Political Agreement on PRIIPS: Does It Close Gaps in Investor Protection?

The intensive period in EU politics before the end of the current legislature and the forthcoming election in May had been focusing on the banking union. With a successful conclusion on this heavy file reached in mid-March, it paved the way for the regulation on Packaged Retail and Insurance-based Investment Products (PRIIPs) to come to the discussion table among member states through the Council and the European Parliament (EP) as co-legislators. On 1 April, the European Parliament and the Council reached agreement on a mandatory Key Information Document (KID), which we previously analysed in this space and examined in detail with a research paper on the topic.

The KID, as agreed by the EP and Council, will now be voted on in the last plenary session of the EP on 14 April, after which it will be formally adopted by the member states. As a regulation, it will be directly applicable throughout the EU, without any need for transposition into national law, and be binding in its entirety.

Ambitious Scope but for Some Pension Products

The regulation covers all packaged investment products for retail investors, including certain life insurance products (such as unit-linked and with-profit solutions), investment funds, and structured products. Ordinary banks deposits, occupational pension schemes, and personal pension products are not covered, however.

Regarding the content of the KID, the European Supervisory Authorities (ESAs) will need to ensure that, when developing technical standards for the content of the KID, these will accurately reflect the products’ investment policies and objectives. Furthermore, the manufacturer should use clear and understandable language, accessible to investors, and avoid financial jargon. The final negotiations also included a provision that, where applicable, investors are to be informed about whether their investment will contribute to any projects with environmental or social aims. For products falling under this regulation, which are qualified as “not simple to understand”, a “comprehension alert” should be added. It would state, “You are about to purchase a product that is not simple and may be difficult to understand”.

Regarding costs, the use of an online calculator should allow investors to add all costs and fees charged by the manufacturers together with any other costs charged in the intermediary chain and not already included by the product manufacturer. Investors can also request advisers or distributors to provide further information on any costs not immediately disclosed.

On the supervisory side, the European Insurance and Occupational Pensions Authority (EIOPA) and relevant national authorities’ powers should be complemented with a mechanism enabling them to prohibit or restrict insurance-based products. Other products will fall under MIFIR (Markets in Financial Instruments Regulation) rules for prohibiting the marketing and sale of PRIIPs, in case of serious concerns regarding investor protection. If an investor can show that a loss was caused by misleading information in a KID, then the manufacturer could be liable under national law.

Implementation by the European Commission

The file will not be permanently closed, as given the reduced scope agreed, the Commission is charged with reopening the file in four years’ time with the possibility of including personal pension products. Meanwhile, the Commission will also be empowered to adopt delegated acts (detailed standards to implement the legislation), under the overview of Council and Parliament. In this review, the Commission will also carry out a survey to see if there are adequate online tools or calculators which the retail investor can use to compute his/her exact cost.

As the legislation moves into the implementation phase, CFA Institute will remain engaged with European authorities to advocate for investor interests in the development of the KID.

Photo credit: iStockphoto.com/FrankyDeMeyer