The questions generally cover the areas which an investor would be concerned about however given the volume of Key Questions identified we believe it will be challenging to provide clear answers within a KID of 3 pages.
Complexity risk should be added. It is important that potential investors are able to understand how the features of a product might impact its potential return – particularly those that are path dependent or include triggers or other events.
Addressing the issue of whether risk and return is balanced is very dangerous, because it is a matter of an individual’s opinion.
We do not agree that they are the only risks – the risk that the investor does not understand the product should also be considered. We also believe that these are the main risks only on the basis that other risks have been deemed instances of the parent risk e.g. currency risk and inflation risk are both instances of market risk. Obviously, it would be important that regulatory standards ensure there is proper consideration and presentation of these subsidiary risks in articulating the overarching parent risk.
It is important to make clear that market risk is not only the impact of movements in the price of the reference asset but a broad family of inputs, hence perhaps “Market Risk is the risk of changes in value of a PRIIP caused by changes in market conditions” captures this better.
We would highlight that credit risk is unlikely to constitute a material risk for PRIIPs constituting a distinct legal entity such as non-insurance related funds, unless there is a requirement to look through to theoretically problematic counterparty and collateral arrangements.
We agree that liquidity risk is a material risk, but would highlight that certain products such as closed ended vehicles have inherent focus and strategies that by necessity constrain liquidity e.g. systematic implementation of gates in certain AIFs. We agree that illiquidity in underlying PRIIP assets could have a significant impact on market prices, however, funds themselves can and should impose constraints on redemption in such circumstances (e.g. ability to suspend redemptions in property investment vehicles). Transparency on this point could presumably mitigate an otherwise unfavourable score for liquidity risk. On a related point, we would be keen to understand whether firms would be expected to consider valuation risk as a subsidiary consideration of liquidity risk in circumstances where liquidity was required immediately and not mitigable.
We reiterate our support for the focus on these risks however we feel the quantitative/ qualitative sections of each were not relevant. Numbers are not necessarily useful in this section – as soon as numbers are added the model or basis on which they have been calculated has to be disclosed and there is not enough space for this in three pages. We feel the most appropriate approach is the implementation of a model based on the prototype risk indicator which we have included as part of our submission – here there are five levels to categorise liquidity, issuer credit, type of underlying etc. The parameters set out in the drop down boxes could be standardised across the industry with each issuer picking the appropriate selection which selects the corresponding rating.
Credit risk is important and we see much value in using credit ratings (or other credit risk indicators) to distinguish between product providers as well as an investor being able to see when credit ratings start to fall. We have some concerns given that in times of trouble ratings can drop very quickly - by the time the downgrade has happened the securities will have lost their value however we still think this is a relevant and important risk to include.
We do not believe that the liquidity risk parameters proposed reflect either the range of secondary market trading methodologies (e.g. fund managers by rule are the only entities to make a market in their own units, with certain exceptions such as ETFs) nor the extent to which liquidity risk (to valuations for example) can be mitigated by the PRIIPS provider.
Access to data must be considered and this pushes us further away from any benefits in using data as it is impossible to include all relevant data/information in the three pages.
There is a risk of information overload and we must bear in mind that this is a three page document for key risks. It is possible for example that in highlighting exit costs/early redemption fees providers would also need to detail situations in which early termination is likely.
When faced with a typical investor we must assess what is useful information for the three pages – perhaps a link to the prospectus or a separate document where these risks and costs can be fully disclosed is best. Even with the lightest touch the sections proposed by the discussion paper are likely to run over three pages.
In relation to structured products, unless the exact model firms need to use is prescribed providers cannot predict outcomes as it will lead to too much divergence between institutions which will cause confusion to investors.
Probabilistic modelling also suffers from suggesting a ‘likelihood’ of an event occurring, based on a particular set of modelling parameters or the propagation of a range of theoretical outcomes. In the ‘real world’ an investor will only experience a single outcome, without any sense (on anyone’s part) as to whether that really was a ‘likely’ outcome.
