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Austrian Federal Economic Chamber/Division bank and insurance

Dr. Franz Rudorfer
• We generally agree with the description of the consumer´s perspective on risk expressed in the Key Questions, since most of these key questions already form the basis of the UCITS KIID and its SRRI, which were consumer tested and which are already applied by UCITS management companies.

• It would be better for the investors to have a realistic assessment of the likely loss in addition to the worst case". A further key question could therefore be "How much am I likely to lose".
Moreover, the representation, under what conditions a profit is made, is missing. A further key question could be therefore "Under which circumstances do I get a profit"."
In general we agree with the ESAs’ proposal to classify market, credit and liquidity risk as
the three main risks for a PRIIP. However, if a particular PRIIP is exposed to significant operational risks that are important for the assessment of the overall risk for the retail investor, these risks ought to be described in the narrative of the summary risk indicator in a meaningful way.

We also make some detailed remarks on the proposed risk categories:
In terms of market risk, we support the ESAs’ mention of inflation risk, which is especially important for retail investors investing in products with long-term horizons given the current low interest environment.
It is essential to enable off-balance products such as funds to highlight that they provide no or little credit risk as the investor is not exposed to the product provider itself or any other one obligor.
When considering liquidity risk(s), the ESAs should also consider the following factors:

- The surrender value of a PRIIP during different stages of its life cycle (i.e. a life insurance
policy’s surrender value is most likely negative in the first couple of years);
- Any time delay between a request to redeem the investment and its effective execution (in some cases it might take several months between requesting an (early) pay-out for products with a fixed or long-term product horizon and the consumer receiving the proceeds);
- We do not agree with the ESA’s assessment that the act of listing has any relevance to a
PRIIP’s liquidity (please see our answer to Q4 for further details).

The terminology used in this Discussion Paper differs considerably from the notion of market and liquidity risk applied for the purpose of risk management/calculation for investment limits and, most importantly, described in the fund prospectus in accordance with the UCITS Directive. We are concerned that the Level-2 measures should not lead to contradicting information being disclosed in the UCITS prospectus and the PRIIPs KID that would create issues in terms of coherence and liabilities, and therefore confusion for investors.
Last but not least, we would caution against the use of certain language in the table on page 23f which uses wording like “How much can I win?” & “How much am I likely to win?”. This language is more akin to the realm of gambling than investments and clearly would not support the Commission’s plans (on the Capital Markets Union) to provide more long-term retail savings to the European real economy. Instead, we would strongly prefer language such as “How much am I likely to get?”.

Also, the phrase “Can I get my money back at any moment?” should be reworded to make clear that the money in question is rather the current value at the date of the redemption request and not necessarily the invested amount.
• In line with our answer to Q5 below, we believe that market, credit and liquidity risk cannot be integrated into a single risk indicator and that a multi-risk indicator should be used. Instead of completely redeveloping a new methodology for market risk, we believe that the existing UCITS SRRI (which has already proven its effectiveness over the past few years) should simply be extended to all types of PRIIPs.
In terms of credit risk, there could be a choice between narrative format and more precise metrics. With regards to table 6 (p. 29) on liquidity risk, the key aspect from the viewpoint of retail investors relates to the possibility and timeframe of disinvesting.

• Some of the used measures or combinations of measures are not available for each PRIIPs or do not represent the real risk of the product. For example, the historical volatility of a trend following fund may be low for a long time until a market crisis. In the past, it has become clear that a credit rating is not a reliable leading indicator of the creditworthiness of an issuer. In this case it may be possible to use the credit spread on its own. We also believe that there is a higher credit risk if a product is funded by one counterpart in contrast to a product with a variety of different counterparts.

• The method depends on the type of product. A one-fits-all" solution is unlikely. Furthermore, it will be very difficult for the consumer to understand the evaluation, if there are too many indicators considered and if the indicators are extremely sophisticated. The consumer will not be able to understand why the PRIIP has a high or low risk.
Market risk:
Historical volatility and VAR are common quantitative indicators. Most suitable is the volatility of forecast returns. However, all methods are difficult to understand for the consumer. Qualitative indicators (depending on the product) should be: type of underlying, risk diversification, leverage, product features (capital protection, knock-out, cap etc.), foreign exchange rates. Furthermore, the sensitivity should be considered.
Credit risk:
CDS and credit rating are also common methods, where CDS is difficult to understand and the credit rating has little relevance. In addition, the following criteria should be taken into account: special assets in mutual funds, level of seniority, secured/unsecured nature or other protective facilities.
Liquidity risk:
The average trading volume is not suitable, since a large proportion is traded over the counter. The bid-offer spread is a better indicator. A stock exchange listing, the number of trading venues and an organized secondary market show the liquidity, whereas permanent trading cannot always be guaranteed. Return policies and return requirements as well as the calculation of the withdrawal prices are important information for investors. However, these criteria are hardly comparable."
Contingent costs would add no value by being included in the aggregate costs. The aggregation is already based on an assumed growth rate, and it is not appropriate to make further assumptions about whether this growth rate is in excess of the benchmark or hurdle by reference to which outperformance is determined. Moreover, embedding a performance fee in an aggregated cost figure is opaque and potentially misleading, as they are based on historical performances and fees.
If the ESAs, despite our strong concerns, would still consider requiring contingent costs, these should be, to the extent possible, based on historical data. Then the actual contingent costs can be addressed when showing total aggregated costs. Where historical data cannot be used it must at least be ensured that the contingent costs correspond to the performance scenarios shown in the performance section of the KIID.
• As regards the choice between a “hypothetical” (i.e “outcomes without any implications as to their likelihood”) and a “probabilistic” scenario, we believe it particularly important to await further discussion on the base of the proposed technical Discussion Paper and the outcome of the consumer texting exercise, which should specifically test consumers’ understanding of the difference.
In general, with a “hypothetical” scenario the prime feature of differentiation for some PRIIPs would be the level of costs because the return of the product is linearly correlated to the underlying and its market movements. For products with structured returns a hypothetical scenario will show how structuring works and affects the return which is not linearly correlated to market movements.
With a “probabilistic” scenario, we believe that past performance remains the most reliable indicator on the basis of validated and confirmed figures that accurately disclose how the product has behaved under specific conditions and should therefore be used as a basis for further calculations. Historical performance data should therefore be used as the basis for any performance scenario. Nevertheless, it should also be remembered that ESMA’s recent Working Paper3 underlined that a “probabilistic” scenario may be difficult for retail investors to fully understand its hypothesis and underlying assumptions. As a prerequisite it would need to be ensured that any underlying assumptions are defined in such a way that they (i) are applicable to all PRIIPs, (ii) the use of overly optimistic assumptions and (iii) do not show certain types of PRIIPs in a more favourable light than others.
Finally, and independently of the performance scenario assumptions scenarios, two notions have to be sufficiently clear from the outset. First, a clear distinction has to be made between the risk indicators and the performance scenarios. For investor comprehension, it is essential not to overlay too many pieces of information, each serving a different purpose, into a single section of the KID (see our answer to Q14). Second, one should consider the purported objectives these performance scenarios aim to achieve. These can be to show either the cumulative effect of costs on a reduction in yield (RIY) basis or the effects of market volatility using historical/statistical data or even a combination of both. The answer to this question will greatly influence the conclusions drawn in the upcoming technical work to achieve these goals.

