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