Complexity of information around fees and charges in the new Packaged Retail Investment and Insurance Products (Priips) Key Information Documents (Kid) is thwarting transparency, adding confusion and making it 'very difficult' to sell a product.

"It's clear that the Kid is far from ideal... there is no consistency, and many of the numbers are misleading," said a senior UK market source. "Some of the Kid's make it very difficult to sell a product. It's not the product that's wrong but the analysis."

A random analysis (GB00BF6XDZ31 - 6Y GBP FTSE Eurostoxx Defensive Step down Autocall -UK Four Option) shows that in a moderate scenario the product will deliver a low return (5.44%) whereas in a stress scenario it will incur in a massive loss (-23.98%). The category 5 Summary Risk Indicator of this product also implies volatility of between 20% and 30%.

"We have looked at some of the Kids that have come out and we think they are a complete disaster," said the source. "Some of the numbers are just not accurate and you wonder how some of the providers are going to be able to sell their products based on what the Kid shows."

The Priips regime has been introduced with 'good and justifiable intentions' but the reliance of simulation models prescribed by the regulator may not necessarily help, according to James Chu, director of the markets and investments team at Reyker. 'We feel that there is an over-reliance on these models,' stated Chu (pictured), in a recent blog post. 'This could result in unintended confusion among advisers and clients.'

Most of the products analysed are 'pretty decent' but when you apply the risk calculations (SRI) most products fall under risk category 4 (most capital at risk products fall under this category) but the 'most interesting aspect' is that the worst case market scenario in the stress test will result in significant losses of between £8,000 and £5,000 on a £10,000 investment, according to the source.

The moderate return over the 'recommended holding period' which is what a regular retail investor would look at as a potential average return, shows returns of around 1.5% but when you add the fees which in some cases add up to over 13%, the product becomes a 'bad investment'.

"In this moderate scenario some products are returning low and zero returns, and when you add the fees (average 6%-7%) the products don't make sense," said the source. "In the worst case scenario, we did some stress testing on a few matured dual defensive products, and some of the products would deliver losses of over £8,000 on a £10,000 investment. On FTSE-only products the losses amount to over £7,000."

The problem for the structured products market is that all the Kids look different and give different numbers on the same products, according to the source.

"So the same product from two different issuers would look very different," said the source. "The RTS is flawed and very badly drafted, and has resulted in different interpretations. Rather that provide investors with a document that would allow them to compare products what they are getting is a completely useless document that is misleading but it has to be given to investors regardless."

The problems with the numbers being fed into the calculations could result in advisers struggling to make recommendations.

"Considering how bad the Kids have turned up to be, we don't think the regulator will have a heavy-handed approach or actively police the market," said the source. "However, distributors will be left with the dilemma of offering products that on paper don't look suitable or appropriate for retail investors."

The source also pointed that Mifid 2 requirements rules go beyond Priips and that the Priips Kid will not be suitable to meet Mifid 2 requirements.

Mifid 2 requires more than just the KID. We expect more problems because investment banks have focused just on producing the KID, but not on how to provide meaningful calculations. It seems that nobody bothered with testing calculations before the KID had to be implemented. There is no consistency and this could be a problem.

Related stories:

Regulatory compliance for complex products is now coming at a higher cost, A&O

Structured products industry spells out 'nonsensical' Priips/Kid issues, urges regulator to 'review and adjust' RTS

No Priips, no sales: new rules threatening to cause serious 'compliance problems', promise million percent returns