• The presentation of performance scenarios should not include any implication as to the likelihood of possible outcomes, as this could arouse false expectations for the retail investor. We recommend presenting three scenarios (positive, neutral, negative) without providing any likelihood.
Most importantly, due to varying costs structures between different types of PRIIPs, it is essential that the performance scenarios should be portrayed net of cost, in order to allow retail investors to assess the impact of costs on their returns in one place.
We support a consistent approach across both firms and products that should provide the same specification for all PRIIPs. This approach should consider that, as models improve over time, so do its modelling, and its approach should contain enough flexibility for the ESAs to adopt new and improved models (with sufficient advance notice to allow all PRIIPs manufacturers to update their systems accordingly).
As an example of the above, it is thus essential that there is a common approach to the pricing used across all 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 what the consumer would buy/sell at.
For further deliberation on the performance scenarios, please consider our reply to Q10 below.
• Given the wide range of PRIIPs available on the market, we would suggest five time frames that should allow for a consistent approach across both firms and products:
(1) 1 year
(2) 3 years
(3) 5 years
(4) 10 years
(5) Product lifetime

Most importantly, these timeframe have to be linked to the PRIIP’s costs and need to be consistent with the time frames used in the cost disclosure section of the KID.
In terms of presentation, we have a preference for a graph covering a rolling period similar to the example on the left top of page 43 (cf. our answer to Q13 below), but showing percentage growth (see our answer to question 9). This would necessarily account for the mentioned timeframes and indeed present the expected performance over time, thus avoiding an undue focus on particular time points.



• If there is no fixed maturity date, the recommended holding period would be appropriate. A standardised holding period assumption should only be used for open end products. A standardisation over all PRIIPs would distort the reality too much. Although comparability may be reduced it is much easier to understand the PRIIP.
• We preliminarily suggest to follow the existing UCITS standards (i.e. percentages based on net valuation at the beginning and the end of the period), wherever this is sensible for the PRIIP in question.
In case a decision was taken to require the scenarios to be based on an initial investment expressed as a specific monetary amount, it is essential not to hardwire an exact investment amount in Euros into the Level-2 measures for all Member States as this would lead to arbitrary numbers in other currencies that will fluctuate with the exchange rates. The amount should be determined by the National Competent Authorities and should be a whole amount that is as close as possible to the Euro figure.

• Monetary amounts are easier to understand for consumers. In addition, percentages should be provided in order to ensure comparability.
Performance scenarios must be presented net of all costs. Not doing so will make it impossible for retail investors to compare expected returns and costs and will make it needlessly harder to understand the different KID sections. Investors must be able to easily grasp the PRIIP’s yield prospects without being forced to make their own calculations by referring to other KID sections.
Moreover, gross scenarios might induce investors to underestimate the effect of costs on the performance. For instance, certain products with surrender values falling below the invested amount in the first years or with relatively large exit costs will look more appealing if performance presentation disregards the effect of costs.
Again, 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. Rules similar to the UCITS KIID regulation (see additional third page of the UCITS KIID for structured UCITS) should apply to new products that do not yet have any past performance data.
• This section should always carry a disclaimer (similar to UCITS KIID) informing investors that these scenarios are based on historic data and/or assumptions about the future and that they cannot be a certain guide to future performance.

