Tag Archives: Karl Murray

Global developments in conduct risk management

Risks relating to conduct of business are attracting increased attention across financial services firms, prompted by the ever-increasing focus of regulators in this area. Senior managers are accountable for conduct risk failings, and accordingly a strong conduct risk framework is an important tool in protecting against such failings. Based on our experience of assisting clients in this area, conduct risk management is still evolving and firms face many challenges. This paper by Milliman’s Karl Murray and Eamonn Phelan looks at recent and ongoing developments from around the globe and discusses actions firms need to take in order to address the changing business and legislative environment with regards to consumer protection.

PRIIPs Level 3 Q&A update

By 1 January 2018 insurers, banks, asset managers and other investment firms offering packaged retail investment and insurance-based products (PRIIPs) must make a key information document (KID) available for all products offered to customers. On 18 August 2017 the European supervisory authorities (ESAs)—made up of the European Insurance and Occupational Pensions Authority (EIOPA), the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA)—published an updated questions and answers (Q&A) document on the PRIIPs KID. The first batch of Q&As was published in July.

The ESAs’ publication is aimed at clarifying aspects of the Regulatory Technical Standards (RTS) or ‘Level 2’ rules covering the specific form and content of KIDs. The latest questions addressed by the ESAs include queries on the following:

• Categorisation of a retail investor
• Market risk assessment
• Credit risk assessment
• Summary Risk Indicator (SRI)
• Presentation of costs

The combined set of Q&As, covering the first and second batch of queries, can be found here.

In addition to the latest Q&A document, the ESAs also published a useful flow diagram or decision tree showing how to perform the various calculations for the SRI and performance scenarios. This is a graphical view of the requirements set out in the RTS and a useful summary of the basic calculations. The flow diagram can be found here.

The ESAs stated they will continue to assess whether further guidance is needed based on additional questions received.

Please contact us if you have any questions or comments on PRIIPs. We would be happy to meet with you to discuss ways in which we can help you achieve a successful PRIIPs implementation including gap analysis, KID production, checking overall compliance with the PRIIPs requirements and review of KID elements, including narratives and numerical disclosure tables, etc.

PRIIPS may lead to increased competition on a smaller range of products

Financial firms are facing significant technical and resource challenges because of the upcoming European-wide Packaged Retail and Insurance-based Investment Products (PRIIPs) regulations. These regulations are aimed at improving comparability of investment products and reducing the risk of consumers buying products that don’t meet their needs. Embracing these changes could improve customers’ outcomes and their understanding of investment products. Milliman consultant Karl Murray offers some perspective in this Finance Dublin article.

European Parliament rejects Level 2 regulatory technical standards, but this is not the end of PRIIPS

Murray-KarlOn Tuesday, 13 September, I participated in a panel discussion on packaged retail and insurance-based investment products (PRIIPs), along with Kevin Manning, a principal from the Milliman Dublin office. The event was cohosted by Silverfinch and Maples & Calder in London. Attendees of the event, including a mix of insurers, asset managers, and data providers, expressed various views on the potential outcome of the vote by the European Parliament on the PRIIPs Level 2 regulatory technical standards (RTS), scheduled for the following day, and the possibility of a delay.

Kevin Manning
Milliman Principal Kevin Manning offered perspective regarding the European Parliament’s vote on the PRIIPs Level 2 regulatory technical standards (RTS).

Yesterday, the European Parliament backed the view of the Economic and Monetary Affairs Committee to reject the Level 2 RTS for implementing the new PRIIPs legislation, on the basis that the RTS did not protect PRIIPs consumers. While many of the attendees at the panel discussion the day before had predicted this outcome, most contributors highlighted the need for clarity on the road map for PRIIPs implementation—something that yesterday’s vote did not deliver.

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PRIIPS: Technical standards sent back to the European Commission for reworking

Murray-KarlThis morning, 1 September, the European Parliament Economic and Monetary Affairs Committee (ECON) voted to back a motion by MEPs to reject the Packaged Retail and Insurance-based Investment Products (PRIIPs) Final Regulatory Technical Standards (RTS) adopted by the European Commission in June 2016. But this is not the end of PRIIPs—the Level I regulations will still be legally binding come 1 January 2017 according to the European Commission’s own legal advice and the MEPs generally expressed strong support for the overall PRIIPs project.

