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The Finnish Structured Products Association

Mr Jyrki Iisalo
All investments are characterised with uncertain returns. This is not a specific feature of the PRIIPs. The question on likely gains with an investment is of course a fundamental question that investors place. But making “the analysis” based on historical or implied volatilities for the investor is questionable. The FSPA is reluctant to assume the responsibility to the issuers or distributors on the matter where ‘a crystal ball’ would be needed. Therefore the FSPA hesitates that the products would state any ‘likely wins’. If that is enforced the FSPA is happy to receive the calculation rules from the ESAs.
FSPA agrees with the behavioural purpose of the KID – after reading the information the retail investor should be able to understand the product. The risks and rewards should have a balanced presentation. We believe on a balanced and equal weighted presentation of the facts together with an educated and independent decision of the investor rather than on a consumer behavioural attempt to steer the decisions. The retail investors are not alike!
FSPA agrees about the main risks. It should be noticed though that “credit risk” can also be the underlying “market risk” for certain products. With credit risk we refer to the issuer risk.
First the FSPA think that there has to be several ways of calculating market risks depending on the type of the structured product since the products have different risk variables. Two typical categories with long maturity in the Finnish market are equity related and credit risk related market risk. Their market risk for the investor cannot be measured with same formula but the result for different types of PRIIPs can be expressed in the same scale.
Second the chosen models for measuring the market risk have to be on a sound theoretical base. They should base on variables which all involved parties have access to i.e. they are not based on individual judgement.
Third the market risk analysis should base on quantitative measures. And the risk results should be comparable with the market risks of other investments.
Such a model has been/is being developed by Swedish market body SPIS. It supports comparison and has sound base both from theoretical and practical point of view. The FSPA supports using that type of model together with a similar risk presentation to UCITS.

Credit risk as related to issuer risk is generally based on the credit ratings. The FSPA does not see any good reason to change the praxis. In relation to credit risk structured bonds should behave like any other bond. The FSPA has given a recommendation that only senior debt can be the base for structured bonds.

The discussed quantitative measures for liquidity risk are not good measures at least not for all types of structured products. For example average traded volume may be zero for years for a structured bond with long maturity but this does not mean that there is no liquidity. Or CDS-margins for the issuer cannot be used from outside sources since there is no liquidity in the name! Furthermore the liquidity risk cannot be seen as a static concept.
The FSPA finds a free format clear description of the exit arrangements with comment on the circumstances that may change these arrangements would be the best path to present the liquidity risk in an easy way for retail investors to understand.
All costs should be reported at least as a yearly percentage.
The Finnish market place already uses the possible outcomes, not the likehood of outcome. It has been forbidden to market products with a probably high performance. The FSPA think that “a what if”-performance is the right approach since nobody knows the future and we all have different assumptions about it. The compulsory warning text states that the future cannot be based on the history. The FSPA finds a probabilistic model potentially being misleading for the retail clients who are likely to hold a probable outcome as “the real outcome” for the investment. Implied performances are often attractive. That is why many of the products are made. The FSPA also notes that probabilistic forecasting is not common for other investments (for example in direct equity investment although analyst may have attached them a short term target price nobody is trying to calculate where the market goes).
The possible outcomes should be within a realistic scale compared to the length of the investment. As a recommended addition the FSPA finds showing of the historical development of the underlying asset for at least the same length of time.
However analysis based on the payout model is needed and therefore a few possible outcomes should be presented. It is the analysis of the payout models and other differences that should give the investors a proper understanding to make a well based comparison with an alternative direct investment or a PRIIP.
No big problems have been noticed in the Finnish market place. The reason to that may be that with several outcome alternatives there is no need to find “the best solution” for a product. The popular products seem to vary a lot in the different markets and at different times but a general rule should be that the investment time frame should steer the scale of the realistic outcome scenarios.
The FSPA doubts if a standard is needed although we understand that a choice of a very favourable scenario may affect the retail investors. The local ESA supervision and the relevant market trade body recommendations could be applied on more detailed market practice should it be needed.
The FSPA believes the maturity and likely or recommended time of ownership should steer the appropriate period. A structured product that has five year maturity and the normal investment is buy once & hold to maturity or “sell once” should be reported as a five year period. If the product is for example exchange traded and the normal time of ownership is short the appropriate performance scenario should also be short.