• At present, normally 3 scenarios (negative, neutral, and positive) are provided. In the case of more complex structures or different redemption options it can be suitable to use more scenarios. Due to the limited space, the maximum number of scenarios should be limited to five. Example equity-linked bonds:
1. Barrier not touched, closing price > 100% => redemption of 100%;
2. Barrier not touched, closing price < 100% => redemption of 100%;
3. Barrier touched, closing price > 100% => redemption of 100%;
4. Barrier touched, closing price < 100% => physical delivery of stocks with a total value < 100%
In principle, a single visual element is easier to understand for consumers and increases the comparability of the PRIIPs. However, as a result of the simplified presentation, the assessment of the different risks is more difficult. A multidimensional risk indicator illustrates the influence of different risks and reduces the risk of misinterpretation. However, the comparability decreases caused by the higher complexity and the indicator is no longer quite so easy to understand.
Single:
UCITS KII synthetic risk and reward indicator is very vivid, but an explanation is required. Risks and possible income are set into proportion. A good differentiation is possible through 7 categories.
Dutch risk indicator: Good idea, but probably too fussy".
Netherland risk meter: good idea, but the position of the arrow is more complex in display than UCITS KII synthetic risk and reward indicator.
Portuguese risk label is good, but should be extended to multiple categories. Especially, the short explanation text is very good. Nevertheless it might become confusing quite fast.
Belgian risk indicator scores by the proximity to the energy label.
Multidimensional:
Both examples of Italian research are good. The presentation as a scale is likely to be best suited. The combination of a highlighted aggregated indicator with the evaluations of the different risks is clear and easy to understand. Even though the table with the statements has greater significance, it will be difficult to define an appropriate benchmark for the breakdown of individual risks associated with their specific measured values. In addition, well-founded knowledge is required to correctly interpret the table. For the VAR, the approach of the DDV should be selected. There are both amounts in percentage and amounts in Euro. The calculation of the VaR is based on five risk components: default risk of the issuer (credit spread), risk of price changes of the underlying, implied volatility of the underlying, risk of changes of interest rate risk and foreign exchange rate. In some cases or on demand the different risks are shown in detail. This approach is widely spread across Germany. So, well informed investors already know this approach. However, one drawback is that the VaR cannot be applied for all products. Based on the VaR there exist five risk categories (presented as five stars with a specific number which is highlighted). Each category represents a type of investor classified by his readiness to assume risk (conservative to speculative). The risk categories are established by EDG."
The right calibration of the performance scenarios will allow the KID to be understandable to retail investor as well as being comparable (between different types of PRIIPs).
To reach these objectives, the methodology used to prepare the presentations is decisive. If the methodology is not reliable and robust (or cannot be properly supervised), the scenarios are of little use or can even be misleading. This would most certainly be the case if the performance scenarios were not standardised, but rather based on assumptions chosen unilaterally by product manufacturers. This standardisation should be based on the basic assumptions and parameters (i.e.interest rates environment, probability of different kind of scenarios, etc.) that are then used by product manufacturers to create their individualised performance scenarios.
Although past performance per se is not a feature of the KID (as compared to the UCITS KIID), it should nonetheless form a basis for the performance scenarios, either through presentation of past performance or used as the starting point for the calculation of the performance figures. We note that this approach was tested and approved by consumers during the UCITS KIID consultation process and has been used since 2012. It is a recognised and meaningful visual illustration of product performance for investors.
Standardised scenarios, which should be prescribed either by the ESAs, should allow for enough flexibility in terms of adapting to changing market conditions (after sufficient time for market players to adapt their KIDs). Furthermore, it has to be made sufficiently clear to the retail investor that these conditions are prescribed and merely provide assumptions about possible future outcomes along the lines of the current UCITS KIID disclaimer.
• Generally, we do not recommend providing a combination of a summary risk indicator with performance scenarios as this form of presentation might confuse retail investors. We believe that only presenting risk indicators and performance scenarios separately is less confusing and provides the retail investor with sufficient information for the decision making.

• 2B:
A single visual element is easy to understand and makes the PRIIPs more comparable as well. Risks and potential returns are balanced. However, the explanatory power is reduced. In addition, investors may do not or hardly understand relations.
3B:
A comprehensive presentation of the different risks is possible. However, it also entails more effort by the consumer.

• Given the importance of the information on risk and reward, we recommend using the necessary space to show separate risk indicators for market, credit and liquidity risk as well as multiple performance scenarios. However, it could be appropriate to display multiple performance scenarios in one visual element as in the example at the top left of page 43.
• The Key Questions are very detailed. Most consumers are not aware of or rather do not care of so many different costs. The difference between one off and ongoing costs is quite crucial and for the investor difficult to understand. This issue has to be addressed sensitively and aligned with MiFID II regulations.

• Regarding paragraph 2 of the table we would like to point out, that actual costs can vary a lot from the estimated amount, e.g. deposit fees which are dependent from the market price. Therefore the discrepancy between the estimated amount and the actual costs can hardly be determined.

Regarding question 8 a comparison between the costs of different products is hardly possible. This is because the scope of KID is a very determined one and therefore just products within the scope of KID can be compared. Furthermore the evaluation and analysis of the costs of other products in the market would lead to an inappropriate burden for providing consumers with this information.
If a comparison should be made, we would recommend just comparing products of the same type and issuer to each other.
We support the ESAs’ suggestion that costs such as insurance elements and a product’s capital guarantee should be disclosed as a cost to the investor. We acknowledge that for some products the cost of insurance is specific to the customer, but we would note that both insurance-based investment products and structured products are products containing an investment element with an additional insurance or capital guarantee element. If it is possible to buy the “pure” investment element without its protection element, then it must be possible to extract from the price of such hybrid products the specific costs, leaving the generic cost of the investment element.
Costs for preparing a KID arise independently from the volume of the issuance. Regarding proportionality principles there should be thresholds for the necessity of a KID or the extent of the information depending on the volume of the issuance.
• A level-playing field in cost disclosures, i.e. for all types of PRIIPs, is one of the central objectives that must be satisfactorily met through the final Level-2 measures. Currently, and particularly for UCITS, a wide array of slightly diverging requirements for cost disclosure exist through the UCITS KIID Regulation, MiFID II and the PRIIPs Regulation.
This level playing field for retail investors can be achieved through two features that necessarily have to provide a certain trade-off in terms of (i) comparability of different PRIIPs types and (ii) the reliability of cost disclosure for unknown future conditions. From the outset, it has to be made abundantly clear to the investor that while ex-post figures are definitive, ex-ante disclosures have some level of uncertainty around them, which requires two distinctive set of disclosures.

(i) Equal degree of transparency for all PRIIPs:
Investment funds are transparent in terms of costs. They do not only charge explicit fees that are known to investors ex-ante (such as management fee, performance fee and depositary fee), but also follow common standards in disclosing ex-post the overall costs deducted from a fund on a yearly basis (so-called “ongoing charges” (OCF) for UCITS, previously known as “total expense ratio” or TER). Since insurance-based investment products or structured products involve implicit costs for which no generally acknowledged measure exists so far, the main challenge will be to make the costs of these PRIIPs transparent and to introduce standardised calculation methods that will ensure comparability of investor information in a way equivalent to the current UCITS rules.

