable for retail investors; we are confident the tests will reveal the same kind of results.

In addition, this presentation has the advantage of a visual element which describes the relationship between risk and return. BEAMA is strongly supportive of that approach which helps retail investors understand that lower risk typically correlates with lower rewards and vice versa.
First we would like to repeat our previous comments (see question 6) stating that the methodology underlying the calculation of the performance scenarios is decisive. The proposed methodology should be robust, reliable and not allow for manipulation of any kind. If this would not be the case, the scenarios would be of little use or even could be misleading. This is why we propose that the ESAs define standardized hypotheses, calculation methods and parameters (e.g. probability of the different scenarios to be presented).

The presentation also has to make clear to the retail investor that the scenarios are mere assumptions regarding future performance outcomes. Sufficient disclaimers should be provided in that respect.

Regarding, the actual presentation of the performance scenarios, BEAMA does not agree with any of the proposed presentations on pages 40 to 43. We think that the presented scenarios should reflect different holding periods (see our answer to question 8 on these) so that investors are able to understand the effect of that important parameter in their investment choice. Only the option presented on the upper left-hand-side of page 43 and the option on the lower side of that same page present different timeframes.

Nevertheless those options present monetary amounts and the presentation of continuous lines gives a false impression of continuous returns along the time. This can be misleading for investors as returns can greatly vary from year to year. We would therefore favour an option only showing returns at specific timeframes. In addition, those returns should presented in percentage terms. As a consequence, BEAMA suggests that the following type of presentation is also tested with consumers:

Example of presentation format:

(Please See the uploaded PDF version of our answers for the visual presentation proposed by BEAMA)

Some explanations regarding the hypotheses and parameters of the model as well as how this graph should be understood should also be provided separately to investors. This could be done via an educational webpage prepared by the ESAs or the NCAs.
We see no reason for combining the summary risk indicator with the performance scenarios as this would only confuse the presentation of those two sections. While it is true that performance and risk are closely linked, we believe it will be clearer to present the two sections separately
We generally agree with the description of the consumer’s perspective on costs expressed in the Key Questions. However, we do not favour including a specific section on giving comparisons of a product costs versus costs of other products. This would require further work from the ESAs on defining points of comparison that apply for all kinds of PRIIPs. We think this question is better addressed by the direct comparison of the different KIDs, this is a task that can easily be done by the consumer.
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The first and foremost challenge BEAMA sees in order to achieve a true level-playing-field is defining the methodology for cost disclosures. That methodology has to be crystal clear so that it perfectly defines which costs are included and it does not allow to artificially escape the disclosure of all costs so that some simpler or more opaque products appear artificially less expensive than what they actually are.

We see a second challenge in providing accurate estimate of all costs on an ex-ante basis. Ex-post disclosure are more certain in nature. There should be a consistent method which allows consumers to reconciliate the two types of disclosures. Ex-post disclosures for funds will be tackled through the MiFID II, reconciliation is the reason why we consider that it is of the upmost importance that ex-ante disclosures under the PRIIPs regulation are fully coherent with the MiFID II. No extra ex-ante disclosure apart from the KID should be required to comply with MiFID II. Should this not be the case, this would cause an unnecessary burden to the distributors and manufacturers and would confuse the consumer faced with different sets of ex-ante disclosed amounts which would have to be summed up.

Regarding the actual disclosures, we note article 8(3)(f) of the level 1 text require two sets of disclosures:

1) Summary indicators
2) Total aggregate costs expressed in monetary and percentage terms, to show the compound effects of the total costs on the investment

For the first category, we feel the cost section of the UCITS KIID could be a good starting point. The UCITS ongoing charges figure (OCF as defined in CESR’s guidelines on the methodology for calculation of the ongoing charges figure in the Key Investor Information Document: CESR/10-674) are calculated on an ex-post basis and then serve as an ex-ante estimation. This method could be extended to provide figures for entry costs, ongoing costs and exit costs. However, we are very concerned the Joint Committee will require costs which are very variable and not predicable in nature (such as portfolio transaction costs and performances fees) to be estimated and included in the ongoing charges. In addition to their variability and as recognized by the Joint Committee, some of those costs such as costs embedded in the price for bonds and OTC derivatives are extremely difficult to estimate. Should the Joint Committee still decide to include those in the OCF figure, it would then have to provide the actors with a very clear method to calculate those so that a true level playing field is achieved. The only feasible methods for this we can imagine would either relying on previous level of costs or estimating these from the performance levels presented in the performance scenarios.