The market praxis in Finland for structured products with long maturity has been a calculation for an example investment. The possible market developments are often shown as a total percentages and performance amounts and translated to yearly yield.
On the other hand ETN’s have not to FSPA knowledge had any performance scenarios.
Any performance should at least be presented as yearly yield to be able to compare with other products.
The FSPA fears that it will very likely lead to investor misunderstandings! Investors are interested in what they can earn not in hypothetical investments. In addition a hypothetical performance would not be Key-information that makes the understanding easier. The FSPA also doubts that it would increase comparability with other investments. And the question of the costs that are deducted will complicate the matter.
At present several scenarios are presented. There should be at least a few alternative scenarios of the direction that the product is designed for and at least a negative development scenario. This would mean five to seven scenarios of possible outcomes depending on the PRIIP general features. The FSPA opinion is that several scenarios diminish the risk of one very favourably chosen outcome affecting the investor. Instead they have a tendency of pondering over the alternatives.
The FSPA does not have any definitive opinion on the type of the risk presentation but the risks should be presented the same way for all different types of investments to allow comparability. Therefore the presentation of the market risk for the moment should be a 7-step scale as with the UCITS until that is also possibly changed.
The FSPA does not understand how risk could be summarised. That would introduce new risk concepts and worsen the comparability and quality of the KID. How could that be in accordance with the Regulation?
There is one type of risk presentation though that the FSPA finds unsuitable. The “Belgian energy saving” risk indicator which gives the clients an unconscious understanding that green is the best alternative without a consideration to the clients risk profile and investment goals. It involves therefore misleading information just because it is a recognisable and familiar graphic presentation of something else.
The FSPA finds all of the presentations very complicated, requiring lots of study to be understood. They are therefore counterproductive to the aim of simplifying complex products. We believe that too much effort is placed in making visual elements of everything. A simple table would be much easier and allow several alternative scenarios.
The FSPA does not support the idea of combinations. Not the risks together nor with performance scenario. As the discussion paper states there are ‘technical disadvantages’ to combining different types of risk into one value. One of the disadvantages that is not mentioned is that a single summary risk/return concept does not have any description in the financial literature and would therefore likely increase the complexity rather than diminish it. And the same applies for comparability.
The FSPA would also like to point out that the risk does not change with the different performance scenarios and does not therefore add any new information.
The Key Questions except for question 5 relate directly to the PRIIPs products. Question 5 is so general question that the FSPA feels that it must be common knowledge that costs diminish yields. The question 6 on the other hand is so specific on one type of PRIIPs that the FSPA finds the kind of specifying not appropriate as Key information and probably the calculation specifics would not be easy to agree upon.
Question 8 is an important question to which the retail clients should get information by comparing the KIDs of different investments (PRIIPs).
The FSPA see many problems with the outline of the cost structures. The outline, as we understood it, is based on an idea that every type of work in the financial institutions is attributable to PRIIPs. A comparable way would be if a financial institution takes a deposit at 0,1% and lends to a customer at 1,6% and the lending margin would be seen as 1,5% i.e. everything attributable to the loan. What cost can be deducted? What would the deposit margin be? No margin and non-profit business?
That is why all the issuers do not agree with the cost structures and the different internal profit units/ departments and involved counterparties record the income and costs in another way.
Also we find that calculating dividends as a cost for products that according to the index rules or/and the product specifications are not included is wrong. This will show in the yields for these products which may therefore be less than for products including dividends depending among other on the market development and participation to the market.
Even the formula how structured product pay-out is constructed was seen as a separate cost element despite the fact that it does not involve a cost factor in the formula. The FSPA holds the formula as a feature of the investment, not a cost if there is no cost element involved.
Whereas the FSPA does think that different direct brokerage charges paid and similar are part of the cost structure, the FSPA find that the most important aim, Key feature, is to make fair comparisons between the products and therefore the calculations should always be performed with same principles.
The costs that occur only if some action is taken by the customer should be disclosed separately.
Costs that are missing from the list are at least, Exchange listing costs, cost to the CSDs and index licensing costs.
