18 August 2015

ALFI and EFAMA respond to the ESA's technical discussion paper on PRIIPs

ALFI and EFAMA responded to the technical discussion paper on packaged retail and insurance-based investment products. The paper aimed to collect views on the possible methodologies to determine and display risks, performance and costs in the KID for PRIIPs.

The ESAs are mandated by the Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products to develop draft Regulatory Technical Standards (RTS) on the content and presentation of the Key Information Documents (KIDs) for PRIIPs. The aim of the latter is to provide EU retail investors with consumer-friendly information about investment products with the ultimate aim of improving transparency in the investment market.

ALFI

As already stressed in several answers of ALFI’s response to the first discussion paper on PRIIPs, the outcome of consumer testing is key for the content and design of key information documents (KIDs) to make them user friendly. It would be very helpful also for the industry when preparing responses to consultations to have insight in what consumers prefer. Therefore, in view of the expected two further consultations on PRIIPs, ALFIcall on the European Commission to officially share the results of consumer testing.

From ALFI’s point of view, where available, historical distribution of returns should be used. The true performance of an asset manager and its products can only be demonstrated by means of historical based track records.

If historical data were ignored, there would be a risk that arbitrary predefined data led to a uniform illustration of a fund’s performance, which might go along with potential disincentive effects to the detriment of the investor’s money. Furthermore, a specific treatment should be defined for structured products or instruments with non-linear pay off, provided that a classification procedure to distinguish different asset classes is well defined. Where historical data are not available or does not cover a sufficient history, the use of forward-looking simulations is the most suitable alternative.

Full response

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EFAMA

EFAMA agrees that it is important to distinguish between liquidity risk of the underlying assets and the liquidity profile of a PRIIP itself. Generally speaking, liquidity risks of the underlying assets are part of market risk. However, it is important that the KID provides a clear description of the liquidity profile of the PRIIP itself, which EFAMA agrees most naturally sits in the section describing the PRIIP’s features.

Moreover, a large majority of our members are concerned that a mere narrative description might be over-looked by retail investors. Therefore, they strongly recommend that the disclosure take the form of a seven-point scale, indicating the timeframe to receive the proceeds of a PRIIP’s sale (not of its underlying assets).

With regards to the underlying instruments of a PRIIPs, EFAMA does not consider it possible to present an adequate quantitative indicator for liquidity and recommend using a qualitative approach instead, especially since the different quantitative measures of liquidity suggested (i.e. bid-offer spreads, average trading volume, and number of market makers excluding the manufacturer) often seem to be unsuitable for the products in scope and a secondary market is usually not existing. Even though the proposed quantitative measures could be applied to the underlying instruments (at least for a portion of the PRIIPS), EFAMA thinks that the (qualitative) redemption conditions are the key driver to determine the liquidity risk and liquidity profile of the instrument.

Full response

Full technical discussion paper

© ALFI - Association of the Luxembourg Fund Industry