For the second category of disclosures, we feel the need to standardize as much as possible this section.
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Should the concerns we expressed in question 19 regarding the calculation of the total aggregate cost’ figures be addressed then yes, we agree that a RIY calculation method might be used to show the possible returns of a PRIIP. We see a natural link with this reduction in yield and the presentation of the performance scenarios which are based on common calculation methods, parameters and assumptions provided by the ESAs.
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It is of paramount importance that growth rates used to estimate “total aggregate costs” are fully coherent with the results from the models used to produce performance scenarios. As previously stated, the assumption, method and parameters for those scenarios are to be provided by the ESAs.
For disclosure of transaction costs, specific guidelines – along the lines of our above comments – would be needed to ensure consistency. However, it is our opinion that individual disclosure of certain fees, such as portfolio transaction costs, may not be meaningful to the retail consumer.
The types of the products may limit the comparability: it is important that the methodology for costs disclosures remain simple and connected to the reality of products.

Additionally, the greatest emphasis has to be put on achieving the overarching aim of providing a PRIIP’s ex-ante cost disclosure, as is required by MiFID II (and eventually IMD II).
While consumer testing will reveal which option is to be favoured, BEAMA feels that the final option should neither be too complicated nor present too many numbers and should be visually intuitive and understandable.

BEAMA does not favour options 1, 2 and 3 as those presentations appear over simplistic and do not satisfy the requirements of the level 1 text. In addition, a comparison of the costs of a PRIIP with other PRIIP would require additional assumptions to be set by the ESAs. This also poses a great risk of subjectivity while this task can easily be done by retail investors themselves. Option 4 does not look intuitive for consumer either. Option 7 does not satisfy the level 1 text as it does not present any amounts or figures relative to the costs. Finally, options 8, 9 and 10 appear too complex and would take too much space from the 3-page document.

In consequence, BEAMA would favour an option that is a combination of options 5 and 6. Option 5 is very clear as when it comes to showing summary indicators and total aggregate costs expressed in monetary and percentage terms. However, we note that level 1 does not require to show monetary amounts per type of cost. Also, this option does not show the compound effects of the total costs on the investment. Option 6 does show the compound effects of the total costs and illustrates several holding periods. However, we are against the presentation of a standardized return as in column 4 (5% in the example): this would leave investors with the impression that all PRIIPs feature the same potential return. As already stated in our previous answers, we feel the presented return should come from the probabilistic modelling used to produce performance scenarios as we see a natural link between those sections.
For funds, costs can be easily broken down on an ex-post basis. For ex-ante disclosures, level of costs have to be estimated and are much less reliable.
BEAMA believes the three risks should be integrated in a single scale-based risk indicator as this is the most comprehensible approach for retail investors. This approach was already tested and approved by consumers during the tests for the UCITS risk indicator. Of course, we are also of the opinion that the new consumer testing phase should reveal whether consumers still understand the correct meaning of the indicator in the case it aggregates different kinds of risks.

On aggregation itself, we view this as a key concern as the aggregation method should not favour certain products versus others or put excessive weight on certain parameters or features such as guarantee schemes or the ability to get the full investment back at any time. In this line, we would suggest an equal weighting for each of the 3 risks as this seems to be the most simple and neutral method.

In addition, we would agree with the addition of a narration giving insight on certain specific risks when those are particularly relevant for a given PRIIP.
We agree with the ESAs proposal showing cumulative costs using RIY over standards time horizons. This effect will also be shown via the presentation of performance scenarios calculated net of costs.
BEAMA agrees with the Joint Committee’s statement that the costs listed in the table on pages 58 and 59 present specific difficulties when it comes to determining their amount. Most of these costs are only known on an ex-post basis and in case they were to be included in the total charge figures, this would then require more work from the ESAs to define how those should be calculated in order to avoid that the KID contains misleading information regarding costs due to wrong estimations of those costs.

