Part three of our blog on the overlap between the MiFID and PRIIPs regulations.
Product Governance and Target Market Identification
There is a clear alignment of principles in both PRIIPs and MiFID II on the identification of the target market for the product in question. Where MiFID II may go further is in the area of product governance and extending the remit across manufacturer and distributor with indications around how each side should reconcile with the other to ensure only investors from the target market are invested. The lobby groups are looking for the use of common language regarding how target markets should be identified and described. This shared language is as important for the investor, as it is for the industry and one area in which we expect to see very close alignment as the RTS/CP documents solidify understanding.
Timing and nature of document/data delivery
PRIIPs requires that a Key Investor Document (“KID”) be delivered to the investor before investment contract. MiFID II also requires disclosure of key facts before investment, but the form of the document is not prescriptive– rather the directive states it must be “fair, clear and not misleading.” Both directives also require information to be provided to investors “in good time.” PRIIPs aims are consistent with those of MiFID II, and the evolution of both will address the unevenness of the playing field that funds were dealing with heretofore.
PRIIPs mandates specific review processes and schedules that must be adhered to by product manufacturers. While PRIIPs does have some pointers to thresholds that would trigger a recalculation/calibration of the performance scenarios, it is more broad in terms of how managers would determine if there was a recalculation required e.g. if there was a material change in cost. The KID document and the data therein must regularly be reviewed by the PRIIP manufacturer, with intervention expected when a review indicates that changes are in order – with a new KID promptly re-published and pushed to all distribution channels. A similar although wider scoped ‘regular review’ obligation exists under MiFID II with firms required to maintain and operate a review process for the approval of each product before it is presented to sale to an investor. Within MiFID II, the regulator explicitly directs firms to ensure their regular review process take into account events “that could materially affect the potential risk to the identified target market, to assess at least whether the financial instrument remains consistent with the needs of the identified target market and whether the intended distribution strategy remains appropriate”.
There are some very obvious conclusions here:
- PRIIPs and MiFID are similar but not the same
- It is not a coincidence that industry response groups have teams looking at the overlap and exploring operation efficiency for the industry
- MIFID II is broader, while PRIIPs is narrower but more prescriptive
- Disclosure requirements in both are very much aligned
- Uncertainty exists with both regulations, although this is expected to be fixed
- The dates for both are likely to line up EOY 2017 / SOY 2018
- There is opportunity for the regulator to reduce industry burden by issuing specific written guidance on the overlap areas
Finally – the investor wants a clean, easy to understand buying experience that allows them to compare products in a simple manner and to understand risks before investment. Bombarding the client with tens of documents to cover myriads of regulations, both national and supra-national only results in a confused investor as opposed to an assured one. The industry players – the regulators, product manufacturers, product distributors and the myriad lobby groups and associations – all need to work harder to ensure pragmatism wins out.