The three consultation documents are worthy of careful consideration, since the entirely appropriate objective of regulating the market for PRIPS must be carried out in such a way that the range of such products on offer is not inadvertently reduced and that innovation on the part of governments as well as the industry is not stifled. The definition must be broad enough and yet precise enough to enable such products to be clearly identified. The Commission has ignored the role that tax relief plays in the design and incentives to save in a particular way and should realise that the public purchasing them would not like to have the tax reliefs removed. The definition should include the elements of volatility, illiquidity, complexity and the fact that the PRIP may be designed for a specific purpose, legal or otherwise. It is this that makes a cost comparison across the range of PRIPS, a difficult and probably ill-directed task, since one type of product rather than another may fit the consumer’s needs and aims, whereas another cheaper product may not. Simple deposits and pensions should be excluded.

KIIDS should be designed for ease of use by the consumer and must include specific pieces of information, font sizes for headings and text. These have been set out below. They should be provided by the product provider and one senior person in each jurisdiction must be fully accountable for design and content. The law of agency will no doubt differ from one member state to the next but in each case it must be made clear on whose behalf the agent or adviser is acting and what his remuneration will be if the consume purchases the product. One of the key protections for consumers is for advisers to be fully trained and competent and to ensure a level playing field, the Commission should be much more directive in the are of professional qualifications and the maintenance of competence. 


Definition

This part of the response refers to the questions regarding the definition of PRIPS in Section 2 where the Commission seeks to define the scope of the PRIPS regime. The questions answered in this part of the response are as follows:-
Q.2 Should a definition of PRIPS focus on fluctuations in investment values?
Q.3 Does a reference to indirectness of exposure capture the ‘packaging’ of investments?
Q.4. Do you think it is necessary to explicitly clarify that the definition applies to fluctuations in ‘reference values’ more generally, given some financial products provide payouts that do not appear to be linked to specific or tangible assets themselves e.g. payouts linked to certain financial indices, the rate of inflation or the overall value of the fund or business? 

The consultation first of all requires a definition of packaged retail investment products, requiring it to be clear, comprehensive and simple. The proposed definition, ‘a PRIP is a product where the amount payable to the investor is exposed through fluctuations in the market value of assets or payouts from assets, through a combination or wrapping of these assets, or other mechanisms than a direct holding’. 

The definition may lay too much emphasis on volatility, which is not a characteristic solely of ‘packaged’ products. Direct investors in stocks and shares have experienced extremes of volatility, especially during the past two years. Illiquidity of such investments is another significant characteristic of PRIPS and the definition should also stress that all of these elements are combined in complex products. The latter feature is also one which should be included in the definition. Extending the definition in this way allows for further innovations and also serves as a reminder to product providers of the risk of creating illiquid investment products or ones which may incur such risks in adverse market conditions.

A reference to the indirectness of exposure does not by itself capture the ‘packaging’ of investments. The point of packaging is that different elements, such as shares and derivatives or the use of hedge funds are combined in a particular structure. It is the structure and not the various elements which are sold to the investor. The combination, complexity and the structure may well be hidden from the investor. For example, a retail investor, offered a product which has a guaranteed rate of return of some kind, may not understand how that rate of return is ‘guaranteed’ and the information currently provided to him may not explain the way in which the guarantee is provided and the risks involved in it. The definition should be accompanied by a non-exhaustive list of packaged products available in the various markets in the European Union. 

It should also be noted that it is not only the product providers who contribute to the development of packaged products. Governments also play their part in the retail investment market where the products are designed to take maximum advantage of the tax breaks on savings which are introduced in order to encourage savings and perhaps also to direct savings. That means that some packaged products in most markets will only provide advantages to the retail investors who are tax residents in a particular market. The consultation paper makes no mention of this and the dangers of incursions into the tax policies of member states. The market will still not constitute a level playing field, despite the efforts to ensure a uniform approach to regulation. 