Furthermore, we have specific comments regarding the following identified types of costs:

Portfolio management techniques: while it is true that those techniques generate costs for the investor, they also generate extra return for the PRIIP. It would not be coherent that a PRIIP appears more expensive because it makes use of those techniques while it actually generates a better return than an equal PRIIP which does not make use of the technique.

Performance fees: performance fees are cannot be reflected correctly in the ongoing charges as it is not possible to predict their level without hypotheses on the return of the fund. The best solution to illustrate them is to include them in the performance scenarios.

Look-through costs: in order to provide a true level-playing-field, a level of materiality for those costs should be defined as to when those have to be included.
BEAMA thinks the following information should be included:

- ISIN code (as defined in the public ISO 6166 norm) of the product; for funds we suggest that this is the identification code of the respective share classes for which KIDs were prepared or, when a PRIIP does not have an ISIN code, any other unique identification code. BEAMA views the ISIN code as an easy way to quickly identify a product when the client is in contact with a financial institution.
- Name and address of the product manufacturer.
- Website of the product manufacturer.
- Name and website of the competent authority and whether if according to national law, this product was approved by the NCA.
- Date of production of the KID.
BEAMA certainly welcomes the ESAs proposal to develop further work/clarification as to when the comprehension alert has to be included in the KID.

In addition, we consider Article 50 of the UCITS Directive as a good basis for clarification of the first case defined in the level 1 text when a PRIIP KID has to feature the comprehension alert. However, we would like to stress that this Article is probably too narrow given there are other investments types such as real estate or precious metals which are commonly invested in by retail investors.

Furthermore, BEAMA feels that the best level to assess whether a product could be difficult to understand for retail investors would best be the NCA. This is because those institutions have a very detailed knowledge of their local market and can therefore best assess how products are to be treated according to local specificities. For example, it is widely known that real estate is a very popular investment in Belgium. Belgium also has a long tradition of UCITS and UCITS-alike retail AIFs which are very simple in nature.
We agree that principles might be set on how a PRIIP might be assigned a “type”, we think this type should only make reference to the legal type of the PRIIP, which can be (i) fund (UCITS or AIF, open-ended or close-ended), (ii) insurance, (iii) structured bonds,(iv) structured deposits and (v) derivatives.
No, we do not consider any other classification to be useful in this context.
Yes, we agree with the provision of some guidance by the ESAs and if necessary, some prescribed statements for the completion of this section of the KID.
We think the description of any technique (such as efficient portfolio management techniques) should be understandable for retail investors. In this regard, we encourage the use of plain language to communicate clearly to the retail investor. Standardised sentences developed by the ESAs might be useful in this respect; also some educational material presented on the ESAs or the NCA website might be useful.
Generally speaking, the problem with identifying a consumer type at which any PRIIP is targeted is that it will have to remain generic and high level because it cannot factor in what other investments the consumer already owns, nor other circumstances particular to the investor. Therefore, the identification of a consumer type by the product manufacturer should not interfere with the suitability and appropriateness tests which have to be performed in the MiFID framework.
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We agree that standard sentences should be specified for fixed length or open ended funds.
We think this section is linked with the credit risk part of the risk section discussed above. In this respect, we would like to repeat that funds should not be disadvantaged versus other products in this section. For example, we would not caution putting too much emphasis on compensation schemes put in place for some specific products while it would not be possible for funds to mention their specific features which protect them from the insolvency of third parties (off-balance sheet product with a separate depositary which performs control tasks and has specific liability in case of losses of assets).
Here again, we would like to highlight that this section should be coherent and not interfere with the MiFID suitability and appropriateness assessment. The section would therefore have to remain generic and high-level in nature as the manufacturer producing the KID cannot know the specific circumstances pertaining to the investor.

