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HSBC Bank

Peter Moore
HSBC notes the proposed Basic Questions related to uncertainty (dispersion of possible returns)". As noted elsewhere in our response, we have concerns about probability related content in the KID due to our belief that investors may misunderstand what information expressed in this manner is seeking to convey.

We are also concerned that the question "Is risk and return balanced?" may infer that the bank is making an assessment of "reasonable" return with reference to the reading investors specific risk appetite, to which the manufacturer will not be privy. Instead, the scenarios should give the client insight into how the price behaves a across a range of occurrences."
Yes, HSBC agrees that market, credit and liquidity risks are the main risks for PRIIPS.

However, we are concerned with the scope of the definitions and the level of detail in describing them. HSBC believes the KID should describe the price behaviour due to a change in the main risk factors. However, it should not explain the reason why the risk factor itself has changed. This is a fundamental position - as the main thing that matters is the view on the risk factors of a PRIIP of the very investor buying the PRIIP - and this is highly personal and by definition cannot be generalized in a KID.

Furthermore, we would like to point out that, in the case of credit linked note, the definition of credit risk should encompass the credit events of both the issuer of the PRIIPS and the issuer of the underlying asset. In the case of the credit linked note, the credit events of the issuer of the underlying asset should not be considered as market risk.
For liquidity risk, we do not consider “the bid-offer spread” and “the number of market makers excluding the manufacturer” to be as anywhere near as relevant as the “average volume traded”.
HSBC believes that contingent costs should be addressed separately.
HSBC has participated in and endorses the ISDA response to this question 6.

HSBC strongly believes that the KID should not set out performance scenarios which include or are based on probabilities. We believe the end investor’s information needs are best met when the KID outlines how the product will perform in a factual set of circumstances without referencing the likelihood of those circumstances occurring. The best approach is to present to the retail investor three possible outcomes (one on the negative side, one the positive side and one intermediate).

HSBC has many concerns with probabilistic modelling, including the creation of a material risk of fewer investors taking investment advice, having misunderstood the probability analysis, thus leading to an elevated risk of poor investment outcomes for the PRIIPs investor.
In our opinion the use of probabilistic modelling can provide misleading information to the investor. Please see our response to question 6.
For shorter dated products we should use expiry date. For structured products with a pre-defined maturity, the strategies are meant to be held until expiry so they should be evaluated that way. By doing this we show a fair representation of the different outcomes for the investment horizon that the client has when entering the transaction and we avoid having to make assumptions on all the market variables that affect the pricing throughout the life of the transaction but do not matter anymore at maturity. In our view, the ‘at expiry’ analysis is the only way to truly isolate the behaviour of the underlying asset (which is the driver of the investment and the instrument on which the investor has a view) from the other market variables.

For longer dated products it is more appropriate to incorporate aging in the scenario-analysis on the risk factors.
HSBC favours percentages.
HSBC believes that performance scenarios are better expressed in gross terms: this approach allows the investor to have a better understanding of the impact/effect of costs on the performance.
The number of scenarios should be based on the best possible representation of the potential outcomes of the product. More complex strategies might require more scenarios.
HSBC would favour the use of narrative together (potentially) with a payoff diagram. The problem with numerical representation only is that it might not be absolutely clear to the investor that those are examples only. The scenarios are easier to represent with a description of a situation followed by a numerical example i.e. “if spot goes up and at maturity is above 1.30 client gets 5% return. For example, spot at expiry is 1.35 - client gets 105%”.
HSBC agrees.
The general KID features proposed for insurance broadly appear appropriate to the extent PRIIPs regulations are aimed at achieving 'minimum harmonisation' with local laws. We note that in the UK, the Financial Conduct Authority have established similar product requirements impacting Insurance (since 2012). These type of local regulations should be taken into consideration by PRIIPs regulations to allow flexibility and alignment with local laws already imposing similar requirements, setting minimum key requirements as opposed to an exhaustive list which may contradict or supersede local regulations.
HSBC agrees.
No, HSBC does not agree. We believe that only an indicative cost should be expressed.
HSBC believes that implicit portfolio transaction costs should be expressed as percentage of the underlying position held.
HSBC believes that the Annual Percentage Rate (APR) is an effective way to present the cost disclosure in the KID (see p. 66).
HSBC feels that the best way to explain risk and the functioning of the product is scenario-analysis by stressing the value of the main risk factors. This gives a good insight to the riskiness of the product and gives the investor directly visibility on which risk factor he needs to make up his mind.
HSBC believes that cumulative costs should be presented on an annual basis.
HSBC agrees with the costs and charges to be disclosed to investors, as listed in table 12, except for the costs embedded in pricing parameters category which is, in our opinion, difficult to measure, and , as a result, difficult to disclose to investors in an easy-to-understand- manner.
HSBC believes that the manufacturer and the competent authority’s website are the appropriate identity information to be included.
HSBC believes that identifying and describing other mechanisms which should be considered as “taking advantage of retail investor’s behavioural biases” would be helpful in defining the cases where the KID should contain a comprehension alert section.
Yes, HSBC agrees but without reaching a specific view.
HSBC believes that a classification by product feature should also be considered
HSBC agrees.
An ability to bear losses should be stated when relevant.
The general KID features proposed for insurance broadly appear appropriate to the extent PRIIPs regulations are aimed at achieving 'minimum harmonisation' with local laws. We note that in the UK, the Financial Conduct Authority have established similar product requirements impacting Insurance (since 2012). These type of local regulations should be taken into consideration by PRIIPs regulations to allow flexibility and alignment with local laws already imposing similar requirements, setting minimum key requirements as opposed to an exhaustive list which may contradict or supersede local regulations.
HSBC is not aware of specific challenges.
HSBC is not aware of specific challenges.
HSBC is not aware of specific challenges.
HSBC is not aware of specific challenges.
It is HSBC’s opinion that costs should be calculated on an ex-post basis and the holding period should always be taken into account.
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