Whilst we believe the Key Questions to be accurate, in principle, an indication of probabilities (How likely is it that I lose my money?" – "How much am I likely to win?") will only very rarely be possible with sufficiently reliability. Moreover, this depends too much on the product manufacturer's expectations and is thus misleading. It would appear to be more appropriate to indicate specific conditions under which investors will make a profit, or incur a loss.
• Investors should be made aware of the conditions for early disposal, or of the minimum holding period.
• As a rule, recommendations regarding the holding period can only refer to the product's final maturity.
• Any recommendations regarding early disposal – for example, for open-ended products, usually depend upon market developments during the term of the product; for this reason, they cannot be identified during first-time compilation of a KID."
Indeed these are the material risks involved. However, inflation risk is an exogenous factor, not a product-related risk – unless where inflation forms part of the underlying instrument – and therefore impacts all products in the same way. For this reason, we suggest the removal of this aspect from the market risk section. We also request the addition of a clarification that the factors stated (interest rate risk, FX risk, equity risk and commodity risk") do not constitute a final definition of market risk. For instance, we believe that market risk also includes the credit risk exposure of the underlying instrument(s) – an aspect that has not yet been covered by the discussion paper.
Market risk is the most important risk by far. Credit risk can cause the heaviest loss – yet the associated probability is so little that it is almost impossible for retail investors to get a realistic feeling for that risk, especially when comparing different issuers. Liquidity risk is most relevant for trading customers, not for those holding their investment to maturity."
Regardless of the chosen approach, identifying risks and their presentation for all product classes must lead to reasonable results. We strongly urge that a solution be found that already encompasses products within the scope of UCITS regulations, and that allows for an adequate inclusion of equities and plain-vanilla bonds (in the advisory discussion). Failing to do so would give rise to the risk of investors being induced – due to a lack of such information, and despite identical or even lower risks for investors – to refrain from considering products outside the scope of the PRIIPs Regulation.
Product manufacturers must be free to choose whether to determine the risk indicators for their product themselves, or whether to retain a third-party service provider for this purpose.
We have a strong preference for the use of (short-term or long-term) credit ratings to make investors aware of credit risk. Where a product manufacturer does not have any ratings, it may be appropriate to refer to the credit quality of the guarantor or the swap counterparty instead. Using ratings has the advantages of employing objective information, easy access to necessary information, and the possibility for regulatory authorities to make simple checks concerning the accuracy of such information.
We believe that a narrative presentation would be sensible.
In our opinion, the presentation of performance – especially for packaged products – should enhance investors' understanding of how a product works (the 'product mechanics'), i.e. the development of the assets invested in various scenarios. In this regard, the presentation of performance also serves to illustrate the risks involved in a given product. That is why provisions, such as the mandatory inclusion of a negative scenario, are important supplements to the risk indicator and its descriptive explanation.
Taking all this on board, a probabilities-based presentation needs to be seen very critically indeed: such a presentation may primarily induce return expectations with investors, which cannot be fulfilled in all cases and are thus misleading. Moreover, this approach would fail to address a negative product performance if such a development was assigned a low probability (or no probability at all) when creating the product.
A probabilities-based presentation would also require constant adjustments and consequently higher costs, ultimately borne by investors. It is fair to say that investors would hardly understand the need for such frequent contacts.
This is another reason why performance scenarios should not incorporate any probabilities, since the probability figures would hardly be comparable – and might in fact mislead investors.
Given the very different specifications of PRIIPs, applying a uniform timeframe within a performance scenario does not appear to be sensible. If the timeframe is set too long (e.g. beyond the product's lifetime), it will be impossible to apply the holding period – if it is set too short, it would fail to reflect the product's features, and the product's underlying concept would be lost. As a consequence, the scenarios would not be meaningful, and investors would be unable to compare them.
What is 'too short' or 'too long', however, depends upon the specific product type, as well as the individual product itself. It is therefore impossible to specify a meaningful uniform timeframe.
From an investor's perspective, using the product's lifetime as a timeframe appears to be sensible. In this case, yield information should be stated on a per-annum basis, in order to facilitate comparison of products with different terms.