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The FSPA has given a recommendation about cost disclosures in 2009. Practically all issuers and distributors are disclosing the costs either as a percentage of the investment or as an amount for a typical investment or both. They are named as structuring costs and the true nature is the same as in Germany, they are “Issuer Estimated” costs. We decided upon this solution after a long discussion on what is a cost and how to open the cost structure to the customers in a comparable way.
Some of the costs have to be estimated also because they are not known at the time of the offering. Therefore the participants disclose the potential maximum costs which might incur not the realised costs. They are for the moment disclosed on aggregated basis not as entry, ongoing and exit costs.
The Regulation requires to ensure comparability between the products. The comparability with UCITS where a list of ongoing charges defined in the discussion paper are explicitly not ongoing charges for UCITS (CESR/09-1028). The FSPA view is that costs for these investments should be best estimated with same principles.
The implicit costs are often at least partly costs that have to be estimated. They are not known at the time of offering and therefore they have to have an element of “issuer estimation” and therefore also the costs have to be disclosed as planned or maximum costs. The issuer together with the distributors can estimate which direct and implicit costs they are booking for the product which is the present market practice in Finland. These costs vary from issuer to another the same way as production costs vary in different factories. The presentation should preferably be similar to UCITS with entry, ongoing, exit and other costs.
The hypothetical solution if the aim would be that everything is attributable to a PRIIP including the margins and spreads (bid-offer or bid-mid?) of all different products involved with structured products and should be aggregated as costs. Disclosing this type of an aggregation would require that the purchasing counterparty (issuer) would know the cost structure (margins and other underlying assumptions) of the seller. Costs would therefore have to be disclosed among professional parties for all PRIIPSs and non-PRIIPs products with the same principles. The FSPA finds that this would be an impossible task for the chain.
We think that the total aggregate costs should be calculated and presented the same way as for UCITS. Full comparability is of utmost importance for a retail investor.
The FSPA has discussed this matter in length and we do not believe there is a solution that everybody would agree upon.
No. Possible outcomes should show the effect that costs have. (See also answer number 2).
The method should be the same for portfolio transaction costs and structured products. The FSPA feels that the commissions paid should be thought as costs contrary to the CESR/09-1028. That kind of cost could be difficult to estimate.
Since costs arise from sources that have many different names for different products it is very important to group them in a few overall groups like entry, ongoing, exit and other costs.
The investment time frame may also cause problems. This happens especially if costs are compared as amounts for different periods.
The FSPA can also envisage problems with insurance and other wrapper contracts which contain another PRIIP and other types of investments in combinations that can change often.
Complicated presentations should be avoided. The FSPA prefers option 5 because it states the facts short and in absolute levels. We would also like to point out that some of the options presented would give the opportunity to play with the results which cannot represent a good model.
No, the same division should be applied for all investments. Today the standard would be the one used for UCITS.
The FSPA doesn’t think that the risks should be aggregated. It makes the comparability between investment products worse and the risk proportions in an aggregation are vague. In addition the integrated risk would create a brand new risk concept. That would clearly reduce the quality of the information and affect the goal of comparability counterproductively.
The case is easy to present with some sample questions. How much overall risk would a single A-rated issuer add with the credit risk to the aggregated risk? Would the risk proportion be the same before and after a new financial crisis?
And the same unclear situation applies to liquidity risk. The risk is not the same in different market conditions. A normally fairly liquid product can quickly run out of liquidity in stressed conditions. But that is not a feature specific for PRIIPs! And the combined liquidity for structured products is mostly dependent on the liquidity of the underlying direct investments and may sometimes be related to the issuer credit risk.

The presentation in the KID should promote comparability!

Therefore the market risk should be shown on a 7 step scale like the UCITS. Issuer risk could be clearly shown separately. And the other risks should be disclosed in a similar way other risks are disclosed for UCITS within the risk section of the KID. Especially the market risk scales should be comparable.
Issuer credit risk could use the credit rating of the issuer and if no external rating exist it should clearly state – not rated. Rating agencies credit ratings are used by the news media and in other simple products. They are therefore known to many retail investors. The FSPA thinks that using a simplified scale could also be possible but the result should base on independent ratings and a conversion to the simplified scale. Such a simplification would probably not make credit risks more understandable.
