Mifid 2 plus Priips is a big revolution, according to Emmanuel Doumas (pictured), senior policy officer, investment management at the European Securities and Markets Authority (Esma), speaking on the regulatory panel at SRP Nordics in The Grand Hotel in Stockholm on September 27.

"It is a big change to IT and the regulatory framework," said Doumas. "For example, transaction costs for investment management are rather big. [Furthermore] there are a lot of big things coming at the same time, so there are likely to be discrepancies. This is why there is a review of Priips regulation, which is coming soon. This is a first step; after six months, the list of problems will be very clear, and that will be a good time to [conduct a review]. The merits of the new regulation include the precise definition these discrepancies."

In a presentation that preceded the panel, Doumas touched on a number of issues, largely based around the interaction of Priips and Mifid, points that introduced with the caveat, "I would like to be brief but exhaustive".

"The underlying philosophy is that the technical work on identifying the cost component of the different types of Priips, identifying the appropriate methodologies for the calculation of [for example] the risk indicator and performance scenario - all this technical work - was aimed at being addressed by the Priips implementing Act," said Doumas. "This is why the work has taken three years. The underlying rationale is that Mifid would, of course, take advantage of this work, as it would make no sense to have the same time of work on the same type of issues, more or less."

Doumas attributed the differences between the two pieces of legislation to the lessons learned from the financial crisis as well as also historic lessons related to Mifid 1. "Priips is a fundamentally presale-related regulation, really aimed at giving information to the retail investor before he invests, as opposed to Mifid, which is supposed to cover the entire lifecycle of the product," said Doumas.

"Priips is clearly for retail investors and has been considered to be extended to professional investors," said Doumas. Mifid is supposed to cover not only retail clients but also professional investors, mainly because, in the previous financial crisis, professional investors did not manage to identify all the risks related to some of the products that the Commission thought they would. "Therefore, the consequences are that some of the requirements that were, until that moment, only to be given to retail investors would be extended to professionals," said Doumas. "When you have Mifid-related requirements related to technical issues unrelated to the type of client - such as the technicalities of the cost component of a product - in a Mifid context, the work from Priips can be used."

In relation to product intervention, aside from their use by national regulators, Doumas said that the circumstances for Esma to use these powers are relatively restrictive and usable when there is a non-action or an inefficient action by national authorities; otherwise, Esma has a coordinating role.

On product governance, Mifid 2 requirements cover manufactuers and distributors. "In its guidelines, Esma has focused on the target market and identified different type of key elements, the type of client to whom the product is targeted, their knowledge and experience, and ability to bear loses," said Doumas. "This is subject to the general Mifid rule on sanctions, but, in that specific case, because Esma is not a direct supervisor here, it will up to the national regulators."

With particular relevance to Sweden, Doumas and the panel discussed the new laws in relation to multi-option products when some of these options are outside the scope of the regulation. "As an industry, we all strive to be compliant by year end; it'll be a hard one, though," said Joakim Alpius, vice president, product development and index administration in markets and asset management at Handelsbanken. "Some questions have been clarified, through Q&As; some have been asked from our side and we are waiting; some are asked but not possible to answer, maybe because of some of the views of local authorities. There has been extensive work on self-regulation through working groups: a one a product governance side, we have managed to harmonise the target market side. Some aspects are still open issues, at least from our perspective; some are more relevant for the whole of Europe, some for the Nordic arena."

The issue is especially relevant to Sweden because of the popularity of an insurance wrapper called the insurance depot, for which the investment range is almost unlimited. "This is an insurance-based investment and falls under the scope of Priips/Kid. And what is requested for this product there are two options: article 10b is to provide a Kid at the Mops (Multiple Investment Options) level in the insurance wrapper with risk range, which depends on the risk of the underlying investments and even range of costs," said Ayal Leibowitz, chief executive officer at Modelity.

"How do you deal with non-Priips-like equity shares? asked Leibowitz. "Are we expected to calculate the risk and the cost of the entire universe of shares or bonds? How do we deal with this?"

Doumas noted that this is a good example of something that is very specific to countries in the Nordic region, which is not well known in other parts of Europe and which is not very well known by European authorities. "Priips Level 1 explicitly excluded shares and, therefore, one line of argument was to say, if Level 1 has done that, the simple answer is that, in the case of a Mop investing in shares, information on costs and risk would not be requested, but, if that was the case, it would extend the scope of Priips," said Doumas.

"When the Commission listened to that argument, it decided very clearly that it is not the case," said Doumas. "It is explicitly stated [that] a Kid needs to be drafted with the corresponding information on cost. This communication was published a few months ago, while the entire work on the different cost components of all types of Priips has been done in the past few years. Of course, it is very tricky from a purely process point of view to come up with guidance on which costs should be taken into account for a share, and how sure the risk indicator be counted in just a few months. So, the best thing would be for regulators to receive a proposal from the industry here, from the Swedish Association, because a Q&A that would say, in this case, cost should be computed in such a way can be more easily done if there is an actual proposal which is in line with what market participants currently have in mind on this topic."

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