Where products have an indefinite lifetime, issuers cannot know when investors might decide to dispose of the product at a later point in time. In such cases, it would be sensible to base the presentation on a forecast period of one year, also indicating an effective yield p.a.
In our opinion, showing scenarios with different terms would be problematic, especially due to space restrictions: assuming three different holding periods were to be incorporated, this would require a total of nine scenarios.
Using a certain holding period would be totally misleading, however, for products that are not purchased for investment, but for the specific purpose of hedging – in line with the product's designation. We therefore suggest clarification that such products remain outside the scope of the Regulation, which relates to packaged investment products.
With regard to OTC derivative transactions entered into by (corporate) clients for hedging purposes, especially in the context of interest rate and currency management in line with normal banking practice, we propose to add a clarification that such transactions generally remain outside the scope of the PRIIPs Regulation, given the clear definition in Art. 4 (a) of the PRIIPs Regulation and the fundamental assumptions given under numbers (6), (7), and (9) of the preamble, since such transactions do not constitute “investments” or “investors”, nor do they involve “early redemption amounts”. Instead,
- they constitute rights and obligations under the law of obligations, which imply payment obligations due only in the future,
- without the issuer requiring an upfront “investment” or the payment of an (investment) amount which then has to be “redeemed”; and
- in many cases, (corporate) clients would be affected, whose intention is to hedge the risks involved in their ordinary course of business – for example, via cross-currency swaps, involving the exchange of two currencies in the future in order to hedge a future payment from an underlying commercial transaction.
Unfortunately, the present Discussion Paper does not take into account that numerous small- and mid-sized corporate clients have to be identified as “private clients according to MiFID, but that they enter into OTC derivatives hedging (as opposed to investment) purposes. Against this background, many of the requirements now proposed for the information documents in the PRIIPs Regulation are not fit for the purpose, regarding such hedging transactions."
Any indications of absolute figures involve a high risk of being misunderstood by investors as actual results that will in fact be realised later, assuming that the base-case scenario shown actually materialises. In practice, however, the figures included in the base case already include certain assumptions, due to the fact that the vast range of life situations does not permit communication of data that is valid for everyone. Issuers should therefore have maximum discretion concerning the use of absolute figures, percentages, etc.
We do agree, however, that consumer tests will be essential here: in this context, we would like to point out that such tests will need to be carefully structured, and that the selection of test persons will need to reflect the likely structure of PRIIPs investors.
In our view, making customers understand that the amounts shown are not identical to their investment performance after costs and taxes is the only essential aspect. Where costs (especially sales and distribution costs) are included in the scenario analysis, this will only be possible using estimates based on certain assumptions.
We suggest to generally showing three scenarios (positive – neutral – negative), a form of presentation that has proven to be adequate for securities product information sheets. Whilst the underlying assumptions must be realistic, they are not tied to probabilities, in order to illustrate the product structure and thus the risks involved.
Exceptions will be necessary for products where it is impossible to depict a neutral scenario (from the customer's perspective), or for product structures where additional scenarios are required to properly illustrate the functional features, e.g. where there are barriers, caps, or similar features.
We denounce the use of colours or pictures carrying suggestive effects beyond the classification as low or high risk. For example, red is a signal colour that subconsciously triggers defensiveness or avoidance. Such a stigmatisation is factually unfounded, however, since many products exposed to higher risk also involve a higher expected return. These products are necessary for certain investors looking for a higher return, who are able and willing to accept higher risks in order to achieve their desired investment objectives.
For instance, a mere combination of letters and colours (in a 'traffic-light' system) holds the risk that investors avoid higher-risk products without considering the risk/return aspect.
We also advocate a design of the indicator that saves space. A horizontal (instead of vertical) presentation is likely to yield better results as a rule in order to comply with the limit of three pages for the entire KID.
We suggest to present a range of five or seven risk classes – an illustration which is already being used in the market (refer to the UCITS regulations), and thus familiar to investors. Such a display also provides sufficient scope for an appropriate differentiation of risks, without excessive complexity.