(ii) Ex-ante versus ex-post disclosure:
The Level 1 Regulation requires disclosure of “direct and indirect costs to be borne by the retail investor” and hence seems to adopt an ex-ante view. However, many cost elements are known only ex-post and can be disclosed with a satisfactory accuracy only after the close of an accounting period.
For investment funds, this relates in particular to transaction costs and performance fees. Hence, we believe that historical data should be allowed to be used as a proxy for future costs in cases where a product’s cost history can be deemed representative. For performance fees this may be misleading, as the existence of the application and amount of the fee will be dependent on the future return. In relation to transaction costs, it is also not possible to accurately anticipate the exact level of transaction costs in relation to the future management of the fund’s portfolio.
In the case of expected changes and for new products, estimations should be made in line with the standards for the UCITS KIID. Moreover, cost disclosure should be accompanied by an explanatory statement clarifying the illustrative nature of the provided information (cf. also our comments on Q26 below).
Additionally, we would like to express our strong support for ESMA’s technical advice to the Commission with regards to product cost disclosures. ESMA correctly highlighted that the PRIIPs KID would be the correct place to fulfil the MiFID II requirements while allowing for cost disclosures that are applicable for all PRIIPs. Without the PRIIPs KID satisfying the MiFID II requirements, the KID will simply become another disclosure document that will have to be provided to retail investors alongside additional MiFID II disclosures on product costs. Only if the MiFID II requirements are recognised as fulfilled by the PRIIPs KID will retail investors be able to receive “one-stop” disclosure that reduces instead of increases the documentation for retail investors received when buying financial products.
We have some concerns about the use of estimated costs, especially in contrast to costs that are already known from the outset. We need to avoid a situation where a retail investor comes to the conclusion that all elements of the aggregated costs are known and subsequently believes that a certain PRIIP has been sold to him/her because the ex-post cost assessment differs (as is likely to be the case with e.g. transaction costs). One way forward could be to use estimations based on the investment strategy whereas in subsequent periods costs could be estimated based on the empiric data of the previous periods within a pre-defined range set out by ESMA.
Yes, we agree with the ESAs’ proposition to use reduction-in-yield (RIY) calculation methods to show the possible return of a PRIIP net of costs. In order to make these calculations comparable, it is necessary that the performance scenarios are standardised in such a way that that are based on common assumptions (e.g. growth rates, turnover/transaction volumes, FX rates, holding periods, etc.), through specific calculation methodologies and base assumptions provided by the ESAs. These will need to be mandatory across all markets and products if a level playing field is to be achieved and
a consumer is to be enabled to make direct comparisons.
No – we aren’t aware of other calculation methods.
As mentioned in our previous answers, it will be paramount that these assumptions are provided by the ESAs to arrive at information that is consistent for comparing PRIIPs. Growth rates assumed for the purpose of estimating “total aggregate costs” should correspond with performance scenarios displayed in the risk and reward section. In the case of probabilistic scenarios, the disclosure of returns and costs could provide added value to investors in contrast to standardised growth rates not linked to a particular product.
If portfolio transaction costs are taken into account, we deem it of utmost importance that such disclosure pertains also to transactions conducted for the account of structured products and transactions concluded by insurance undertakings for the purpose of managing their capital investments. Only such broad understanding of transaction costs will ensure a level playing field among all PRIIPs and avoid unbalanced cost disclosures to the detriment of off-balance sheet products such as investment funds.
To the extent possible, historical data should be used. As the disclosure of portfolio transaction costs is required in the annual report and accounts of UCITS, these ex-post figures should form the basis for any disclosure in the KID.
Furthermore, it is essential to distinguish between costs for services provided by parties involved in manufacturing, managing and operating the product, from which each party earns revenue that contributes to its profit and loss, and “raw materials” costs incurred as a consequence of executing the investment strategy, such as portfolio transaction costs.
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.
• There are different kinds of costs for different PRIIPs. Some cost categories might not be relevant for all PRIIPs. Furthermore the different maturities and holding periods have to be considered. There are great differences in the amount invested. Therefore, there won't be an appropriate basis for the calculation. The more detailed the information about costs is the less consumers will be interested to deal with it.

• 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). Without the PRIIPs KID satisfying these requirements, the KID will simply become another disclosure document that will have to be provided to retail investors alongside additional MiFID II disclosures on product costs. Only if the MiFID II requirements are deemed fulfilled by the PRIIPs KID, retail investors will be able to
receive “one-stop” disclosure that reduces instead of increases the documentation received when buying financial products.
Consumer testing will provide important input to this important question. However, we recommend that certain of the options described in the Discussion Paper be excluded from that testing as the information presented should neither (i) be too complicated, nor (ii) include too many figures, nor (iii) be not visually understandable.
As a general rule, the presentation of costs should be structured according to the UCITS KIID rules, as it is a well-tested presentation, is familiar to investors and ensures that relevant information is provided in a non-discriminatory and understandable way. Importantly, the presentation should avoid miscomprehensions by investors and should not allow manufacturers to create an artificial impression of cheap products. The presentation should be based, to the extent possible, on historical data. There should be a strong link between the information provided in the costs section and by the performance scenarios in their respective section of the KID. In particular, the performance scenarios should be net of costs, which will provide an immediate and visual expression of the effect of costs on
the product’s return.
Specifically and in line with our above comments, we thus have a preference that the cost section takes the form of option 5 on page 68 of the discussion paper. This option covers all the requirements in the Regulation since it shows summary cost indicators as well as aggregate cost figures. However, it has the disadvantage of being focused on one specific time horizon (a holding period of 20 years, as provided in the example, is much longer than the average holding period of PRIIPs). Moreover, costs of many PRIIPs do not apply in a linear manner (for some PRIIPs, more of the costs are charged in the first few years of the investment meaning that such products have liquidation values that are lower than the invested amount in the first few year). This information is necessary for investors and should be clearly visible in the KID. Therefore, we recommend presenting option 5 by reference to different timeframes (as foreseen in option 6), as follows:

This information and table show the effect of costs for someone with EUR 1.0001 to
invest, if the return in each year exactly covers the costs.

