27 January 2014

Positions on the proposal for a regulation on KIDs for investment products: EuropeanIssuers, JAC, PensionsEurope

EuropeanIssuers

The Commission's PRIPs initiative had originally limited the obligation to provide a Key Information Document (KID) to packaged products (e.g. investment funds, retail structured products and certain types of insurance contracts used for investment purposes). However, the European Parliament voted on 20 November 2013 to include corporate bonds in the scope of the proposed regulation.

European quoted companies fear that the application of PRIPs to corporate bonds, which are of a different nature than packaged products, may result in unintended consequences for companies and investors alike, and that it does not take into account the existing disclosure requirements applying to bonds.

In the framework of the trilogue discussions, issuers therefore ask Members of the Council and of the European Parliament to keep the initial scope of the KID/PRIPs regulation (packaged products only), i.e. without including corporate bonds.

Having to provide a key information documents (KID) for corporate bonds traded on regulated markets is superfluous and redundant. Existing prospectus and transparency requirements are very detailed and provide the information the investor needs to draw a well informed investment decisions. It is the main function of the prospectus’ summary to describe the key aspects of the financial instrument in a brief manner.

In an environment where alternatives to bank financing are much needed, KIDs would undermine efforts to increase the attractiveness of capital markets and to improve issuers’ (including SMEs’) access to market funding: adding disclosure obligations for non-financial companies would contradict recent efforts of the European Commission to reduce unnecessary regulatory burden and costs for companies; the potential to mislead investors, in particular retail investors, could lead to the opposite result than the intention of policy makers, who aim to promote plain vanilla bonds to retail investors.

European issuers’ more specific concerns relate to the following points:

• a requirement on the issuer to measure and/or summarise the company’s risk and reward, in particular using a synthetic (risk) indicator, which would be difficult for issuers to manage and could potentially result in misleading information;
• the status of the KID as a standalone document;
• a requirement on the issuer to keep the KID up to date;
• the liability regime attaching to the KID;
• a requirement on the issuer to establish a documented product approval process including review of the compatibility of the bond with the interests of the identified consumer group, stress testing, etc.

Burdensome disclosure requirements make capital markets no longer attractive and have strongly contributed to a serious decline of IPOs in Europe and many de-listings. Similar effects should be avoided for bonds, at a time when alternatives to bank financing are particularly needed. The retreat of corporate issuers from bond markets would also limit possibilities of retail investors to diversify their investments in a manner which is adequate from a risk / return perspective.

Full position paper

Joint Associations Committee on Retail Structured Products

The Joint Associations Committee on Retail Structured Products (the JAC) welcomes the proposed introduction of a requirement for manufacturers of certain types of investment products to provide prospective retail investors with a key information document (KID) summarising the most important features of those products. A standardised and concise disclosure document is likely to assist retail investors in understanding the key features of different types of products and in identifying the key differences between them.

The JAC supports the approach taken by both the Commission and the Council in setting out a relatively high-level summary of the content requirements of a KID, with further detail on the precise content and style requirements to be set out in Level 2 legislation. The JAC supports the Commission’s approach of not specifying a maximum page limit in the Level 1 Regulation.

The JAC is strongly of the view that a KID alone cannot provide the basis of an informed investment decision. To suggest that a fully informed decision could be made on the basis of reading a KID alone is misleading and ultimately detrimental to investors. It may also discourage investors from taking appropriate advice on the product documentation and is inconsistent with the recently updated Prospectus Directive regime. Accordingly the JAC supports the general approach taken by the Council (as expressed in Article 8 (2) and Article 11) as to the purpose of the KID but also proposes that Recitals 10, 11, 16 and 19 be amended so as to remove the implication that a KID alone will enable retail investors to take an informed investment decision.

The JAC is strongly of the view that, following the approach taken for the Prospectus Directive (Article 6(2)) and UCITS (Article 79(2) of the UCITS Directive), the PRIPs Regulation should not seek to set out detailed provisions as to the specific remedies which may be available in any proceedings arising in connection with a KID. Such remedies are already well established and efficiently achieved under national law. An additional and entirely separate liability regime under the PRIPs Regulation would give rise to legal uncertainty and inconsistency with national regimes with the consequent detriment to both retail investors and product manufacturers. Accordingly, the JAC supports the Council’s general approach insofar as it relates to liability for misleading or inaccurate disclosure in a KID, but proposes certain changes to the text of Article 11 of the Council’s general approach to align it more closely with the Prospectus Directive.

The precise territorial scope of the PRIPs Regulation should be clarified in the text of the final PRIPs Regulation. In order to best give effect to the policy objectives of the Regulation (namely protecting, informing and educating retail investors in EEA Member States), the JAC believes that the Regulation should be limited to investment products sold to retail investors located in EEA Member States, but that it should apply to all product manufacturers and distributors regardless of where they are located.

The JAC supports the approach taken by each of the Commission and the Council in focusing the PRIPs Regulation exclusively on the disclosure to be provided to prospective retail investors. Whilst the JAC welcomes an informed debate on product intervention and governance, it believes that the PRIPs Regulation is not the appropriate forum for this.

The JAC submits that a numerical risk reward indicator should not be included as one of the content requirements on the basis that it is likely to mislead investors and discourage them from fully reading and understanding the risk profile of the product.

Please click on the PDF link at the foot of the page to read the full position.

PensionsEurope

PensionsEurope is concerned that the rules for (the offering of) retail financial products could also apply to occupational (work-related) pensions in Europe.

As to the European Parliament’s text, the question has been raised whether the part that reads “for which a financial contribution from the employer is required by national law and where the employee has no choice as to the provider” is, as a condition, to apply only to individual pension products (as it was intended by the Commission proposal) or also to officially recognised occupational pension schemes. We hold that the latter interpretation would be false (clearly the reasoning in the last sentence can only refer to personal pension products). It would also be contrary to the original intent of the European Commission and Council to exclude occupational pensions. Therefore, we propose the sentence to be clarified in alignment with this view.

Key points:

• PRIPS is inappropriate for occupational pensions;
• Information on occupational pensions should be tailor-made;
• The coverage of occupational pensions in Europe would be negatively affected;
• The IORP Directive establishes the transparency requirements for occupational pensions;
• A Directive instead of a Regulation would have been a more appropriate legal instrument to regulate issues affecting occupational pensions;
• The EMPL Committee should have been consulted;
• Personal pensions should also remain out of the scope for the time being. PensionsEurope strongly encourages clarifying that occupational pensions are excluded from the scope of the PRIPS regulation.

Full position paper