The inclusion of simple deposits under the PRIPS legislation would conflict with the entirety of the definition. Provided the interest rate on the deposit and access to the account is clearly stated, both the investor and the product provider would face an unnecessary regulatory burden. Retail investors often move deposits from one bank to another on the internet very frequently as they see that even a marginally better rate is offered elsewhere.
Option 1, although a more detailed definition than Option 2, does seem to provide a more realistic description of the range of products available where the risks for retail investors are greater. It is more difficult to discern whether or not an ‘indicative’ list should be developed. It does depend on how the list would operate in practice; if a product is not added to the list, then will investors consider that it is not subject to consumer protection requirements? It is not clear who would be responsible for up-dating the list of products in such a way that it would enable and allow for product innovation and for market developments. Once again, governments have a role in product design in that tax rules may be aimed at encouraging savings of one kind or another. The products may then lose an important characteristic which encourages individuals to save in that way when sold across the border. If additions to the list are proposed by national regulators or by the Commission might not this stifle innovation and lead product providers to consider that they are limited by the approach regulators take? It is therefore important to know who decides on inclusion in the indicative list and how it would operate.

Pensions and annuities should certainly be excluded from PRIPS at this stage. The national legal requirements surrounding pension provision; the regulations covering the use of pension funds for retirement income, including annuities, together with the tax implications, make this both an extremely difficult task. It may not bring any protection to retail investors, as the investment, say, in a pension fund in another country, may be taxed in the home country, which does not recognise any particular tax status of investment in a private pension fund. Retail investors wishing to save for retirement would be wiser to use the vehicles available in their own countries or a means of long-term savings which are not explicitly designed for pension saving. The proposed exclusion in 2.4 (b) does seem to provide an adequate means of so doing

Design of KIID

This part of the consultation document refers to Section 3 entitled the Legislative approach to be taken in delivering the PRIPS regime with particular reference to pre-contractual product disclosures. It seeks to answer the questions regarding the design of KIID, which are as follows:-
Q.17 Should the design of KIID be focused on delivering on the objective of retail decision-making?
Q.18 Should the KIID be a separate or stand-alone document compared with other information that might be necessary e.g. background information, other disclosures or contractual information?
Q.19 What measures do you think will be necessary to ensure KIID remain streamlined and focused solely on key information?
Q.27 Should product manufacturers be made generally responsible for preparing a KIID?
Q.28 Are you aware of any problems that might arise in the distribution of particular products should the responsibilities for producing the KIID be solely placed on the product manufacturer?
Q. 30 What detailed steps might be taken to improve the transparency of the social and environmental impacts of investments in KIID for PRIPS?


 The design of the KIID should certainly focus on aiding retail investment decision-making. The investor should, as a result of reading the key investor information document, be clear as to the nature of his investment, the costs, the risks and returns and that it meets his needs. It should be a stand-alone document, a prominent part of the sales pack. It may contain pointers to other documents where further and more detailed information should be given, but any such pointers must be relevant and accurate (e.g. title and page number of the relevant document must be accurate). It must be identified as the key document with a form of words such as, ‘You must read this before you make any decision about your investment’ and should stand out from the rest of the documents the customer will receive by its heading being in a strong colour, for example. 

In response to questions 19 to 23, it is not possible to set out the kind of detailed rules, designed to harmonise the UCITS KIIs, as the products will vary considerably and such rules may stand in the way of innovation and market developments. That does not mean that they cannot conform to general rules, of which one or two may be quite precise; for example, it seems to me given long experience of Key Features documents in the UK, that font sized could be specified such 12-14 for the main text with headings in larger font sizes and deep colours so that they stand out. The text should be in black or dark blue; fashionable pale shades are not always easy to read. 

More general rules would also ensure that the KIIs remain streamlined, are focussed solely on key information and that they enable comparisons to be made. These rules should include the length of the KII ( two pages), the order in which information is set out and the key headings. These should be as follows:-
-a description of the product;
-its aims;
-the investor’s commitment;
-risks;
-charges;
-performance;
-guarantees.

It may well be possible to standardise the last four elements for a similar range 
of products; for example, unit-linked life insurance products. Information can also be usefully and simply conveyed in the form of ‘frequently asked questions’ such as:-
How flexible is this investment?
What might I get back at the end of the period of investment?
Can I take my money out at any time?
Where is my money invested?
What about tax?
Can I change my mind?
How will I know how my investment is doing?