Costs:
- Upfront costs: 1,00%
- Ongoing costs (p.a.): 1,50%
- Exit costs: 2,00%
- Incidental costs (e.g. performance fees2, transaction costs3)

Number of years invested Total accumulated costs
Annual impact of costs
on investment

1 €45 4,5 %
3 €75 2,5 %
5 €105 2,1 %
10 €180 1,8 %
End of product life [if applicable] €330 1,65 %

1 See our answer to question 9 regarding the need to avoid requiring a Euro amount for non-Euro zone Member States.
2 This fee is charged only if the performance reaches a certain level and is therefore not known in advance.
3 Transaction costs will vary from period to period and are not known in advance.

The other presented options are much less preferable. In particular, options 1 to 3 appear over simplified and do not present information in a discriminatory manner, while option 4 is too complex. No clear holding period is shown in option 7 and this makes it difficult to interpret. Option 8 suggests certain theoretical likelihoods for the scenarios and, therefore, is likely to be misinterpreted by the investor. Given performance is already shown net of costs and the space is limited, options 9 and 10 would take up too much valuable space. Finally, the likelihood shown in option 9 might be misinterpreted by investors and gives room for overly positive presentations by manufacturers.
As stated already at the outset, even if consumer testing reveals a preference for the simplest representation of costs, the ESAs should promote efforts to develop financially aware customers. Last but not least, even while the KID is aimed at retail investors, their advisers also need sufficient information to correctly preselect certain products for their clients and therefore they need to interpret the PRIIPs KID and understand how the products will behave, including the effect of costs.
For a fund, these costs can be broken down on an ex-post basis, but the required ex-ante disclosures are based on estimations and are much less reliable. In order to ensure consistency with the UCITS KIID, we would also add “portfolio transaction costs” as a cost category (while keeping in mind that the UCITS KIID currently only provides this as a narrative disclosure).
• Market, credit and liquidity risks should not be integrated into a single risk indicator, as this would expose retail clients to oversimplified risk aggregation that would ultimately provide them with misleading information. We therefore strongly suggest the use of a multi-risk indicator (accompanied with narrative explanations) that provides scale-based risk indicators for market, credit and liquidity risks and allows investors quickly to compare the different risks for each type of PRIIP and between different types of PRIIPs.

• The aggregation of risks bears the risk that the consumer does not understand that it is a mixture of totally different risk aspects. The indicator does not automatically explain or show, which risks are included and what specific impact they have. The consumer will not be able to understand the interdependencies. For the consumer it would be easier to understand if all three risks are displayed separately because they might be of totally different importance not only for the PRIIP but also essentially for the individual investor. A summarized risk indicator might be misleading. If we have a summary risk indicator all three risks should be taken into account. The focus should lie on market risk, followed by credit risk, followed by liquidity risk. Also the correlation should - as far as possible - be taken into account (e.g. an increased credit risk also brings higher market and liquidity risks). An additional narrative to what the summary risk indicator shows, how he is built up, and what he does not cover might be useful, in order to avoid any ambiguity regarding misunderstandings/misinterpretations.
While we understand the call by some commentators for an easy-to-understand single risk-indicator that integrates market, credit and liquidity risks, a single risk indicator should be provided only if it is shown in addition to the three separate risks indicators. Moreover, we ask the ESAs to place strong emphasis on the issue of comparability when considering the combination of individual risks into a single measure as well as the weighting of different risks within the same PRIIPs types (e.g. passive FTSE 100 tracker fund vs. actively managed emerging debt fund) as well as between different PRIIPs types (e.g. funds vs. structured products).

For example:
- Market risk will always be the predominant risk type for a UCITS and will vary according to its investment objective.
- UCITS generally do no expose the investor to credit risk, as they are off-balance sheet
products whose underlying assets are held in custody by a depositary subject that is liable for their safe-keeping, and the diversification requirements minimise exposure to any one issuer or counterparty.
- Liquidity risk for the retail investor is very low, as the UCITS must provide the possibility to redeem at least twice a month (in practice, most UCITS provide for daily redemption) and the manager is required to run the fund in such a way as to honour this commitment in all but very exceptional circumstances.

As regards the presentation of the indicators, we urge the ESAs to take full account of the previous consumer testing of the UCITS KIID, which clearly demonstrated the merits of a scale-based risk indicator.
It should be described, what additional risks from the summary risk indicator are not captured adequately.
Cumulative costs should be presented always in absolute figures and as a percentage, as this information is – due to MIFID II requirements – needed by the retailer anyway. Providing this information within the KID would reduce the expenditure for retailers.
Generally speaking, our primary concern is focused on providing information that is in an understandable and aggregated form for a retail investor to arrive at an informed investment decision.
Too many cost categories will be confusing for most retail investors. Furthermore, many of the categories included in this discussion can be fully ascertained only on an ex-post basis. While these ex-post costs will be reflected in the estimates, this has to be made clearly understandable to the retail investors.
In terms of the costs categories related to PRIIPs, we provide more specific feedback each identified cost category:

Portfolio Management Techniques (PMT)
We support transparency of PMT, not only in the cost section of the KID, but also when describing the relevant risks.

Dividends
We ask for further clarification that dividends can be considered a cost to the investor only if they are withheld from the investor (and therefore indirectly form part of the manufacturer’s fees). In such instances, dividends should clearly be regarded as costs. In the case of funds, where these costs are credited to the client, they should be considered as a source of income rather than costs.

Look-through costs
Look-through costs should be disclosed in cases where they are material to the PRIIP (analogous to the UCITS KIID).

