SP industry positions held strong on new Priips/Kid rules

The structured products industry has reacted positively to the introduction of the packaged retail and insurance-based investment products (Priips) rules endorsed by the European Parliament last week.

Under the new EU rules, a new pre-contractual information document for retail consumers will be required before they buy an investment product offered to them by a bank, an insurance company or an investment fund.

A senior source at an investment bank who wished to remain anonymous told SRP that although there is no place for industry triumphalism, the Priips outcome has taken into account a number of issues of concern for the industry and the work that trade bodies have undertaken over almost six years.

“This could have been an absolute disaster and it really is quite good at the end of the day,” he said.

The new information document, set out in a mandatory, three-page A4 Key Information Document (Kid), will have to indicate what the product invests in, what its risks and potential rewards are and what total costs will come the consumer’s way in the course of the product’s life cycle.

Tim Hailes, chairman of the Joint Associations Committee (JAC) on retail structured products said that “overall” the industry is pleased with the Priips regulation.

“The JAC positions have held strong and many of them are reflected in the compromises we now see: on the purpose of the Kid, the liability regime, the comprehension alert and the narrative that now needs to accompany the risk indicator,” he said. “We all wanted to see the introduction of a sensible regime for consumers – and today we have – and we hope this will continue when the detail behind the regulation is fleshed out over the coming months.

Zak de Mariveles, SocGen's managing director for UK independent financial adviser (IFA) sales and chairman of the UK Structured products Association told SRP that any move to improve the quality of information provided to investors is welcome by the UK Structured Products Association and its members. "Not only should a simple, standardised document provide investors with all the information they need to compare different structured products, but also to compare structured products to other investment types such as funds and ETFs," he said.

However, Hailes pointed out the Priips rules “could have been made even stronger to apply to all product manufacturers and distributors regardless of where there they are located if the investment products are sold to retail investors located in EEA Member States – something that the JAC called for – and we hope that is something that will be considered in the future.”

Priips reach
Internal market and services commissioner Michel Barnier said that the new information document will cover a wide range of investment products that retail consumers can buy through banks, financial intermediaries and on the internet.

“Too often, retail investors are caught out because the financial industry sells them products they neither understand nor need,” he said. “European consumers need to know in simple language what they are investing in, and what the risks are. In line with the Commission’s original proposal, Parliament has agreed that all investment products offered to retail investors must have a basic information document to help consumers make the right choice.”

This measure, added Barnier, will be essential to restore consumers’ confidence in the financial sector. The financial sector will also be required to specify whether products provide for guarantees covering the invested capital or whether all the invested capital is permanently ‘at risk’.

However, the Key Information Document (KID) will only be required when the products are to be sold to retail investors, not to professional investors.

“Occupational pension schemes, pension products for which the employer is required by law to contribute financially and where the employee has no choice as to the pension provider do not need the document,” said the EC in a statement.

In addition, other pension products that are recognised or certified under national laws as providing income in retirement will not be covered. Savings products that are structured as providing an income stream in retirement but that have not received official recognition or certification as a pension product will, however, be covered. The exceptions for recognised pension products will be subject to a thorough review four years after the new rules have entered into force.

Background
According to the EC, the new rules are a response to a myriad of problems that retail investors have faced in the past. The EC said that a consumer ombudsman in one member state recently found 12-year subordinated notes, carrying significant losses in the event of issuer default, being sold to elderly clients, and also pointed to a study for a consumer affairs ministry in one member state which suggested that up to 50 to 80% of consumers wanted to get out of long-term investments prematurely, indicating investments made were not suited to their needs.

On an EU-wide level, a mystery shopping exercise on behalf of the EC indicated that up to 60% of sales of investments could be considered unsuitable or not in the best interest of the consumer.

“The quality and neutrality of advice is part of addressing these problems, but the Commission’s impact assessment also points to improved transparency of the investments themselves as a necessary remedy,” said the EC. “Better disclosures about the features, risks and costs of products through the Kid will really help. Retail investors have themselves called precisely for better, more standardised information, seeing lack of comparability as a key barrier to more informed shopping for investments.”

MEPs noted that although Priips can benefit small investors by spreading risks across many different economic sectors or underlying assets, they are nonetheless “not simple” and hence may also mislead them. They therefore ensured that, where applicable, investors will also be given a “comprehension alert” warning that “you are about to purchase a product that is not simple and may be difficult to understand”.

The new rules still need to be officially endorsed by the member states, and would then take effect within two years.

The Priips text was approved by 637 votes to 26, with 16 abstentions.

This update includes comments from the chairman of the UK Structured Products Association (UK SPA), Zak de Mariveles.