We are in favour of a tabular description of scenarios, since this form of presentation offers clarity and transparency whilst using little space.
Describing the neutral scenario as average" is misleading (and should be changed to "neutral scenario"), since it implies a probability of occurrence. We reject the use of probabilities (please refer to our response to question no. 6).
Looking at the alternatives presented in the discussion paper, we appreciate the Spanish scenario shown at the bottom of page 41 however, using the term "average" for the neutral scenario should be avoided. Also, we believe the presentation of formulae should be improved from an investor's point of view.
Furthermore, the German scenario warrants for clear, understandable and space-saving presentation.
In contrast, we believe that the Italian scenario (at the top of page 42) would not be applicable for most PRIIPs – especially since the example shown appears to have been taken from an information sheet for a single share, which is of course outside the scope of the PRIIPs Regulation.
Finally, we consider the example from scientific research (at the bottom of page 42) to be difficult to understand for investors."
We do not believe the full aggregation of the Summary Risk Indicator and the performance scenarios – to form a single figure or indicator – to be feasible.
We are in favour of presenting a visual risk indicator, supplemented by a narrative presentation (in a table) of generally three scenarios (positive – neutral – negative), to keep the presentation as simple as possible.
Additional narrative performance scenarios (in tabular form, as discussed above under question no. 13) have the benefit of illustrating the product mechanics well (How will the value of the PRIIP change upon what change in the value of the reference asset?"). Our view that aggregating the Summary Risk Indicator and the scenario analysis is not the right approach is based on our opinion that scenarios should be based on hypothetical performance assumptions."
Any isolated comparison of the costs associated with different products is problematic; costs are always related to the services rendered and potential returns, and should be seen in this context. Comparing costs only would therefore be misleading. Investors can compare costs and services in the form of a comprehensive product comparison, by comparing the respective KIDs.
Only total costs are decisive from an investor's perspective. Total costs determine the net investment performance – irrespective of individual costs components, and to whom such components are paid. The structure of various cost types may differ considerably among different product types. In our view, ESMA's claim to make product-specific cost types comparable is hardly possible to fulfil, especially to the extent of detail envisaged by ESMA. We believe that it is important for investors to have a fundamental understanding of a product's cost structures: this means being made aware of the underlying components included in overall costs. More importantly, investors should be informed whether or not the total costs shown are final, whether they include any estimates or standardisations, and that investors' personal tax burden also needs to be taken into account when analysing returns.
We would also like to note that statements concerning the Bid-Ask spread" (in table 12 on page 59) are incorrect in relation to certificates, whose price does not directly or exclusively depend upon supply and demand. We believe that the 'reduction-in-yield' approach is unsuitable in principle, since it involves numerous assumptions and depends upon the chosen scenario."
We largely agree with the cost structure shown, except for the references to indirect costs" and "costs embedded in the purchase price".
The wording of the Regulation does not provide any indication that the KID must provide a breakdown of "indirect costs", as stated in the discussion paper. In fact, the disclosure of such costs embedded in the purchase price might be misleading for retail investors, since these costs are not deducted from the investor's return."
The discussion paper addresses the material issues. Similar to the presentation of risk and performance, the challenge is to find a manner of presentation that is meaningful for each specific product whilst facilitating comparison between different product categories. Another similarity to performance presentation lies in the significant impact of holding periods and maturities upon costs. With respect to the so-called ongoing costs", we would like to reiterate that the product manufacturer only knows product-related cost, but is not aware of sales and distribution costs.
The methodology chosen for the presentation of costs must not lead to regulatory arbitrage. Therefore, products within the scope of UCITS regulations must be considered as well."
Please refer to our comments regarding question no. 17. If disclosure of the product manufacturer's costs embedded in the purchase price turns out to be necessary, the Issuer Estimated Value (IEV) is an approach to making product costs transparent to investors: it has been successfully tested on the certificates market.
We consider the RIY approach, which involves numerous assumptions, to be complex and difficult to reconcile for investors.
We believe that costs should be presented in a consistent manner. Therefore, there should be no conflict between costs indicated in the Costs" section and those shown in the "Performance scenario" section."