Bid-Ask spread and Market impact costs
In terms of the ESAs’ analysis on bid-ask spreads and market impact costs, we do not agree with the proposal, as it is inconsistent with ESMA’s Technical Advice to the Commission on MiFID II and MiFIR, which notes that, in line with MiFID II, “transaction costs should be understood as costs incurred in order to acquire and dispose of investments. ESMA acknowledges that in some markets (bond market, derivatives market, foreign exchange market) these transaction costs are embedded in the “bid-ask spread” [p. 118; para. 24] and that “the underlying market risk should be understood narrowly and relates only to movements in the value of capital invested caused directly by movements in the value of underlying assets” [p. 119; para. 25]. These statements thus imply that the bid-ask spread covers market impact and may include transaction costs (i.e. the bid-ask spread is not per se transaction costs). As the PRIIPs KID will be relied upon by MiFID distributors to provide appropriate information on product costs, the understanding of the relevant cost elements should be congruent under both EU frameworks.
On a more general level when discussing cost disclosures, we fully understand that transparency of transaction costs raises significant practical problems, as we have highlighted above (e.g. for bonds traded with bid and ask spreads, it is not possible to determine which part of the spread is attributable to the broker and which part can be attributed to a market momentum at the time of trading).
Moreover, it should be borne in mind that in some transactions such as OTC derivative contracts, transaction costs are simply not identifiable as they are intrinsically embedded in the instrument price.
Since the PRIIP KID Regulation will cover only those derivatives that can be bought direct by retail investors, we see no prospects for quantification of costs in relation to B2B derivative transactions.
However, should the ESAs decide to further promote disclosure of transaction costs, we deem it of utmost importance that such disclosure pertains also to transactions conducted for the account of structured products and transactions concluded by insurance undertakings for the purpose of managing their capital investments. Only such broad understanding of transaction costs will ensure a level playing field among all PRIIPs and avoid unbalanced cost disclosures to the detriment of off-balance sheet products such as investment funds.
• Generally, a link to the homepage as well as a telephone number or e-mail should be included in the identity information; however, we think that the address of the manufacturer is not of any relevance. Additionally, we suggest providing the ISIN for securities, as a universal identifier.

• An example for the first section could be the German information sheet (PIB). In addition to the name of the PRIIP the International Securities Identification Number (ISIN) is stated to ensure accurate identification. In the case of financial instruments that are not issued with such information (such as CfDs, swap contracts), all information necessary to accurately identify the financial instrument is stated. Furthermore, the issuer (= manufacturer) is specified by providing a reference to the sector and website of the issuer. So it is easier for consumers to access additional information. The name of the competent authority should be sufficient. A web link won't be necessary. In addition to the date of the document a time stamp might be useful.
We consider the current Recital 18 to be too widely drawn, especially if the comprehension alert is not aligned in some way to the categorisation of an instrument as complex or non-complex under MiFID II.
This misalignment will create confusion among retail investors. We therefore generally welcome the ESAs’ initial suggestions on how to better capture what PRIIPs should be excluded from the comprehension alert and ask for further clarifications along the lines of our comments below.
Secondly, we strongly welcome reference to Article 50 of the UCITS Directive as a basis for what could or could not be included in the comprehension alert. While this should serve as a basis for further discussion, we would also stress that there are other types of investments that are typically invested into by retail investors, such as real estate and precious metals, and that the comprehension alert should also exclude these investment types.
Additionally, we believe that this thinking should also be extended to certain types of AIFs. While we understand that AIFs cover a broad range of products and that (such as hedge funds) can be considered as complex and therefore unsuitable for retail investor, a very large number of non-UCITS retail funds exist in many member states which have been designed to be non-complex instruments and which differ from UCITS only in terms of diversification limits but which would otherwise easily qualify as non-complex instruments along the lines of the UCITS Directive.
The information about the type is fundamental. The type should include a reference to the legal form (e.g. debt security / obligation, structured deposit, UCITS, life insurance contract). In addition to that the classification should also include a differentiation according to product features. In case of existing markets classifications they should be used as a starting point (e.g. fund classification used by the ECB, classifications of AIFs related to the reporting requirements under AIFMD, structured products classification developed by the EUSIPA).
In addition to the legal form the classification should also include a differentiation according to product features. In case of existing markets classifications they should be used as a starting point (e.g. fund classification used by the ECB, classifications of AIFs related to the reporting requirements under AIFMD, structured products classification developed by the EUSIPA).
• This information is crucial, as it provides the description of what the product aims to achieve, and how it will do this. This aids in comparing different types of PRIIP. The potential for confusion amongst retail investors comparing different KIDs increases, if PRIIPs of a similar type are described differently in their KIDs. Guidance on language might be necessary as well as common principles like keeping descriptions very brief and using a summary format. In addition to indications and examples of how to do it concrete text modules will be appropriate to assure that similar product types are described in the same way.

• Generally, we agree that general principles and, as necessary, prescribed statements might be needed for completing this section of the KID. The objectives and investment policy section of CESR’s template for the UCITS KIID is a good starting point.
• A possible measure could be to highlight important indirect exposures by listing instruments that create higher exposure than the combined overall holdings. The use of leverage, which would need to be measured by a specific rate/indicator, could be highlighted somewhere in the sections of the KID.
Moreover, the description of any sort of measures (such as portfolio management techniques) must be understandable for the retail investor. In this regard, we encourage the use of plain language to communicate clearly to the retail investor. But it can be difficult for PRIIPs to avoid technical jargon.
The use of a glossary or standardised sentences developed by the ESAs might assist understanding of some terms.
Unfortunately, the PRIIP KID Regulation does not refer to the known constituents of ESG: Environmental, Social and Governance. The G for Governance is essential to ESG strategy, because if a shareholder has no relevant rights vis-à-vis the management of a corporation, it cannot effectively engage in a dialogue with the management and hence may not be in the position to improve social or environmental issues the corporation might have. We believe that it should be possible for PRIIP manufactures to include in the description also governance criteria, where applicable. This would improve the quality of the information for the retail investor, who would then be able to evaluate the product with respect to the complete criteria.

