Response to joint Discussion Paper on Key Information Documents (KIDs)

Go back

2: Do you agree with the description of the consumer´s perspective on risk expressed in the Key Questions?

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.

3: Do your agree that market, credit and liquidity risk are the main risks for PRIIPs? Do you agree with the definitions the ESA’s propose for these?

Although categorising risk into three types is a simplification, we believe it is acceptable to help communicate to consumers.

12: Do you have any views, positive or negative, on the different examples for presentation of a summary risk indicator? Please outline advantages and disadvantages, and provide any other examples that you are aware of that you think would be useful.

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.

15: Do you agree with the description of the consumer´s perspective on costs expressed in the Key Questions?

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.

18: Do you have any views on how implicit costs, for instance costs embedded within the price of a structured product, might be best estimated or calculated?

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.

20: Do you agree that a RIY or similar calculation method might be used for preparing ‘total aggregate cost’ figures?

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.

29: How do you think should cumulative costs be shown?

As described elsewhere, the totality of advice costs must be made clear to customers, whether via the KID or through other channels.

31: Do you consider that the criteria set out in recital 18 are sufficiently clear, or would you see some merit in ESAs clarifying them further?

We are happy with the text as it stands.

34: Do you agree that general principles and as necessary prescribed statements might be needed for completing this section of the KID?

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”.

51: Where a PRIIP is offering a wide range of investment options, do you foresee any particular challenges in keeping the KID up-to-date?

Presently, KIIDs for OEICs and unit trusts are updated regularly, so regular updates should be workable.

Name of organisation

FCA Smaller Business Practitioner Panel