The document should also state as well as the name of the company, how the company can be contacted (address and telephone number, and especially any help line which may be available). It should also stipulate how to complain, first to the company and then to any Ombudsman service, which may be available. 

The general rules should also stipulate that the language used should be plain and simple without any technical terms, jargon, bureaucratic or legal language.
The language should also be relevant to the needs of the target market. The KIID should also state clearly why the consumer should read this document and make sure that he understands it before taking matters further. A signature should not be required as it may well not mean that the customer has read and understood the document, but it may be used against him in the event that the product has been missold to him, for example.

Liability on producer or distributor?

The task of ensuring that the KIID remain streamlined and focussed solely on key information would be simplified if the product providers, who should alone be responsible for the provision of the KIID, designated one person to oversee their production. That senior person should be responsible for ensuring that those who produce the KIID are fully aware of the principles and regulations; have a style guide covering the use of plain language, and are trained in appropriate layout and language techniques. That person should also arrange for the KIID to be reviewed by the appropriate experts in the company: legal, compliance, risk managers and actuaries. Since most companies now conduct consumer research, the sales pack should be tested on consumers before use and that they should be able to show the results of such testing to regulators. Making a senior manager responsible for the management of the process should simplify the task for regulators conducting on-site inspections, especially if the company has to show the results of its own consumer research and the KIID can be inspected to test its conformity with the guidelines. It would also be his responsibility to keep the information up-to-date and accurate. 

It is difficult, if not impossible to see in what circumstances a distributor should prepare the KIID. One problem which would arise here is that it is then difficult for the product provider to be sure that his product has been correctly described and if it has been misdescribed or presented in a misleading light, the issue of legal responsibility becomes a complex one and the legal processes in settling the matter might well leave the investor out in the cold.

Describing the product as ‘green’ or ‘socially responsible’ raises unnecessary complications, owing to the lack of agreement on what should count as ‘green’ or indeed as ‘socially responsible’ or supports a ‘social business initiative’. Supporting any such claim would require long explanations regarding its meaning and might be too restrictive in terms of the investment opportunities available for the investor. A separate category of ‘ethical’ investments does exist and it is after a long period of discussion, fairly clearly defined. A number of companies do specialise in such investments and investors do have a choice at present. The range of investment opportunities offered in the various products on the market could be listed, so that the investor could choose to invest in e.g. solar energy if he wishes without simplistic and misleading labels. 

Risks, Guarantees and Costs

Q.38 What in your view are the main challenges that will need to be addressed in developing common cost metrics for PRIPS?
Q.39 How can retail investors be aided in making ‘value for money’ comparisons between different PRIPS?


In these sections, the Consultation Paper offers little by way of application of 
the UCITS risk-rating methodology to other products or for costs, performance and guarantees. The Paper indicates that difficult questions may be raised by such attempts. This could be because the unified approach is being pursued in the wrong way. It is very sensible to look at the risks, costs and so on of investment in a wide range of UCITS funds. However, if an investor requires some kind of guaranteed return on his investment, then provided he understands the risks and costs involved in the provision of guarantees, the product may still be suitable for him even if investment in a UCITS fund might produce higher but riskier returns. The search for exactly equivalent descriptions across different categories of products does not seem to be appropriate as different products are designed to meet different needs and objectives on the part of the investor. 


Insurance Mediation Directive.

Agency

 My response to some of the questions raised in this Consultation Document also apply to the PRIPS consultation although they are not explicitly raised there.  
In the case of the consultation on the Insurance Mediation Directive, the responses refer to the following questions:-
A.1. Should the information requirements as contained in Article 12 of the IMD be extended to direct writers taking into account the specificities of existing distribution channels?
A.4. In the context of information requirements, do you think that a definition of ‘advice’ should be introduced?
B.1. What high level principles would you propose to effectively manage conflicts of interest taking into account the differences between investments packaged as life insurance policies and other categories of insurance products?
B.4. How can the transparency of remuneration in the sale of non-PRIPS insurance policies be improved for all participants involved in selling insurance products, taking into account the need for a level playing field?
B.6. What conditions should apply to disclosure of information on remuneration?
E.1. What high level requirements on the knowledge and ability of all participants involved in the selling of insurance products would be appropriate in view of the existing differences in the applicable qualification systems in Member States?
E.2. Should these requirements be adapted according to the distribution channels?