• Guidance on language might be necessary as well as common principles like keeping descriptions very brief and using a summary format. In addition to indications and examples of how to do it concrete text modules will be appropriate to assure that similar product types are described in the same way.
It might be necessary to explain uncommon abbreviations. Complex sentence structures are to be avoided. The mere reiteration of financial-mathematical formulas is no substitute for a generally comprehensible description of how a financial instrument works.
Example of impermissible wording in PIBs according to BaFIN: The x certificate was designed as a recovery product for the holders of the y certificate."
Examples of abbreviations and unknown terms not permissible without explanations being provided in a PIB according to BaFIN:
1. "Settlement currency: NOK"
2. "Stock exchange listing: EURO MTF"
3. "Style of exercise: Bermudan"
The KID should be in accordance with the information given in the legal documents e.g. the prospectus."
• A PRIIP with a focussed investment objective (e.g. Asian emerging markets) could be suitable for any investor as long as it was part of a diversified portfolio which, overall, matched the investor’s risk appetite. We therefore insist the consumer type must stay sufficiently high level for product manufacturers to be consistent with the requirement of the “identified target market” in MiFID II and not to preclude a necessary suitability and appropriateness test being conducted during the investment advice.

• The question of the target market should be defined clear from ESMA/ESA to avoid legal uncertainty and to reduce potential confusion for retail investors. In the actual status of the MiFID II Consultation Paper, there is no definition for “standard target markets”. In our view every manufacturer will define its own target markets / customers.

• Information should include a generic description of the consumer type at whom the PRIIP is aimed at. This should include reference to the ability to bear investment loss and the investment horizon. A key aim is to summarise the overall risk/reward profile of the PRIIP in terms the consumer can relate to. Therefore it should be in line with the summary risk indicator and the recommended holding period. The consumer type must also suit the PRIIPs manufactures' defined target market. Information might also include the experience or knowledge expected of the consumer.
Information on a consumers' investment orientation like “risk-tolerant”, “risk-averse”, etc. should be avoided as long as the terms are not used uniformly throughout the industry. As a result, this might impair comparability until an industry-wide standard has been developed.
In general all consumer types should be covered in a similar way. Otherwise the complexity will be too high. It should harmonize with MiFID II.
Standard sentences should be specified for fixed length or open-ended products. If necessary, the conditions for an anticipated term could be specified or it could be mentioned only that an anticipated term is possible (e.g. open-ended funds that can become closed-ended).
We would, however, like to point out that besides a fixed length or open-ended term, some products have a fixed term that might be extended. This applies for example to ELTIFs, the manager is required to define a term but may also define conditions in which he may extend the term. Any rules regarding description of a term should take this into account.
The challenges might arise from different local investor compensation or guarantee schemes in different countries. Depending on the legal form of the PRIIP the risk of losing money because the manufacturer is unable to pay is quite different (e.g. debt security / obligation vs. UCITS / PEPs). So the handling or procedure will be completely different. The transposition of the BRRD into national law could be different in the EU-Member States. Furthermore, the BRRD might not be affecting all manufactures and the bail-in tool might not concern all PRIIPs.
This part should be in line with the consumer type and the summary risk indicator without providing any repetitions. The recommended holding period and the consequences of an early exit depend on the type of product. For some insurance products penalties might apply on early exit. An early exit may also mean a guarantee does not apply, or means that the investor receives market value of components of the product instead of the nominal value. For some UCITS the NAV is calculated only once a day. Some products might not be be listed on a stock exchange or there is no secondary market. So it might be difficult or expensive to sell the PRIIP.
The manufacturer may not know who the distributor is and may not be able to include specific information for the handling of complaints related to the distributor. Furthermore, for a great number of PRIIPs there will be several different distributors. So it is impossible to give information about all of them. Therefore we suggest to further elaborating on the different options for customer complaints, such as on a detailed differentiation between complaints regarding the product itself or regarding the final distributor´s advice to the customer. A possible solution might be to include generic information like If you have any complaints concerning the product please contact the manufacturer as mentioned below. If you have any complaints concerning the investment advice please contact your distributor.""
This section should refer to official documents, such as offer documents, the full prospectus for a fund, or other contractual documents related to a life insurance contract. A reference to the periodic disclosure documents the investor can expect should be also included. This section should refer to the manufacturer's webpage. But it should also contain the postal address of the manufacturer for investors which might not have access to the internet or request the documents on paper.
We consider that a generic description of the underlying investment options is not necessary for the investment in funds. However, if necessary, a generic description of the underlying investment options should only be provided via specific KIDs for each of the offered options.
We would not recommend using examples or representative investment options for illustrating possible risks and rewards as well as costs of an investment. If a product offers investors a free choice between different investment strategies, stipulation of a representative investment is not possible and could mislead investors into thinking that the presented figures bear some relevance in terms of their final choice. Instead, the use of ranges for the risk/reward information and the cost data could be envisaged.
Description of the different investment options should at least correspond to the information required in the section “What is this product” under Article 8(3)(c) of the Level 1 Regulation for individual PRIIPs.
Hence, the main features of the relevant investment options should be explained in particular to depict potential differences in the investment strategies and the relevant consumer types. This depiction should be accompanied by a clear reference to other pre-contractual information on the underlying investment options.
In the case of products offering many options, it could be difficult for investors to relate the information obtained on the product wrapper to the information on specific investment options. This pertains in particular to the overall risk profile and overall costs as well as performance scenarios presented net of costs. Whereas costs incurring at the level of the product could possibly be added to the costs of the underlying investment option, obtaining an aggregated picture of risks could be more complex, especially if the product wrapper provides for some elements of insurance/capital protection not present in the chosen investment.
• The UCITS KII Regulation should be used as a guide for developing these measures. It is important to remember that the KID is intended as pre-contractual information and any attempt to extend this to inform existing investors of any changes (other than through a broadcast or passive model) would create serious complications (including overlapping existing periodic disclosure requirements) and should thus be avoided at all costs.
Further clarifications on the meaning of material changes would be appreciated in this regard, as these which will trigger the need for a revision of the KID.
One practical issue worth mentioning from our experiences in revising the UCITS KIID is that of a UCITS moving from one SRRI risk category to another (i.e. from “3” to “4”). Currently there is a 13-week observation period that forms the basis of the SRRI calculation. This observation period is not in line with having to provide a KID within 35 business days. These practical concerns need to be taken into consideration.