Notwithstanding the limitations that divergence of different modelling techniques introduces, it may be sensible to highlight “highly unlikely”/”highly likely” outcomes, i.e. to highlight to investors that, at least from a pricing model perspective, certain events are deemed to be low/high probability where this may not otherwise be obvious or provoke further thought.
It is possible to look at how the product is affected if the reference asset does not move or if it moves by X. We could have one or two examples but the best method would be to point to a website which would have the mechanics to show different outcomes for investors to play around with different scenarios in line with their investment view. This can provide a tool for investors to model what happens to their investment in various scenarios. This website would need to be created by the regulator or an industry body so an investor could go to the same place to carry out the modelling regardless of who the manufacture of a particular PRIIP is.
We would highlight that for products other than those comprising a relatively static exposure to an underlying asset or range of assets, probabilistic returns are much more problematic to forecast. We agree that relying on past performance as a predictor of future performance is not helpful. We believe in such circumstances that there is little information that can be provided to customers other than a factual description of what risks each product presents.
Clear regulatory guidance is required e.g. German/Swiss product categorisation. Even then, it should be noted that different firms’ pricing methodologies or models may vary which would impact the usefulness of the results produced. This, along with differences in parameters used to price a particular product/tranche (for example firms’ funding or credit spreads) might mean that probabilistic outcomes might differ from one issuer to the next. This could be addressed by appointment of independent third parties, for example on the COSI segment of the SIX Swiss Exchange valuations are produced by a range of independent third parties.
We propose that where a PRIIP has a defined maturity (and is designed to be held to that date), the most important time frame would be the maturity of the product. . Such products are clearly designed as buy-to-hold/hold-to-maturity investments. This would seem to be particularly sensible for those fixed term products offering protection of a minimum fixed proportion of the investors’ principal.
For open-ended products or ‘trading’ products, this should be aligned to the typical/intended holding period of the product. For trading products, ESAs could review both the UCITS standards and the commonly-used retrospective time frames that are provided by information service providers such as Morningstar as a guide to information that retail clients might find useful (i.e. 3 months, 1 year, 3 years etc). We believe that these are representative of the prospective holding periods that the average consumer has in mind when making investments.
We would support the use of monetary amounts – our consumer research has shown this is what investors want to see, combined with percentages.
We believe that it would be appropriate to align the scenarios with the presentation of cost information and MiFID II appears to stipulate a combination of percentage and actual cost information. By contrast, the UCITS regime currently requires only percentages.
There could be a general provision for costs we are aware of but this would need to be qualified by external costs which we do not know to avoid it becoming unnecessarily complex.
If fees are path dependent they can be very difficult to estimate and we risk misleading investors as we cannot be certain of what these fees will amount to. Certain fees are dependent on product performance during the life of the investment we are not sure how that would be most usefully/consistently represented. Similarly, in relation to funds, fees are calculated based on Net Asset Value, which will evolve over time and it is additionally not possible to predict trading volume or the cost of implementing structural or regulatory change where that is borne by investors.
Previous guidance from the FCA has pointed to the shortfalls of pointing solely to either historical or forward-looking scenarios in representing potential investment outcomes.
In the context of the KID for structured products (particularly with limitations on its length) it is important to be clear on whether investor benefit is best served by highlighting extreme/lower probability scenarios (that might in some cases produce significant investor benefit or detriment) or scenarios with a ‘reasonable’ possibility of occurring.
The ‘optimal’ number and range of scenarios might also depend on the structure of the product as if it is end point dependent/ path dependent/ end point dependent with an event – we believe that the best way to deal with all three is for the regulator/an industry body to build a website for investors to play around with numbers. If this were a feasible idea one scenario in the KID would suffice and then investors could put their numbers into a website to see what happened if prices moved in a certain way.
Alternatively, a hypothetical scenario could work – what happens if the market goes up/goes down or stays the same without making any predictions. As the product provider typically does not interact directly with investors it is inappropriate to make judgements based on what they are looking for.
Alternatively, we could work out the best and worst possible outcomes and include a scenario which shows these outcomes together with a scenario where the market doesn’t move much.