One of the main reasons for this rejection of the RTS is due to fears that the standards, as they currently stand, could hurt “high street investors”—the very people they are trying to protect. This is partly due to a view that future performance scenarios to be included in the Key Investor Document (KID) do not meet the requirements of being “accurate, fair, clear and not misleading.” There is a concern that the introduction of future performance projections on the basis set out in the RTS could be misleading and result in investors not realizing that they could lose money by investing in these types of products.

Whilst the RTS in its current form was rejected, ECON members remain committed to PRIIPS regulations. Members emphasized that they are prepared to work with the European Commission and the European Supervisory Authorities to develop a workable version of the RTS to implement alongside the PRIIPs Level 1 regulation by 1 January 2017. It seems a limited number of changes could likely be made to the current RTS in order to address MEPs’ concerns.

However, even though some members conceded that PRIIPs implementation should be delayed, the mechanism to achieve a delay is unclear given the Level 1 regulations are in force. The European Parliament will still debate the RTS in its plenary session scheduled for 12 to 15 September, but given the rejection today by its own ECON Committee it seems likely that the Parliament itself will vote to reject the current RTS.

The European Supervisory Authorities could have the power to introduce guidance on implementing PRIIPs, in a similar way to the Solvency II preparatory guidelines. Such guidance may not be legally binding but could be on a comply or explain basis. EIOPA chair Gabriel Bernardino said Parliament, the Commission, and his own organization should work together to develop revised RTS, stating that “Implementation without regulatory technical standards will lead to legal uncertainty. If we only have principle-based [legislation] it will be difficult to achieve consistency across the single market. Our intention is to have a solution as soon as it will be possible.”

PRIIPs guidance considerations

Murray-KarlI joined the live streaming of the workshop hosted by the European Commission on the implementation of the Packaged Retail and Insurance-based Investment Products (PRIIPs) framework in Brussels today, 11 July 2016. There were lots of clarifications coming out of today’s industry workshop. Finally. No more excuses now to delay PRIIPs implementation projects.

The Joint Committee of European Supervisory Authorities (ESAs) indicated that the Level 3 guidance will mostly be in the form of the promised Q&As. This guidance will likely be released in tranches over this summer.

My key observations of the comments made today are outlined below. You may need to refer to the Regulatory Technical Standards (RTS) to follow my comments.

Scope
• ESAs consider top-ups and switches on insurance products likely to be out of scope. They are deeming such transactions as variations on an existing contract. But you need to check your Terms and Conditions (client contract). However, they still suggested that it might be “best practice” to offer a key information document (KID).
• Disclosures for underlying investment options (i.e., risk, performance, and cost) could be considered under general groupings or categories of investments (e.g., low/medium/high risk) as opposed to the full list of actual underlying funds. This could significantly help the open-architecture funds and discretionary asset management structures in particular.
• Generally, no credit risk look-through is needed for funds investing in equities and bonds, as the credit risk element is deemed captured in the market risk measure. Credit risk assessment really only relates to structured funds (e.g., tracker bonds) and derivatives where a fund contracts a credit exposure. This could significantly reduce the volume of look-through effort required for most funds.

Risk
• The risk narratives still need to explain both market and credit risk separately even though the quantitative risk measure is an overall 1-7 for the combined risk.
• Firms can’t opt into high-risk categories voluntarily to avoid the hard calculations. However, the ESAs are considering whether the market risk measure can be voluntarily changed in response to certain market events. This would avoid misleading customers because the general update process follows a four-month monitoring window, which could be slow to react to market events.

Costs
• Cost information to be reassessed at least annually on an ex-post approach.
• Lots of detail on transaction costs and look-through.

Performance scenarios
• My take from the workshop today is that the underlying performance disclosure doesn’t necessarily need to reflect the PRIIP wrapper for multi-option products (MOPs) although it was mentioned at another point that entry and exit costs should be reflected.
• No further prescription on the fourth scenario (where necessary). It should generally illustrate a specific event beyond the 97.5% Value at Risk (VaR).

Data
• Firms need to use five years of actual data when available (but two years is enough if daily priced).
• Benchmark data to be concatenated with actual data where necessary.
• Where only benchmark data is being used, it’s subject to a maximum of five years and at least the same minimum requirements as actual data, e.g., two years of daily observations.

KID communications
• Recital 22 of the Regulatory Technical Standards (RTS) relating to informing existing customers of changes to KIDs is considered best practice rather than mandatory.

I am sure the debate on interpreting PRIIPs will continue. I look forward to joining the debate.

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