However, the section should also include a description of the consequences of an early exit when those are particularly detrimental and when this fact is already known at the time of manufacturing.
In itself the information presented in this section needs to be generic in nature, otherwise manufacturers might need to create different KIDs for the same PRIIP in order to address different distribution channels and distributions, which would be contrary to the concept of a single KID per PRIIP. Therefore, one feasible solution we see is including a link to the website of the manufacturer where more information per distributor and jurisdiction could be found. On that webpage links to e-mail/webpages from the various distributors of the PRIIP could then be found. The consumers would then find more information on those pages on where to address their complaints.
Yes, we agree that this section should link to a webpage of the manufacturer.
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We agree with the ESAs that the UCITS KIID regulation should serve as a starting point for developing the measures on review, revision and republication.

BEAMA certainly suggests that the methodology to be developed to determine the materiality of a change rely on the proportionality principle: it should be avoided that very frequent reviews and republications are required because of normal fluctuations in the life of the product. Performance scenarios can vary because of market value fluctuations, this should not trigger a republication that is too frequent.

As correctly noted by the ESAs, the KID is a precontractual document, this means that this document is desynchronized from disclosures determined by other European or national legislations. Therefore national authorities should not impose coordination of the KID reviews with other types of contractual disclosures.
We see potential problems in case the ESAs would decide to impose specific constraints on the KID when a PRIIP is traded on a secondary market. This results from the fact the manufacturer is not always aware that a product is traded on a secondary market. Listing and/or trading is sometimes performed by a distributor without the manufacturer being notified. It is thus unclear to us whether it would be a requirement that the producer is active in the secondary market, either directly or through distributors with whom the producer has an agreement, or if it is enough that the PRIIP can be traded in the secondary market to trigger this requirement. In any case, we believe it should be ensured that no extra burden is placed on the manufacturer because of actions undertaken by a distributor.
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No, BEAMA does not favour the active communication model as this would generate costs that are very high in comparison with the actual benefits for the end investors. We view the publication of the updated KID on the manufacturer website as a sufficient measure. Distributors can then take the appropriate measures so that new investors are provided with the latest version of the KID at the moment of their investment.
First, we consider that those requirements should be fully aligned with the requirements of the Distance Marketing Directive and MiFID II. In addition to this, we think that the final requirements should not preclude the retail investors to invest at the point they want because of constraints imposed by overly prescriptive regulation.
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Yes, we think the ESAs should develop templates for the KID: the UCITS KIID templates produced by CESR greatly helped KIID producers to acquire legal certainty about their documents and permitted that consumers can easily compare all UCITS.

Not developing standards templates would permit that local versions of the KID are imposed in certain Member States. This would clearly be detrimental to the single market by adding new barriers. However, we would also like to add that the ESAs should try to develop a number of different templates which is as low as possible so that comparison is actually possible between different kind of PRIIPs.
No we do not think the KID should be adjusted to reflect the impact of regular payment options. BEAMA reminds the ESAs that the PRIIP manufacturer often does not know the distribution channels of its products, therefore it is difficult for the manufacturer to provide the correct version of the KID on that basis. We would only favour an adapted KID for regular payments in the case of PRIIPs which are specifically designed for regular payments.
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Regarding the ex-post versus ex-ante discussion, please refer to question 16. We believe that the best ex-ante estimates are based on ex-post calculations. Regarding the holding period(s): those should be in line with the time frames proposed for the performance scenarios, as we stated those will have to be standardized for all PRIIPs in order to allow true comparisons between products. Please also see our response to question 8. Regarding the return/growth rate(s), we believe those should be in line with the results provided by the probabilistic returns derived from the model used to produce performance scenarios. As already stated several times, those will be based on common assumptions for all PRIIPs. In order not to overload the consumer with information, we might suggest that only one rate of growth is used to illustrate the total aggregated amount of costs and the compounded effect of costs on performance. This would be the neutral scenarios as referred under question 13 although consumer testing will probably giving more useful insight on that topic. Consistently, we do not prefer the idea of assuming a 0% growth rate as this gives a too negative image of the return of the PRIIP.
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