The diagram on page 1 of the model KID we have prepared and included as part of our submission, along with the table on page 2 is an option of how it could be presented.
Finally, there is a practical issue that different products may have different needs in terms of scenarios presented and there may need to be an element of flexibility where we can apply a different approach for different products if necessary. If it is too prescriptive some products may not be able to fit into the methodology.
The scenario analysis used in the German equivalent of the KID, the PIB, provides a live framework to help direct the presentation of scenarios hence consultation with the German Derivatives Association/BaFin is recommended.
Retaining distinct risk indicators for the different categories of risk is the only viable option in our view. Giving one indicator is not an accurate description of different risks which have different effects on underlying assets. A single indicator potentially misrepresents the risks to investors as it masks the impact of each individual risk, however three individual risks with one overall risk are considerably better than one solitary number.
Owing to the limited space in the KID we would suggest the absolute maximum number of scenarios should be three. These would need a health warning that they are just examples and not to be relied upon and could show a historical negative/positive/neutral scenario.
Alternatively we could show forward looking negative/positive/neutral scenarios but regulators would need to set what the rates of return should be, i.e. what good/bad looks like, i.e. bad means -10% and good means +10% if there is to be any meaningful comparability between products.
In our view, there is greater investor utility in being able to compare product A from Barclays with product A from JP Morgan and to do that the regulator has to set the specific rates.
All scenarios should be presented from the point of view of the investor.
In our view a multiple risk indicator (as per the Risk Reward Indicator we have attached) with a single visual performance scenario is the best option.
We believe that consumer testing will help steer this point but first it would be necessary to take a purposive view of the product and establish what we are trying to explain - the potential for a high return, a low return or a loss?
In our view, one possible option would be for the regulator or an industry body to produce a tool where the investor looks at where it expects the market to go. The tool can provide a scenario of their view of the market and could go on to provide the probability of that scenario happening. Such an approach would of course not reflect the consideration that the client holds a PRIIP amongst a range of other investments and that it is intended to achieve a specific purpose in a portfolio context. The limitation of a static KID is that it cannot hope to anticipate all the uses to which the PRIIP will be put. That will vary greatly depending on the nature of the PRIIP and each client’s investment objective. The KID cannot compensate for the absence of a consideration of product suitability.
There should be an investor profile with the length of time the PRIIP is to be held and what will happen if the market goes up or if the market goes down to give the investor the opportunity to see what the product is designed for.
For prescribed return products any purported representation of how a product might perform prior to its scheduled maturity date should consider how best to disclose the impact of market parameters (including credit spreads, implied volatilities, etc) on the product’s performance – i.e. the product price will (typically) not move in line with its maturity payoff formula during its life.
Should ESAs choose to restrict themselves to the provision of a static KID, we would support the inclusion of a summary risk indicator with performance scenarios that separated out risks and performance. As stated above, we do not support the aggregation of information on types of risk and believe that performance projections are useful only to the extent that they are relevant to the PRIIP.
Our view is that the following questions represent the consumer view:
How much does it cost me to get in or out of the product?
What is the cost of holding the product?
Who takes the risk of these costs changing?
What might affect the costs?
From this, we would deduce that clients would want to understand what costs, if any, are embedded in the product as well as explicit product charges and, in relation to funds, predictable static charges to be drawn from the value of the product.
We believe it is very important that the KID should also reflect any possibility that costs could be higher than shown and what might increase that possibility. As reflected in ESMA’s Technical Advice to the Commission on MiFID II in relation to information on costs and charges, it is clearly not realistic to show actual costs in all cases at the outset.
In relation to structured products only - Distribution fees/ Issuer fees/ Bid/Offer pricing adjustments/ Hedging Costs/ Manufacturing fees which may be built into the product.
If comparability between structured products and other products such as funds is the aim, we need to be very careful as the cost impact is very different in the funds world. For example, in a funds context, hedging fees are relevant but these would be taken off the NAV and not disclosed to clients.
