In relation to the question ‘Can I get my money back at any moment?’, this needs to be linked with potential minimum holding periods which are shorter for lower risk assets and longer for higher risk assets due to volatility. This is covered elsewhere in the KID but is important in this section. We have concerns that consumer may think it is appropriate to invest in a high risk investment for the same time as a low risk investment. As an example, one Panel member has encountered consumers who seek to invest in a building society three year fixed bond, and also invest for three years in a UK Index Tracker Fund, without understanding the difference in risk profile.
Although categorising risk into three types is a simplification, we believe it is acceptable to help communicate to consumers.
One of the FCA's Smaller Business Panel members, a financial adviser, has used in practice an example in their client questionnaire, similar to the Netherlands ‘dashboard’ graphic, to demonstrate increasing volatility. We are happy to provide further information if required.
As outlined in the general comments above, there is potential for consumers to miss important information on costs if the MiFID and PRIIPs requirements are not coordinated in such a way that both advice costs included in a product, and advice costs which are independent of a product, are disclosed to the customer. There is also a mismatch in that MIFID II includes stocks, shares and bonds within its definition of a product, creating a mismatch with PRIIPs.
The main challenge is consistency with MiFID. PRIIPs sold by Article 3 firms must have the same cost disclosure as the same PRIIPs sold by MiFID authorised firms. Also, firms which passport in cross-border from other EU territories or third country firms should be subject to identical requirements.
We would prefer that a Total Expense Ratio (or Ongoing Charges) method is used. We have concerns about use of RIY. As an example, in the 1990s pensions illustrations were used where front loaded contracts would use up all premiums to pay for commissions in the first two years, yet RIY to normal retirement date showed 1% to 1.5% per annum charge. If RIY is adopted, it must be on the basis that excessive product charges in the early years of a contract are clearly visible, not just in numbers but an illustrative picture.
As described elsewhere, the totality of advice costs must be made clear to customers, whether via the KID or through other channels.
We are happy with the text as it stands.
The FCA Smaller Business Practitioner Panel supports the requirement that the description of the product must include reference to specific environmental or social objectives targeted. We would go further and suggest that for further clarity, where funds do not cover this at all, a clear statement is made to that effect.
For the wording of the references to environment and social objectives we would suggest it is not overly prescriptive, but that as a minimum it should cover the following areas:
• Whether the fund has exclusion criteria
• Thematic investing (otherwise known as positive screening)
• Integration of environmental, social and governance (ESG) issues in the fund management. This can affect “mainstream” funds not clearly branded and marketed as social / environmental funds.
If a fund only covers one, or two of the above three areas, we suggest the text in the KID only describes what they cover, and does not state what they do not cover. For instance, if a fund does not use exclusion, the KID should not say “the fund does not have exclusion criteria”.
Presently, KIIDs for OEICs and unit trusts are updated regularly, so regular updates should be workable.