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The review of the Level 2 framework should not only allow for technical changes but address the fundamental issues in the Regulation with regards to performance scenarios, the transaction costs methodologies and the cost disclosures. If they are not addressed within the current Level 2 review, then a Level 1 review becomes absolutely essential. However, such a Level 1 review would have to be concluded and implemented before the end of the UCITS exemption (currently foreseen for the end of 2021) to avoid constantly changing the PRIIP KID – which would be detrimental for retail investors.
Whether Level 1 or 2, the purpose of any review must be to address the inherent conflict stemming from the current PRIIP KID’s dual aims to provide clear, fair and not misleading information and to provide comparability between products (of both similar and different types). By focusing too much on providing comparable information between widely different investment products, the information presented to retail investors is, in some cases, irrelevant and, in other cases, even misleading.
Simply put, comparability should not come at the cost of misleading information. It is therefore essential that a review seeks to achieve an optimal balance between these two aims and considers more closely what information is relevant to retail investors for each different type of PRIIP. This move towards more flexibility is fundamental because each type of PRIIP provides a different value proposition and thus necessitates slightly different disclosures on costs and performance. Broad, but not detailed, comparability can still be achieved. A reduction in theoretical comparability will be more than offset by better explaining the fundamentals for each PRIIP and providing investors with more meaningful information while maintaining a degree of standardisation so that retail investors can compare similar PRIIPs.
EFAMA also infers from the ESAs’ comments that the European Commission has not yet started its review of the Level 1 legislation, as required by Article 33 of the PRIIPs Regulation, which was due to be completed by the end of 2019. This wider review by the Commission was meant to coincide with the ongoing Level 2 discussions to ensure that all issues are addressed in a holistic manner with a well-functioning PRIIP KID “version 2” being the final outcome.
The Commission’s inaction, however, creates the risk that the fundamental issues will not be properly and swiftly addressed. EFAMA fears this could be the case, as many of the currently proposed solutions remain solely technical in nature, simply masking the inherent flaws while introducing further complexity.
EFAMA also stresses its disappointment that the ongoing consumer testing appears to be a “consumer testing” in name only. The fact the current PRIIP KID has not been consumer-tested and used as a baseline for any proposed changes, as well as the narrow focus on performance scenario disclosures without any testing on costs, clearly indicates that the results of this particular testing will not provide any additional insights into investors’ understanding.
These concerns weigh heavily on EFAMA, as the importance of a revised and well-functioning PRIIP KID cannot be overstated for the European fund industry. First and foremost, it is essential that investors receive clear, fair and not misleading information. Second, the success of the UCITS brand both inside and outside the European Union can, to some extent, be attributed to meaningful disclosures, such as those provided by the UCITS KIID, which is used as a de-facto term sheet for UCITS investors outside the EU. The upcoming switch to the PRIIP KID (which may still contain misleading disclosures) will require fund managers to reconsider whether other types of information document should be given to potential investors in order to save the UCITS long-standing reputation from harm.