In relation to structured products, we can look at the Adjusted Fair Value, i.e. the value as it would appear in the Issuer’s books and records for the purposes of trading book valuation and risk management.
The scope of an investment bank’s (or issuer’s) analysis, in relation to structured products, would be hedging costs, estimated margin or profitability (typically ‘at risk’) and known distributor fees and while more fees may be added down the supply chain this would be outside of the scope of the product manufacturer’s analysis.
Furthermore, all other things being equal the cost to manufacture should be a source of competitive advantage for cheaper product providers.
In a structured products context, the important thing is the price the investor is paying rather than the profit the issuer is making. In a defined return product the costs may be less relevant, and potentially more relevant in open ended products. It should be noted, though, that factors such as high funding/credit spreads may correlate to low ‘fair values’ and either low offer prices or higher margins (for a fixed offer price). Those same funding/credit spreads might also point to perceived credit weakness of the issuer, and it will be difficult to separate ‘manufacturing efficiency’ from ‘creditworthiness’ and explain this to potential investors. This is another reason why we propose the risk factor presentation, included as part of our submission.
Costs embedded in a structured product are likely only reflective of the amounts related to the primary transaction. These embedded costs are likely to materially change through time (on a daily basis) and it would of course impractical to update a KID to reflect these movements.
Overall, we would be supportive of an approach that limited overemphasis on the value of projected cost information. In addition, we would be uncomfortable with an approach that required firms to calculate and represent costs in a spuriously accurate manner. On that basis, we believe that there should be limited reliance or prominence given to projected compounding of costs in relation to products where these are far from certain.
Our view is that the fee and cost disclosure within the German PIB are a sensible (and live) approach, i.e. disclosure of embedded distributor fees as well as issuer margin & known direct day-1 costs (legal, listing etc…). Not included are expected hedging costs, which are difficult to estimate and will vary depending on the pricing model used.
If the EBA would like to disclose estimated/expected hedging costs, we feel third party estimates would be most appropriate.
We do not believe that this approach would work for anything other than a fixed rate deposit or security. Trying to compare costs as a potential yield impact would not make for a sensible comparison as the impact of fees and other charges doesn’t necessarily map to yield in a consistent manner, particularly when comparing one product to another.
There would have to be two scenarios for the minimum and maximum return which could be confusing for investors. For structured products the important thing is the defined return – fees are paid upfront and an investor can see what is being paid to distributors etc. Other costs such as hedging costs are built into the payoff, and it is difficult to see how they are relevant for the purposes of disclosure in the KID.
We would suggest that the UCITs KIID has an ongoing charges measure and as this is very well understood, it would require a lot of unnecessary re-education to move away from this. The KIID provides a total charges breakdown, incorporating the ongoing charges component, which we believe would provide a more meaningful disclosure methodology than an aggregated figure. This more detailed approach to charge disclosure would also allow consumers to understand the relative dynamism or steadiness of different cost elements.
For a defined return payoff it is easy to provide defined fees of P&L, distribution fees etc as other fees are built into the payoff. For open-ended products these fees would not be known at the outset. You could however provide information as to how these charges might arise during the life of the product.
For a defined return payoff, rather than RIY it might be appropriate to show how much more of the product could be purchased for each [1%] reduction in (upfront) costs.
On the whole, we do not believe that using assumed growth rates is helpful. Associating costs with investment returns is likely to create a direct causal association in consumers’ minds.
In addition, where all charges are upfront it is misleading to show the costs of the product if the scenario itself appears to minimise the cost. For example, if, in a given scenario, the market rises by 10% per year the fee is likely to look low. Actually the fee is £X and the monetary amount should be disclosed as it is not linked to a return.
This is obviously different for open ended structured products with variable fees which are affected by the length of time etc the product is held.
For structured products while there could be an estimate of the portfolio transaction costs this will not affect the return for a defined return product.