Depending upon the specific financial product involved, the examples shown in the discussion paper are not (or only conditionally) suitable for the presentation of costs. (Please refer to our comments regarding questions nos. 16 and 17.) We believe there should be no separate presentation of costs in tabular form, not least due to space restrictions.
Option no. 2 is easy to understand for investors and provides a good overview.
Both a quantitative and a qualitative approach are conceivable.
We consider including details regarding the manufacturer to be sensible, provided that they are relevant for the target group. Given the possibility of cross-border use of a KID, we believe the telephone number to be less relevant, since establishing contact via this channel is often prevented by the language barrier. Moreover, it is easy to find this detail using the website (which must be specified); we therefore consider the indication of the manufacturer's website (which includes contact details) to be sufficient.
Yes, Recital 18 is sufficient and does not require any further supplement.
From an investor's point of view, classifying PRIIPs into different types is useful. These types should be developed by originators, as is already the case in practice.
No. However, care should be taken that no conclusions regarding the risk class may be drawn from this classification alone.
We consider general principles and boilerplate text modules to be helpful, provided that usage is voluntary (also refer to our response to question no. 55).
We welcome the approach by ESMA, as indicated in section 220.127.116.11, to ensure consistency between the target market in accordance with the PRIIPs Regulation (the consumer type") and the target market as defined by Level 2 of MiFID II. Against this background, it is essential to ascertain that the ESAs have a common and uniform understanding as to the substance of these two concepts. No specific requirements need to be formulated for such classification – in fact, this should be left to practitioners. There must be no uncertainty – for investors and investment service providers – that the concepts of "consumer type" and "target market" are identical in substance. Any divergence in the criteria used to determine these two categories would lead to substantial restrictions in the range of PRIIPs on offer, to the detriment of investors."
It is impossible for the manufacturer of a PRIIP to indicate a recommended holding period that would be suitable for each investor. The recommended holding period depends upon the individual investor, and in particular, his/her individual circumstances and investment objectives. Therefore, any recommendation provided would simply be misleading to numerous investors.
A manufacturer will only be forced to revise the KID in the event of material changes to the PRIIP. In addition, and in the manufacturer's discretion, it must be possible to revise the KID if the manufacturer deems this suitable in order to enhance investor information.
Yes, we foresee particular challenges in keeping the KID up-to-date, e.g. where PRIIPs are not bought from the manufacturer, or where the manufacturer does not operate the secondary market.
It is impossible in practice to comply with a general duty to update the KID in every secondary market (e.g. an exchange), especially for products without a defined lifetime.
Active communication will be impossible in many cases, since the investors are unknown to the manufacturer. But even where manufacturers know the customers involved, active communication would involve excessive effort – due to the fact that this would require a permanent update of contact details, and also given the fact that many customers do not have access to a sufficiently secure communication channel (mailbox). Communication by e-mail would be exposed to too many threats of being manipulated, which excludes such communication from an investor protection perspective.
Yes. We would very much welcome a regulatory synchronisation with MiFID II, also from a fundamental perspective (in terms of legal certainty and transparency for investors) – with the exception of hedging transactions entered into by corporate customers at very short notice, using OTC derivatives such as interest rate or foreign exchange hedges. Delivering a KID in good time is impossible in practice for such hedges, since corporate customers call the institution (mostly without advance warning) and want to execute a foreign exchange transaction (for example) straight away, to prevent the market from 'running away'.
Moreover, where foreign exchange hedges are executed via electronic trading platforms, no natural person is involved.
Yes, we are in favour of preparing templates, and we will be happy to contribute our expertise as part of the consultation process. Such templates would facilitate the issue of standardised products by smaller manufacturers in particular – a key aspect when assessing whether regulation is reasonable. Moreover, templates would enhance comparability and quality of KIDs.
At the same time, however, we believe it is essential that the use of such templates is optional, in order to maintain the possibility for innovation and further development of KIDs by the market. In particular, it must be possible to supplement templates in order to be able to illustrate product-specific details.
In order to safeguard legal certainty and a level playing field, we are in favour of providing concrete sample calculations – for example, in a KID template.