The best way to describe liquidity risk in clear and understandable way is a verbal description of the exit arrangement and conditions. A qualitative approach would give a retail investor much more and easily understandable information compared for example with a spread figure that FSPA feels is more an instrument for professional investors. The liquidity risk description makes more sense for the products with long maturity but is good for exchange traded products also.
At least as a yearly cost percentage. In Finland the market practice use a percentage, amount for an example investment or both. The investment time frame for PRIIPs with very long maturity may be misleading if only costs are shown.
The FSPA does agree that the mentioned things are somehow related to the structured products but we are most hesitant to attribute all of them as costs for the structured products. For example dividends are not a cost for a product that explicitly does not include dividends. They may not be income in certain products but that is also visible in the yield comparisons.
The principles defined have to be the same for all investments and different things cannot be assigned as costs if they are not portions of the involved products!. Alternative costs are never by definition product costs.
The FSPA welcomes ISIN & the trading name to be included when applicable.
The aim of the KID is to standardise and make them comparable, the criteria is sufficient.
As stated in the discussion the variety of PRIIPs would probably lead to the fact that the type would not mean anything to many retail investors. The point (ii) description is much more relevant perhaps together with a classification code. (See also answer 33.)
There are classifications recommended by the FSPA which but different types of product into three different classes. The aim has been to make sure that retail investors do not misunderstand the product to be something very different. For example a “capital protected” product and a warrant may have similar features when option is described but have very different investment profiles. The EUSIPA has a similar risk based category classification but that is not used on all the products marketed like the Finnish type is. The classification does not cover all types of PRIIPs since it is designed for structured products.
Yes, but a limited amount of statements. This is a difficult and important section in relation to the PRIIPs and how retail investors understand the value for them.
Too many standard statements reduce their value since they will probably be overlooked.
The rules should be co-ordinated with the MIFID regulation. A general view from the FSPA is that a PRIIP should be suitable for investors to whom the underlying market is suitable. The payout model should not normally change the target group. Instead it might reveal a model that is more suitable than the direct investment alternatives.
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No. Some PRIIPs may have a term that is depending on market conditions which can launch an early repayment or termination.
The Finnish market place already has this in the marketing material
The Finnish market place already has this in the marketing material
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Yes and possibly to the distributors page
It is common that one structured product is being offered in two alternatives of the same underlying investment. They differ in the issue price and pay-out multiple. Depending on the presentations and the space required they could be presented in one KID or two separate KIDs. From the comparison point of view one KID would be preferable.
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The FSPA sympathises with the reasoning but ‘material’ changes is a very unclear concept. Depending on the definition that could be daily, weekly, monthly or never happening. The follow-up and up-dating systems would have to be highly automated. The FSPA finds that frequent updating will be very laborious and expensive. Due to the huge amount of outstanding PRIIPs this would be true even if updating would be done seldom.
The FSPA thinks that the frequency for updating should be reasonable for those PRIIPs that do need updating.
The FSPA thinks that for PRIIPs that are offered in tap-issues the updating is not relevant although they might be sold in the secondary market. Keeping up a ‘secondary market’ for these products is valuable for the retail investors and the FSPA fears that updating all the KIDs with unknown volume, possibly no volume at all on the secondary market might lead to closing of this market for some of these products. KID could not be seen as pre-contractual information for a retail investor who is selling the investment in advance, she has made to the maturity in the first place.
Yes, this is obviously much more difficult.
No, the FSPA thinks that an active model is very heavy instrument to use. And for exchange traded PRIIPs and some other PRIIPs it is impossible for the issuer to know the address for the recipient.
Yes, there is no need to regulate it especially for PRIIPs
Many PRIIPs are being offered for a limited timeperiod. The end date for such offering period should not cause any extra liability for the issuers in this respect.
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The structured products would use more ex-ante based calculations since the product history does not exist. This requires estimations as we have answered previously. The FSPA thinks that issuer defined recommended holding period is a suitable time frame. Several scenarios should be presented and they should include negative and positive outcomes for the pay-out formula. These could be made with issuer chosen amounts which makes monetary comparisons more difficult between different products but percentage comparison would still prevail. The issuer defined amount should reflect a typical investment size which makes it easier for the retail customer to reflect for her own investments. Rebates should not be accounted for. The FSPA does not think that a detailed standard would be needed.
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