This is a key difference between funds and structured products and investors should be clear that in the funds space transaction charges can negatively impact an investor’s return (even though at present the ongoing charges figure in the UCITs KID excludes portfolio transaction costs). We would also highlight that transactions are undertaken by fund managers to pursue investment strategies and generate investment returns for the portfolio and not the fund manager. By contrast, for most structured products the cost has typically been built into the payout and the return an investor receives will not be impacted by any change as the provider bears the ongoing risks of any variability in these costs.
If the issuer invokes its right to redeem early under (for example) an increased cost of hedging event, this might give rise to costs that would impact an investor. Experience shows us that this is a very rare event and, given the constraints on the KID design (including maximum length) we feel that the space required to explain this eventuality might be better used to display other elements of investor information set out in the discussion paper.
In reality, we think it is unlikely that standardisation is achievable as the sections are not going to look similar across product types. It is incumbent on regulators to provide a guide book to investors which show why things might look different and what these differences actually signify.
From our perspective, the key challenge the ESAs face is that structured product providers charge explicitly/implicitly on day 1 and so an investor’s return is typically not then impacted in a variable manner and the effect on investment performance at maturity is known with certainty. For nearly all other products with underlying investments (excluding life insurance wrappers), the charging model comprises a range of contingent and variable costs, making comparable disclosure extremely difficult. The costs embedded in a structured product may also evolve over time, for example distributor fees will be amortised over a period, hence the cost information in the KID will only be relevant for a primary transaction and not for a secondary transaction.
We agree with the comments on the limitations of most of the presentation approaches. In our view, options 8 & 9 have too much information and the best/worst scenarios in terms of costs are not helpful for a structured product. Unlike a fund that may increase in value by 4% in one year, a structured product whas returns linked to its maturity.
If the product has a defined maturity, the only sensible scenario to explain is where the product is held until maturity and the fees are drawn upfront. If the product is open-ended it might be helpful to look at the impact of costs on different years of the investment and show the compounding effect. This however would be difficult to determine at the outset given the contingent and variable nature of charges.
The impact of fees for a fixed return product may be best represented by showing that for each EUR 1 you pay in fees, you could have bought another x securities and if there were no fees it would allow you to buy more of the product.
There would not be costs to be disclosed here in relation to a structured product as they would have already been built in to the issue price/redemption amount.
We do not believe it would be appropriate for the measures to be integrated as we do not know which section is important for each investor and if they are merged it will lose meaning. If we use one number it will become meaningless as all issuer’s will use the same number (which is not too high risk and not too low risk, a three or a four). We would support thorough consumer testing of both a single integrated measure and a disaggregated approach. We believe that whilst the testing would reinforce a consumer preference for one number it would quickly highlight the drawbacks of the integrated methodology from a consumer understanding perspective and emphasize there being little value in meaningless simplicity.
It is important to remember that risk is not necessarily a bad thing, and within a well constructed portfolio an investor might sensibly want to include assets with different levels – and types – of risk. The KID provides an opportunity to highlight to investors the type and level of risks that a product offers and this opportunity could be lost by alighting on a single (potentially meaningless or misleading) indicator.
In our view, for most products this would be best shown as: what you pay – fair value. This would show what you pay in and what amount is known will be taken out as fees. Additional information should be provided to help investors understand how and when other charges will arise.
We believe that table 12 represents a comprehensive list of direct and indirect costs associated with PRIIPs. We broadly support the methods proposed for disclosure. We have some additional comments in respect of certain items, which largely relate to the extent to which items could be deemed to be direct costs or cross-subsidies or relevant for particular product types.
Portfolio management techniques – in our view these don’t represent direct costs to the customer but indirect ones as the revenues earned are used to pay for services that would be otherwise be borne in the product. They are therefore a form of cross-subsidy rather than a direct cost. We do not believe such costs should be articulated in a KID. The additional risk created to client assets through permitting stock-lending could reasonably be flagged in the risks section (unless acceptable collateral mitigates any risk presented).
Broker commissions – these will only be able to be disclosed to the extent that they are always discoverable by product providers at the time they issue products. Similar considerations would apply in relation to bid-offer spreads on underlying securities.
