In the second part of an interview, Sarah Natt (pictured), head of LDSS, managed services at Delta Capita, talks about the challenges around the implementation of the PD3 by the structured products industry, the extra resources manufacturers will have to deploy and the lessons to be drawn from the implementation of the Priips and Mifid 2 regulatory framework.
According to Natt, providers issuing hundreds of products have already significant regulatory implementation projects ongoing, and "they will have to grapple with these requirements before they're even ready to meet Priips and Mifid 2 requirements".
"The Prospectus Regulation will have an impact in the format and the content of the prospectus so every manufacturer will have to look into their issuance processes, their template automation systems, and adapt those to comply with the new regulation," says Natt, adding that technology and automation will almost certainly help issuers to address some of the tasks around processes although it remains a challenge. "It will not be easy because of the need to provide the 15 key risk factors on a product specific basis. That is going to require some changes around templating and automation systems so that it can be programmed to select the correct 15 risks."
The whole regulatory overhaul has created disruption among manufacturers and some have even retreated somehow but in general banks will need to work in implementing the PD3 as soon as Priips/Mifid have gone live, according to Natt.
"Some of the changes in the legislation will require technical standards and a great deal of discussion within the bank and with the bank's adviser's, and potentially with other issuers in the market as well so that they can work out a standard approach to some of these new requirements," says Natt. "It will certainly be a challenge as it will mean a significant overhaul of prospectuses which adds to the current challenges issuers have to face to comply with Mifid/Priips."
This is another change around the issuance framework issuers will have to grapple with it to make sure they meet the implementation deadline, according to Natt. "If issuers fail to meet the deadline their issuance programs could be disrupted," says Natt.
The process of implementing the PD3 should be slightly smoother than Mifid 2 and Priips as the "industry now understands how challenging and intensive implementing these kind of regulatory changes can be", according to Natt.
"We have seen the industry coming together and working to implement the changes consistently across the market and providing feedback to regulators with one voice," she says. "We have seen that by working with the Priips' consortium working groups and this has helped manufacturers to tackle some of the main challenges and get clarification on a number of areas."
According to Natt, manufacturers have been working on a number of regulations and new requirements for several years now, and they will need to consider the approach they will take with their issuance programs and the PD3 should not take the industry by surprise. "[However] there are a number of areas (such as risk materiality) where they will have to seek external advice and assistance to help with the prospectus update, and will need to increase their resources to meet those requirements and overhaul their issuance documentation systems," says Natt.
On the focus of the new regulation, Natt points at the 'investor protection' theme underlying the new regulation. "There is a specific statement about 'risk factors should be prepared solely for the benefit of investors' and there is a significant emphasis on the need for 'clear' and 'easy-to-read' documentation," she says. "But I also think there is a genuine desire to improve efficiency and access of issuers to the market, and there is also an acknowledgement that qualified investors can be viewed differently, quicker prospectus approval procedures via the "Universal Registration Document", as well as less onerous requirements for SMEs and secondary issuance."
The new regime brings challenges to issuers but also some benefits, according to Natt. "The detail of that target market assessment and definition falls mainly on Mifid 2 and Priips but within the PD3 there is also a requirement to determine whether the product is aimed at a retail or a professional-only investor," says Natt. "The overlapping between the different regimes suggest that in an ideal world these could have perhaps been part of the same set of rules, and the different regulations could have been more integrating and address any grey areas more consistently. However, because of the complexity of the rules this could have been very difficult to achieve in practice within the same timeframe."
According to Natt, the industry has acknowledged the need for a strong framework and harmonisation will be for the benefit of the industry and investors, but it's ready to move forward. "It feels like over the last few years regulation has dictated somehow the agenda for the structured products industry and the industry is ready to reach the end of the regulatory overhaul and move on."
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