Shouldering the burden
Where to start with MiFID II and PRIIPs
Where to start with MiFID II and PRIIPs
It would be hard to disagree with the principle that investors are entitled to clear and comparable information about the products they are putting their money in. However, asset managers could be forgiven for feeling overwhelmed by the burden (or rather burdens plural, given the differing requirements of each regulatory initiative) of providing this information according to the various European directives and regulations.
Scarcely have fund managers accustomed themselves to providing Key Investor Information Documents (KIID) for their UCITS funds that the work has to start all over again with the Key Information Documents (KIDs) for Packaged Retail and Insurance-based Investment Products (PRIIPs).
The PRIIPs regulation does not just expand the range of products captured by the disclosure standards -such as life insurance product and structured bank deposits- it significantly changes some aspects of those standards, compared to UCITS KIID. Asset managers not only have to assess which of their products distributed to retail investors need the new disclosure documents, they have to reassess how they gather and calculate the information, then present it in a new template as prescribed by PRIIPs.
The new requirements will affect most asset managers to greater or lesser degree, as PRIIPs is designed to cover most funds not already captured by the UCITS category, including private equity and real estate.
In addition, fund manufacturers must have regard to the Markets in Financial Instruments Directive II (MiFID II), which also comes into force at the beginning of 2018. Distributors who advise retail or institutional investors to buy investment funds will have to be provided by fund managers with product disclosure as required under the coming directive.
By January 2018, under MiFID II and PRIIPs fund managers will have to provide additional product disclosure to enable investors to better understand risk, performance and cost and also to be able to compare investment products.
In the risk and performance areas, the PRIIPs rules meet the less prescriptive MiFID II requirements. Concerning costs and associated charges, information is expanded under MiFID II. Fortunately, fund managers will not be faced with different definitions on costs and charges in MiFID II and in PRIIPs regulation, as clarified in the last ESMA Q&A on MIFID II rules ,published in June.
In principle this should facilitate competition, due to a greater transparency. In practice, it is also expected to change the range of products available as fund managers focus on developing products that can stand out from the crowd within the confines of standardised presentation and indicators.
As compared to the UCITS KIID, the main challenge for managers compiling new Key Information Documents will be determining (and regularly reviewing) performance scenarios, a summary risk indicator and a costs indicator. While for non-structured UCITS the KIID risk summary indicator (historic volatility) and performance scenario reflect the past, the corresponding KID information aims at providing a prospective view: the risk measure is a combination of a Value at Risk equivalent volatility of the fund and credit risk associated with the underlying assets. In addition, projected performance under four prospective scenarios (favourable, moderate, unfavourable, stress) must be disclosed.
The same difference in approach applies for cost disclosure requirements between the UCITS KIID and the PRIIPs KID. In a UCITS KIID, recurring costs can be based on the costs and charges incurred the previous year and do not include transaction costs. A PRIIPs KID cost indicator is a reduction in yield over a holding period, making it clear to the investor how much of their potential return may be eaten up by the various costs and charges on the product.
In theory, UCITS funds may continue to publish only KIIDs until 2020, when they are required to meet the PRIIPs standard. In practice they will have to produce additional information such as transaction costs, which must be included under MiFID II. If UCITS are sold as investment options of multi-option insurance products they will have to provide insurers either with transaction costs or a full compliant PRIIPs KID, depending of the insurer’s choice.
Gathering and managing all this information will be critical for fund managers – the majority of which can be done by the back office. BNP Paribas Securities Services, which can support asset managers with the PRIIPs and MiFID II disclosure requirements, has also published a guide to the timetable and requirements of both regulations.