Following the call by the Personal Investment Management & Financial Advice Association (PIMFA), UK's personal investment management and financial advice association, the Investment Association (IA), and the European Federation of Financial Advisers and Financial Intermediaries (Fecif), for a review of the Key Investor Document (Kid) for the packaged retail and insurance-based investment products (Priips) regime, SRP spoke to Ian Cornwall (pictured), director of regulation at the UK body, about the main issues found by advisers in relation to the Kid, their concerns around potential liabilities with additional explanations, and how investor choice could be damage if distributors retreat from the retail market or stop using structured products altogether.
Product manufacturers claim that the Priips Kid is not fit for purpose and fear it could raise even bigger hurdles for investors and distributors which could shy away from structured products because of lack of clarity and potential liabilities.
Cornwall points that the association's members don't transact significant amounts for structured products but they have reported problems around the manner the information to produce the Kid has been computed.
"The Priips Kid is aimed at helping end investors (and market professionals) understand the product, and the problem is that the content of the PRIPP KID does not meet this objective," said Cornwall. "We're aware that manufacturers have raised questions throughout the consultation process and it is a damning indictment that FCA is suggesting that distributors may want to provide additional explanations accompanying the KID."
The association has significant reservations regarding this suggestion as "it is unclear what explanations distributors should provide and given the significant number of products distributed it is exceedingly difficult to provide explanatory information for every product", according to Cornwall.
"The risk and cost calculations are in the view of many distributors misleading even though the Kid is compliant with the regulations," said Cornwall. "We also see a problem with additional explanations because our members don't have the knowledge and expertise to second guess the Kid information provided by product manufacturers, and we think this can add more confusion as well as increase legal uncertainty and potential liabilities."
There are also a number of practical issues around the new regime, and intermediaries are finding it difficult to establish what instruments are required to have a Kid and which ones don't need it, according to Cornwall.
"There's no central place where issuers and distributors can check if a product needs a Kid," said Cornwall. "This has resulted in a number of products being launched without a Kid provided by the manufacturer and some others disappearing -especially those issued by non-EU manufacturers."
Cornwall understands that some of these issues are part of the "bedding down process" but the reality is that "there is also a degree of angst among manufacturers" because the Kid is adding more confusion to the retail investors, according to Cornwall.
"Some of these issues were flagged to European Insurance and Occupational Pensions Authority (Eiopa) during the consultation period by manufacturers and distributors alike, and the problem now is that the requirement is to provide the Kid but it is very difficult for distributors to explain [such as] the rationale for some of the calculations," said Cornwall. "There is also the cost of producing Kids, and we have some anecdotal evidence in the corporate bond market suggests that the hassle of having to provide Kids has resulted on a number of product providers considering ignoring the retail market going forward."
At the end of the day, the logic of the Kid is that gives the end investor some basic information that the average investor can understand but the problem is that at this stage even market professionals are struggling to understand them, according to Cornwall.
"The risk scenarios have added confusion and this is happening across products and market," said Cornwall. "The frustration for manufacturers is that they flagged the problems throughout and for distributors is the uncertainty about liabilities in the event they choose to provide explanatory material and the fact that they are the ones facing the end client with information that not only is difficult to explain but also makes difficult to sell products."
The onus is on the European regulators as they "have a responsibility to set up a workable framework", according to Cornwall. "Otherwise this could impact negatively manufacturers and distributors alike, and limit investor choice if firms shy away from particular product types and distribution channels (retail)."
Cornwall notes that European regulators should not be surprised because the issues have been talked about for months and he does not believe that the Q&As proposed by the regulators will address these issues but points at two practical issues that need to be solved.
"On one hand, we need to have certainty about what products are required a Kid (even if we don't like the content) and which ones don't need it," he said, adding that the association is in regular contact with European regulators and feeding back the problems and issues it is finding.
"On the other hand, some firms are finding the process of producing the Kid so cumbersome that they are not bothering with offering certain products which actually goes against the goal of regulators to get retail clients investing in corporate bonds, funds, insurance products and structured funds."
PIMFA is the UK's leading trade association for firms that provide investment management and financial advice to individuals and families to charities, pension funds, trusts and companies. PIMFA was created in June 2017 as the outcome of the merger between the Association of Professional Financial Advisers (APFA) and Wealth Management Association (WMA).
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