Entry and exit charges paid by the fund – we understand that these are in place to balance out the interests of those purchasing and those selling interests in funds and these are not therefore direct costs to investors and should not be disclosed.
Market impact costs are relevant for funds but not for structured products as the product provider will have already priced this in. In our view, these might impact fair value if a number was put against market impact costs for a structured product, the relevant number would be zero, which would presumably constitute meaningless information for a defined return product.
Manufacturer’s website for contact details for the manufacturer, the competent authority of the manufacturer and the ISIN or other unique instrument identifier.
The criteria is clear however our concern is that the criteria, as currently drafted, means every structured product will need to contain the warning and, as such, will lose impact.
This will need to be prescriptive or investors will not be able to compare products as if manufacturers describe each product using their marketing names they will become meaningless and impossible to compare. If it is overly general, i.e. structured product/insurance product etc, it will have limited value.
In relation to structured products we would suggest it is best to stick to the basics, i.e. note/certificate/warrant and either capital protected or non-capital protected. It will have to be prescriptive and reflect the diverse nature of structured products and the need for flexibility to allow for future innovation.
No. We do agree it will be very hard to summarise some complex product structures but prescribed sentences which can be used as examples will be so general they will not help such complex products.
One or two example statements in the Level 2 text would be helpful to provide guidance to manufacturers as to what information should and should not be considered key and ensure conformity but given the diverse range of products covered it will be too difficult to formulate statements that are meaningful and insightful in all contexts.
In relation to structured products, it would be helpful to cross refer to the base prospectus where the full information is to supplement the limited information provided in the three page KID. While the manufacturer will try and provide as fulsome information as possible it must be recognised that there is an ambitious set of criteria to be covered in three pages and there will always be a risk that an investor may not understand all of the risks and features of the product.
For other products, we believe that the Level 3 material provided in relation to disclosure of product objectives and investment policies for the UCITS KIID might be helpful.
We agree that it is helpful for an investor to know the intended consumer type for a specific product. For example, if it is aimed at a sophisticated or high net worth investor with a particular risk appetite it would be helpful for amateur less sophisticated investor with more limited financial markets knowledge to understand that it may not be suitable for them. Similarly, if a product is meant for someone who is happy to hold it for a certain amount of years without having access to their money, it would be helpful for investors to be aware of this.
The analysis should be limited to a very high level consumer type given the space constrictions in the KID and an acknowledgement that the manufacturer (KID producer) may be one or more steps removed from the end investor. On the whole, we believe that stipulating a target market with any degree of specificity or for example, reference to client demographic characteristics, unnecessarily limits the use of particular products in portfolios of clients for whom they could well be suitable. The intended use of a product is always a relevant consideration but infrequently known by a product provider.
No – these schemes are not manufacturer specific and so should have prescriptive wording so investors can easily see if they are the same or different. Following a short summary of the applicable scheme a link to the applicable website containing the full information would be a suitable and efficient way to provide investors with the required information.
Any disclosures required in this section should anticipate that certain products are not exposed to balance sheet risk of the provider or other party providing the underlying investment components.
For structured products, there would be challenges for providers as the exact costs in relation to early redemption fees etc would be unknown at the time the manufacturer produced the KID. We can insert the formula we use to calculate such costs however it will contain a number of unknown variables.
Should an investor sell a structured product prior to the maturity date (in relation to a hold-to-maturity product) they will receive market value and lose any entitlement to capital protection but no further information can be provided.
For other types of product, we believe that a recommended minimum holding period might be misleading and conflict with any tactical investment recommendation an investor receives through a suitability process.
We are not entirely clear on the intended scope of the article in question. On the whole we believe the manufacturer may not know who is distributing the KID further down the chain and so may not be able to provide this information. By way of illustration, the complexity of the UCITS regime (with Manco and UCITS passports) and the proliferation of intermediaries in the investment market would make the provision of contact information for complaints about distributors impossible, unless it is intended that clients always direct their complaints to the product provider for their information only.
