As fund managers, stock brokers and investment platforms scrap some of their products, such as US-domiciled exchange-traded funds, for failing to meet the new Priips rules or halt the sales of products that have not yet produced key information documents, the European Structured Investment Products Association (Eusipa) and the European Fund and Asset Management Association (Efama) have raised concerns that the new regulatory regime is threatening to cause serious investor detriment by mandating figures, particularly in relation to performance scenarios and costs, that will at best confuse investors and also mislead them.
In a letter dated December 15, Eusipa urged the European Securities and Markets Authority (Esma) and the European Insurance and Occupational Pensions Authority (Eiopa) to look into 'severe problems of the industry in complying with some of the requirements for the Key Information Documents (Kids)' and 'review the relevant rules and applicable methodologies and to provide (updated) regulatory guidance on this basis'. According to Eusipa, these relate to the methods prescribed for the calculation of cost, performance scenarios and the synthetic risk indicator (SRI), all of which form an integral part of the Kid's content.
According to Eusipa, the banks it represents and its member associations have, in the absence of regulatory guidance, devised different strategies to ensure compliance with at least the legislative superiority of the Priips implementation rules, while at the same time avoiding the creation of misleading information for investors as far as practically possible.
Eusipa pointed that, at a technical level, leverage products faces a complete lack of clarity when determining an appropriate recommended holding period. 'Together with the prescribed determination methods for the performance scenarios, this leads to partly abnormal figures, and, as regards the prescribed annualisation approach, [even impossible] to comply with all elements of the methodological prescriptions at the same time,' it said. 'In addition (...), there are a number of other examples where the prescribed methodologies result in misleading cost, performance scenario-related or risk indicator information.'
To minimise the risk of misleading investors, Eusipa members will provide additional information to investors, such as: additional textual information in the Priips-Kid; explanatory notes or documents added to the Priips-Kid; and modifications and/or selective omission of certain elements of the information provided visually, eg. with regard to (parts of) the displayed performance scenarios (see issue 1 below).
Eusipa has identified two problematic cases in the course of implementing the methodological requirements under Priips. According to the trade body, products with very short recommended holding periods, in particular open-end products, often show positive scenarios with returns in excess of one million percent. 'The extreme values shown in the Kid will thus confuse investors in their investment decision,' stated Eusipa. 'They are suggesting potential gains which are not realistic and imply that investors can lose more than the amount invested (which is not a feature of these products).'
In addition, Eusipa pointed out that the reduction-in-yield shown in the Kid is calculated as the difference between two internal rates of return and based on the assumption that the moderate performance scenario realises - products where the moderate scenario has a very negative return or even a total loss of capital - show a reduction-in-yield that would suggest no or very low costs. 'This flaw could easily be addressed by changing the relevant RTS items, eg. by allowing for a calculation of a total expense ratio expressed as the annualised amount of entry cost and adding the annual on-going costs,' it said.
Efama, the fund trade association, has also urged EU policymakers to support investors by working "urgently with the industry and relevant stakeholders" to rectify serious issues around the implementation of the new rules.
According to Efama, it is becoming clear, as companies apply the new rules, they will not achieve the desired objective. 'Instead, the new rules are threatening to cause serious investor detriment by mandating figures, particularly in relation to performance and costs, that will at best confuse investors and at worst mislead them,' it said. "In short, the Priip Kid risks forcing manufacturers to make claims for products that breach the fundamental principle that investor communication must be 'clear, fair and not misleading'. The new methodology for calculating transaction costs will also produce confusing and unreliable figures.'
Efama believes that the proposed rules would prove to be badly calibrated and regrets that its proposed 'calculation methodologies' and 'practical solutions to get the rules right for investors' were ignored in the final rules. The trade association is also concerned that in addition to Priips investors being presented with misleading Priip Kids the European Commission may choose to scrap the Ucits Kiid for the Priip Kid in 2019.
The methodology for calculating transaction costs and the new rules around future performance scenarios are fundamentally flawed, according to the trade body. This, in turn, drastically challenges the ability of the Priip Kid to assist investors in making good investment decisions - 'given both the value proposition (the funds projected performance) and the cost proposition are seriously skewed.
Efama believes that cost calculations are based on partially inappropriate methodologies resulting in misleading information for investors, while past performance will no longer be disclosed in the Priip Kid. Additionally, the trade body stated that looking at future performance scenarios without further context will not help investors make investment decisions and that meaningful comparisons between similar investment products will become impossible.
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