The first significant issue regarding conflicts of interest concerns the issue of agency. As part of the PRIPS style KIID, which should also apply to sales of life insurance policies which are not linked to investments, the KIID should make it entirely plain on whose behalf the agent or broker is acting. Retail investors may consider that an insurance agent is acting with his interests in mind and may even consider that a direct insurance salesman is acting on his behalf as well. Commission disclosure will also be an important part of the sales process. Banks and insurance companies with their own sales staff or agents may also have other financial incentives besides commission, such as an annual bonus based on the number of sales. To secure a level playing field this should also be revealed to the customer. A broker or independent adviser, who advises investors or customers to purchase policies or products offered by more than one company should also be obliged to declare what commission he receives from the company from whom the customer/investor decides to purchase the product. In other words, the key issue is not definitions of brokers/agents/ introducers but a clear statement on the intermediary’s business card and any other documents of their status; that is, are they acting on the customer’s behalf or the insurance company’s behalf and exactly where do their responsibilities begin and end. 

In answer to the questions posed in Section A of the consultation document on IMD, it is essential that the same information requirements concerning remuneration, conflicts of interests and incentives applies across the board; that is, to direct writers as well.  

What should apply in all cases is that the ultimate supplier of the insurance contract should be responsible for ensuring that all who sell the product provide clear information about the content of the policy in simple terms and that his contact details are also included on any documents relating to the contract which the customer purchases.

 
Advice

The MiFID definition of ‘advice’ is an appropriate starting point and one which requires careful consideration both for PRIPS and for certain insurance policies, such as health insurance and non-unit-linked life policies. It cannot just be a ‘personal recommendation’ to a client either upon the client’s request or at the initiative of the investment firm, unless it involves the conditions in Article 12 of the IMD. Indeed, these and other conditions make it unlikely that this can be on the initiative of the firm, since advice implies a relationship and knowledge of the client’s circumstances. 
The product must meet the client’s needs and must be appropriate for his circumstances as well as being affordable. The definition of ‘advice’ must take all these elements into account. Otherwise, the customer purchases the product at his own risk if he purchases it without advice. Even so, certain protections could be an intrinsic part of the process. One notorious case in the UK involved a mentally deficient person buying three exactly similar life policies in response to newspaper advertisements from the same company because a free gift was offered with the purchase. It should be possible for a system to be in place to pick up such repeat purchases. 

Some purchases such as term insurance could be bought without advice, but the safeguards in the system should include all the elements of the KIID plus a statement that the purchase is his responsibility since he has not been advised and information concerning the company and the complaints procedures.

Training and Competence.

The most important objective both for PRIPS and IMD2 is to achieve a higher level of professional requirements. The proposed requirement as set out in Section E of the IMD consultation paper has long been in force in the UK, following the implementation of the McDonald report, published by the precursor of the FSA, the Securities and Investments Board in 1990 and its implementation in 1994. Since then the rules and requirements have changed, but basically two elements have been regarded as essential: the initial qualification, the competence test and records of continuing professional education. The qualification should be offered by an organisation independent of the product provider and should take the form of a written test. In the case of the insurance company’s direct sales force, it is the responsibility of the company to ensure that all its sales staff take and pass the test within a specified period of time and that they are not allowed to engage in sales without supervision until then. Agents and insurance brokers would have to demonstrate a higher level of knowledge and abilities according to their duties.  

In addition, the approach to training and competence should include the need to secure appropriate standards of application of the knowledge acquired through the examination process and professional expertise. For those giving advice, especially independent advice, have to recognise that advice is not an exact science, but that nevertheless, the standard they have to reach is one in which they exhibit the ability both to apply and to justify their professional judgement. The IMD should not therefore merely require that some objective standard should be reached and that there should be mutual recognition of that standard without further work being undertaken to examine and compare both the training that sales staff and advisors (agents and brokers) receive and the professional examinations which have to be met. Both for PRIPS and the products covered by the IMD, one of the greatest safeguards the consumer can have is the fact that all those providing advice or selling products are fully professionally competent. The EU should provide clear guidelines on the standards required.