Making disclosure meaningful again
The Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation was always well intentioned. It aimed to provide a Key Information Document (KID) in a short and accessible form to help retail investors understand and, where relevant, compare the investment products on offer to them. We have always supported these intentions.
However, nearly 6 years after becoming EU law, those objectives remain just intentions.
High-profile interventions by stakeholders, including Professor John Kay and Better Finance, have helped illustrate that the original PRIIPs KID is widely regarded as a failure. The problems, increasingly recognised and documented by both the UK and EU authorities, include:
- Over-optimistic and pro-cyclical performance projections could mislead investors into buying unsuitable products while denying them the essential facts about how a product has performed in the past.
- Estimations of costs are provided based on multiple assumptions that are not consistent with the information required to be given to investors by product distributors.
- Transaction cost information is distorted by embedded assumptions that, in extreme cases, can negate the true costs entirely.
- Risk indicators are included that significantly understate the risk associated with products investing in illiquid assets.
Providers of insurance, banking, and listed investment products have been producing KIDs since the start of 2018. Investment funds are due to switch to KIDs from their existing form of Key Investor Information Document (KIID) at the start of 2022. As things stand, millions of fund investors across the UK and the rest of Europe will be forced to switch from a simple, accessible KIID to a flawed, complicated KID when they invest in a fund.
These problems cannot go unsolved. It remains essential both for customer confidence and the flow of reliable information through the distribution chain that regulators, industry, and other stakeholders work together to ensure a new generation of digital disclosure frameworks deliver meaningful information.
As the front-line point-of-sale document, getting the PRIIP KID right must remain a central priority.
That’s why we’re now calling for the investment funds’ switchover to be delayed beyond 2022 to allow the following four areas to be addressed in the KID across all relevant products:
- Abandon the use of complex performance scenarios and replace them with information about past performance, where it is available, that holds investment managers to account for what they have actually delivered.
- Replace cost approximations with actual costs consistent with those provided by product distributors.
- Simplify transaction cost calculations to eliminate reliance on imperfect assumptions.
- Ensure risk indicators provide a realistic assessment of all the risks associated with the underlying investments.
It is our duty to deliver meaningful information to retail investors and ensure their interests are firmly at the heart of what we do. Let’s take the opportunity for a partnership between regulators and industry to get this right, once and for all.
To read our full position paper on PRIIPS, click here.