• KIDs for products that are no longer offered should not be revised and updated anymore. In general, the information should be reviewed regularly. There are also situations in which an additional review might be needed. The change should be materially important enough to require a revision, for instance when significant changes to the product (e.g. corporate actions, knock-out, credit event, reclassification of risk) occur. For secondary market sales, an update of the KID would be appropriate due to strong price fluctuations and their impact on the performance scenarios. The KII Regulation for UCITS might operate as a good starting point. It can be adopted for other products. However, it should be changed to meet the requirements. Furthermore, the circumstances in which investors are to be informed of a revision, and how this will be done, have to define. It has to be in mind that in most cases the manufacturer does not know the identity of the investors and that the KID has been designed as pre-contractual information. Most likely will be an information or alert on the webpage where the revised KID is published. The republished KID could be highlighted as well. Notifications of the public using mass media like an advert in a newspaper would be too expensive on the long run and have the downside that investors might not read it.
We agree with the ESAs that the UCITS KIID should be taken as a starting point for questions on periodic review, revision and republication. One issue that requires clarification at this stage is connected to the issuer’s responsibility to keep the KID up-to-date. Furthermore, it is unclear to us whether it is 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 derivative can be traded in the secondary market to trigger this requirement.
For open-ended funds, we do not see any particular challenges. For closed-ended funds, however, it would be very burdensome to keep a KID up-to-date where these funds are actively traded on a secondary market (and if such trading is based on the decision of a third party and not the manufacturer). Closed-ended funds have signing periods during which the product is offered. If a product is no longer sold by the PRIIP manufacturer, there should be no obligation to keep the KID upto-date.
The UCITS KIID regulation should be the starting point and should be adapted to cover PRIIP potential specificities. In particular, the RTS should be specific as to what is to be considered as a material change.
• We think it won’t be possible to inform private investors about changes in the KID in an activate communication model. First, the manufacturer doesn’t know the identity of the customers or is even allowed to receive the retail investor’s contact details from the distributor due to data security. Secondly it is too costly for the manufacturer to inform the investors on a specific way. We think there should be a section on the website of the manufacturer to inform about a changed KID. We argue that manufacturers should actively communicate changes to the distributors. Only if the retail investor opted for periodic assessment of suitability distributors may have to communicate actively to retail investors.

• The KID has been designed as pre-contractual information. Therefore, an active communication model where manufacturers and distributors should alert retail investors to the new KID or send it to them (e.g. by email) should be rare.
A relevant issue is the decision under MiFID II if the seller is offering post sales advisory or not. For post sales advisory an active communication model might be needed.
While we agree that the technical standards should address the issue of retail investors being given the time they need to consider the KID before making any decision, it is an equally important investor protection concern that they should not be prevented from investing at the point they want to because of constraints imposed by overly prescriptive regulation.
We would consider these technical standards to be in line with the Distance Marketing Directive and MiFID II.
One might distinguish between an investment advice provided to persons present respectively absent (advice via telephone) and deals without advice.
• The KIID template published by CESR (CESR/10-1321) has helped consumers by making sure all KIIDs are similar in format and it has helped firms by clearly indicating how to construct a compliant document.
A similar approach for the KID would be most welcome. Otherwise there is a high risk of having to comply with multiple templates for products distributed on a cross border basis, which reduces competition by increasing barriers to entry while being a source of confusion for both investors and manufacturers.

• Prescribed templates, i.e. documents that manufacturers may complete, but with samples of layout and content would be helpful. It would make implementation much easier for manufacturers. Furthermore, manufacturers get an idea of what is requested to fulfil legal requirements. Templates will create a standard across the EU. It should be clear that prescribing templates do not release manufacturers to take responsibility for developing the KID. KIDs should be permanently enhanced. It should be possible to adapt the templates to the precise features of different PRIIPs if necessary. Different templates for the most important types of PRIIPS would be useful.
One possibility could be to follow the UCITS approach which does not address regular payment structures in the KID itself. In this case the regular payment arrangement should be addressed separately, e.g. in a pre-contractual document specifically. The more accurate information on regular payment products is the more helpful it is to aid investors in making decisions. But it would make comparisons between single and regular payment products more difficult. A KID for regular payment products should include specific information according to that fact.
The more complex the requirements concerning the compilation and distribution of the KIDs will be the more elaborate and expensive the drawing up and putting new documents into circulation would be. Depending on the type of risk indicator, the display and calculation of the performance scenarios and the cost disclosures used, procedures have to be implemented or adapted. The extent might be tremendous. A great challenge will be to keep the KIDs up-to-date, especially, when a PRIIP is offered in secondary market. Many documents and data have to be stored. Systems for monitoring data related to the ongoing accuracy of the risk, performance and cost information in the KID and devices for producing the KIDs on a continuous basis will be needed.
• Parameters and assumptions should be standardised across all products using the PRIIPs KID in order to create a level playing field. The holding period would need to be standardised, requiring the ESAs to establish such standardisation, in order to facilitate comparability across product ranges and to avoid that discretion is exercised in this regard by manufacturers. The holding period should be in line with the time frame for performance scenarios. The rates of return assumed for the purpose of cost calculation should match with the return rates underpinning the performance scenarios in the risk and reward section if probabilistic modelling is used. Since we prefer scenarios including probabilistic modelling and thus illustrating performance outcomes that can reasonably be expected for a PRIIP, it should be consequent to refer to the same scenarios for the purpose of cost disclosure in order to show probable results also in terms of costs. We believe that this approach would provide added value to investors in contrast to standardised growth rates not linked to a particular product. • Ex-post vs ex-ante: Ex-post figures (as used for UCITS) would be fine. But there should be an explanatory statement that they are not necessarily relevant to what might happen in the future. An estimate instead is being nature not an appropriate tool to calculate costs and charges. Assumed amount invested: The assumed amount invested should be same as used in the performances scenarios. The amount depends on the type of PRIIP. One option might be to establish a standardised amount for each type, e.g. 100 EUR, 1.000 EUR, EUR 10.000 etc. It has to be considered that for some product a minimum respectively a maximum size exists. A standardization over all PRIIPs would distort the reality too much.
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