On 21 July, 2020, the European Supervisory Authorities (ESAs) informed the European Commission of the outcome of their review on the Key Information Document (KID) for packaged retail and insurance-based investment products (PRIIPs). The review of the PRIIPs Delegated Regulation pointed out the main issues that had been identified following the October 2019 Consultation Paper, in particular regarding information on risk and performance measures and transaction costs.
As a result, the draft regulatory technical standards (RTS) to amend the technical rules on the presentation, content, review and revision of KIDs were not adopted by all three ESA Boards. The EBA and ESMA Boards agreed on the draft RTS while the EIOPA Board did not give them the support of a qualified majority, although many members agreed with the draft. The EIOPA Board members that did not support the technical standards generally argued that a partial revision of the PRIIPs Regulation is not appropriate at this stage.
The final report, published along with the letter, summarises the findings of consumer testing conducted by the European Commission. It proposes amendments to the PRIIPs for KID based on the feedback received.
This article will focus on the two relevant topics covered in the draft RTS i.e. risk and performance measurement and the methodology used in transaction cost calculation.
The draft RTS not having been adopted by all boards result might mean that the last agreed version of the RTS will come into effect on 1 January 2022. Another potential outcome is that we will have to produce and distribute the UCITS Key Investor Information Document (KIID) and PRIIPS KID to our clients in parallel.
Independently, if the UCITS KIID can be produced after 2021 and risk and performance are calculated with UCTIS, the PRIIPS transaction cost methodology using the current basis point method will no longer be applicable from 2022. It will only be able to be able to be applied to new funds for which a history is not available.
Many German, French and Austrian asset managers use this simple method, but we anticipate this no longer being possible.
Whatever the case, acarda is prepared for any eventuality with our regulatory reporting platform arep. We can set-up for each country an own version.
As shown by the survey conducted in response to the drafted RTS, many respondents opposed using the proposed performance scenarios computations that employed dividend yield methodology to estimate growth instead of using historical growth returns. This current methodology tested by the ESAs indicates uncertainty over the computation of future projections across the market. It is also opposed by the view that such projections cannot be relied upon to provide optimistic outcomes. The flipside is also reflected by stakeholders of AIFs or UCITS bond funds who are of the view that using historical performance data would create confusion. As a response to this, the ESAs also strongly support employing historical performance data in the form of graphs (already present within the UCITS KIID): this data would be included in the PRIIPs KID rather than ina separate document.
It is important to understand that the analysis conducted by ESAs focused on technical practicality and comprehensibility for consumers. In light of this, the ESAs proposed the use of scenarios forecasted from actual price history of the fund or a relevant benchmark for non-structured investment funds and PRIIPs. Meanwhile, for structured products, the ESAs proposed using the existing methodology provided that the PRIIPs manufacturer is allowed to use lower percentiles of estimated future returns to practice conservatism. This is in line with the ESAs current guidelines that provide extensive optimism in outcomes. Moreover, the ESAs suggestion regarding the time horizon for historical performance (a minimum period of 10 years) to encompass both positive and negative market scenarios is also supported by the current COVID-19 situation.
The second topic discussed in the report underlines the issues pertinent to transaction cost calculation and its methodology. The consultation paper presents two options and the report discusses the positives and negatives of both.
It is worth noting that the ESAs have been supporting the slippage methodology as a more accurate reflection of cost compared to the bid-ask spread. However, with the aim of improving transaction cost representation to consumers, the ESAs have also prescribed exemptions to the methodology where products do not generate sufficient transactions to eliminate market movements, or where there has been low portfolio turnover over the previous three years.
This calls for a comprehensive market data sourcing strategy that enables asset managers to rise their reporting challenges.
At this point, the discord in submitting the draft RTS delays the process of adopting the new PRIIPs Regulation. It also challenges the acceptability of the proposed changes to the Regulation. Although the UCITS exemption for providing a KID remains set to expire on 31 December 2021, a further delay in the adoption of the new Fund KID report may provide ground for yet another extension, if no agreement is reached.
The issues are currently under discussion include those pertaining to the present guidelines involving future projections versus historic performance disclosures. It is likely that the acceptability of the proposed changes will remain in debate. While the current impasse creates an uncertain situation, to say the very least, it has steered the industry towards incorporating historical information. This aligns with the method of providing such information as part of the PRIIPs KID, something that has been flexibly incorporated into our regulatory reporting platform arep.
The paper presents the view that transaction costs should be calculated as an aggregation way of costs over a three-year period, thus eliminating the impact of the market movements. Slippage cost methodology is therefore a more accurate representation than the half-spread approach.
On page 91 the Draft propose that Annex IV (14) of 2017/653 is given a new 23b clause: The clause stipulates that until 31 December 2021 transaction costs may be calculated using the methodology laid down int the Annex for funds and insurance products or which a Member State applied by 31th December 2021 rules on the KIDs)This means that the exemption or estimation method will still be permitted until 2024.
The exemption method allows clients to allocate a benchmark to each fund and apply this cost to the transaction. We suppose that using any external base point table e.g the AFT table will no longer be not allowed.
acarda, as a leading full-service provider in the compliance and regulatory domain is continuously on the look-out for changes in the regulatory landscape. We keep a close watch on the current situation in the market and review proposed amendments to the RTS
acarda´s reporting and data management platform, arep, incorporates a comprehensive PRIIPs reporting solution. Its modular capability ensures flexibility at times when new regulations are introduced or changes to existing regulations are prescribed for regulators in risk and performance calculation. It also uses a hybrid approach that combines comprehensive market practices, the basis points for a sample of transactions and the arrival price methodology through an optimised waterfall strategy, with the option of using several market data providers.
We thank our colleagues Osama Khan and Agata Cichecka for their contributions to this article.