MiFID & PRIIPs
Part two of our blog on the overlap between the MiFID and PRIIPs regulations.
The range of disclosure types between the two regulations is broad but can be summarised under the following headings: cost, risk, performance & complexity.
Both PRIIPs and MiFID II focus on completeness and product cost disclosures, and indeed the sufficiency of said disclosures. PRIIPs has a quite prescriptive approach to what exact costs should be disclosed, as well as very clear direction on how it should be calculated and presented. MiFID II is less prescriptive and does take into account disclosures which are made under a different EU regulation/directive being equivalent – where the sufficiency requirement is met. This would mean for example a PRIIPs KID would be sufficient under MiFID II, where as a UCITS KIID might not, as it does not include transaction costs.
Key with both regulations is that the disclosure of risk must pass the “fairness” test, with each of the regulations also have requirements to ensure risk is prominently disclosed i.e. no micro-font footnote style disclosure allowed. Clearly on PRIIPs, there is a rigid approach to how risks should be disclosed, right down to specific language to be used as well as the calculation of the SRI analytic which then needs to be reviewed and monitored continuously. MiFID II does not go as far as to prescribe a specific risk measure to be calculated, but does indicate one should be developed and used by the firm. A key point on which firms should have a written policy is the situation where a product is in-scope for MiFID II and PRIIPs – they should document their decision as to whether they apply the same or a different approach when it comes to disclosing risks to investors.
Disclosures: Performance scenarios
In the more recent history of the development of the PRIIPs regulation there has been a consistent ‘under-theme’ to remove and reduce the usage of ‘past performance’ data in the key investor documents. PRIIPs under the guise of the rejected RTS proposed the use of forward looking performance scenarios from favourable to moderate to unfavourable scenarios. This included a proviso to allow for the manufacturer to choose an even more unfavourable scenario, with a growing expectation that this is one area the commission may choose to look at in the revised RTS. MIFID II on the other hand also specifies standards for the use of forward looking performance – such that firms have to take account of the following when using such data:
• Periods where performance was positive, as well as negative, have to be used
• Not be based on past performance
• Be based on reasonable assumptions
• Contain warnings on unreliability of the data, and it cannot be used as an indicator of expected future performance
• Take into account the impact costs, fees & charges – demonstrating their impact on the performance in question
• Reflect the nature and risks of the specific types of instruments included in the analysis
Within both PRIIPs and MiFID II there is a focus on highlighting complexity within the product disclosure. In PRIIPs, there is a comprehension alert requirement to alert investors to products that are potentially more difficult to understand by the average retail investor. In MiFID II, on the other hand, there is also a complex product stipulation that prescribes the mandatory offer of advice before investment. Whether a product is complex or not is driven by an understanding of the product framework itself, as well the percentage weight, or indeed simple existence of complex underlying investments – with anything beyond exchange traded equity; vanilla fixed income and money markets being potentially complex. Recent commentary from UK regulators with respect to complexity treatment of NURS vis-à-vis UCITS under MiFID II has re-assured many firms that the regulators are seeking a pragmatic path forward – with the position being that just because a NURS (Non-UCITS retail scheme) is not a UCIT does not automatically make it complex under MiFID II.
Next week we will focus on product governance, target market identification and the timing and nature of document/data delivery
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