Yes – there should be a link to the provider’s website where the base or full prospectuses or other relevant offering documents are held together with a link to financial information or other disclosure documents relating to the manufacturer or other relevant issuer of the underlying securities.
We support the proposal that each of the underlying options should be regarded as a different product and requires an individual KID. We believe that this creates an appropriately level playing field in terms of information provision across investment vehicles, particularly between regulated funds and unit-linked funds, in light of the equivalence of these investment options with other investment vehicles in investors’ minds.
We do not believe that considerations related to the structural arrangements in the life insurance market should outweigh the necessity of consumers understanding the nature of risks to which they are indirectly but explicitly exposed.
Guidance is needed on what constitutes a material change as this requirement will put a significant burden on manufacturers if the KID needs to be republished every time there is a change in the risk reward indicator which could be daily in relation to volatile underlyings
If this were the case for all products which are sold on the secondary market it would be too burdensome as all secondary market activity could be halted daily while new KIDs were being prepared for every structured product and there is a risk that the KID will never be fully up-to-date as the risk profile might change constantly.
As the KID is a pre-contractual document prepared by the manufacturer, it should not substitute the duties of the distributor to provide information to investors throughout the life of the product and should not be used to inform investors of any changes occurring after the product has been sold. The KID should only be updated to reflect changes likely to significantly impact investment decisions in future primary market sales.
In our view, requiring a manufacturer to review and update the KID where products are not actively marketed/there is no open offer period or liquid secondary market would be disproportionate and inappropriate.
For retail public offers or during offering periods for closed-ended vehicles an active communication should be provided during the public offer/subscription period only. A manufacturer’s responsibility should be to deliver the updated KID to the distributor and it should be the distributor’s responsibility to ensure the end investor receives the updated KID.
We would strongly support the dissemination of information about changes to KIDs in a passive or broadcast manner only. We believe that requiring the active dissemination of a changed KID would undermine in particular the role of advisory intermediaries and could create a false impression in the eyes of investors that they are receiving ongoing advice in relation to products, depending on the mechanism of intermediation. Under the UCITS regime, it was clearly understood that KIIDs were precontractual documents and as such, the obligation to provide a KIID related only to the first instance of recommendation or for existing clients, if they requested further information.
Broadly speaking, this seems a sensible approach as we should retain flexibility as every investor has different needs. We would however support the retention of those elements of the Distance Marketing Directive that permit investors to make investments at the time they want to make them, rather than after an arbitrarily defined “good time” has passed. We believe that this is key to ensuring clients receive timely execution of their orders.
Yes. This would be very helpful for a standard structured product, i.e. an autocall or reverse convertible. It must be clear that this is an example and manufacturers will need to deviate for complex products.
This should be addressed during the RTS rather than at Level Three, given the amount of work and investment which will be required to be completed by firms to prepare for production of KIDs. By the time Level Three is published it will be too late to be of any practical help to firms.
We are concerned in relation to probabilistic modelling of likely return scenarios and where the theoretical benefit of such approaches needs to be weighed against the reliability of this modelling in light of the level of assumptions that will need to be applied to allow application across all PRIIPs. This is particularly the case given the likely significant costs in implementing such measures and monitoring the inputs and updating the outputs of such models.
It is our preference that assumptions are kept to a minimum in the KID document itself, to avoid confusing investors and setting false expectations. We believe that the wide diversity of client requirement should necessitate the KID being limited to providing consumers with the information they require to understand the factors having an impact on the product outcome.
We believe that the number of assumptions being made should be kept to a minimum, with the objective of ensuring that the KID – including its purpose, benefits and limitations, is understandable, i.e.:
- Holding period – to maturity or example holding periods
- Rates of return/growth rates – no assumptions should be made
- Amount invested – a nominal EUR 1/EUR 100 or other statistically prevalent increments
- Fees – to be included as a currency amount per X invested and as a percentage.
ESA needs to consider the impact of other intermediaries further down the distribution chain that have to produce the KID and have external fees to pay. The product manufacturer can happily disclose fixed fees but others could run into difficulty down the line.