Lausunto 31.1.2011

31.1.2011

The FSPA welcomes the opportunity to respond to the consultation on legislative steps for the Packaged Retail Investment Products initiative (and indirectly the Insurance Mediation Directive).

to: MARKT-PRIPS-CONSULTATION@ec.europa.eu

The Finnish Structured Products Association (FSPA) is a registered non-profit organisation founded in 2005 to promote the Finnish financial investments and especially to support Finnish offering of structured investment products and the operating environment. For achieving its mission the FSPA is developing common practices for members and their companies and recognizing / answering compliance and regulatory challenges to the business. The Association also offers education, research, information and publications.

The FSPA warmly supports the initiative to harmonize and simplify the pre-contractual information regarding PRIPs and to bring also insurance and pension products (where applicable) with the new IMD under similar regulation and standards. The FSPA is however concerned that the proposed definition of PRIPs may not cover the whole range of products that are generally classified as structured or packaged.

As there are several consultations, such as MIFID and IMD, open at the same time the FSPA believes that it is important to ensure that the combination of rules and regulations lead similar levels of playing field for all the different type of operators in the marketplace.

The FSPA cannot agree with the recognition of important problems, not at least, in the Finnish retail investment markets nor the description of a collapsed retail investor confidence. It is important to notice that PRIPs have made it possible for retail investors to invest in new markets and new products with less risk and to lower cost compared to making direct investments. PRIPs are therefore a very important alternative for retail investors when considering different investment products.

The FSPA as the representative for the structured products industry in Finland has produced a number of recommendations for the industry regarding information on structured products to investors. The recommendations provide guidelines and a common minimum standard as to what shall be regarded as accepted industry practice, primarily with respect to the provision of information in marketing material concerning structured investment products on the primary market. The purpose is to strengthen investor confidence in the market for these products and improve comparability between different structured products and ensure a high standard of information. As an example the major Finnish Banks issues of PRIPs are now transparent regarding the costs as they are stated in marketing material and/or term and conditions.

It is also an objective to produce information about the products that is easy to understand for retail investors. Our experience shows however the difficulties to produce such information in a concise way and we are concerned that a two-page KIID could in fact give investors less key information than they receive today and thus hide the complexity of the product. KIID could be the first step for an investor but it is important to take into account that the investor needs more information about the product before making the investment. We cannot envisage a situation where a PRIP could be issued with less information than a plain vanilla bond.

To strengthen the retail investors understanding, another initiative of risk classification has just been accepted and will be introduced during this year by the Finnish structured retail products industry. It is meant to help investors recognize the products from a risk point of view.

In addition the general remarks above we have based our answers on European Banking Federation EBF preliminary comments, not answering all the questions but highlighting the points which we find crucial or where our view differ from the EBF views. The FSPA answers below are in italic text.

 

General definition

 

Q. 1: Should the PRIPs initiative focus on packaged investments? Please justify or explain your answer.

The EBF agrees with the Commission‟s proposal to maintain the focus on packaged investments, rather than to broaden the scope to all types of investments. This is for the reasons set out by the Commission itself: while PRIPs are designed to deliver a specific risk profile to the investor, investors often find it difficult to fully understand the functioning of these products. Importantly, the difficulty that has been identified lies in the nature of the products‟ construction, rather than in the levels of risks involved in them.

The EBF therefore also strongly supports the conclusion that simple shares and bonds should be excluded, including bonds whose return is directly linked to EURIBOR, LIBOR or any other interest rate indicator. For such direct financing tools, it is most important to understand the general functioning of the instrument, i.e. to understand the basic functioning of financial markets. However, the same is true for derivative instruments [alt 1: without an element of package, alt2: traded on exchange and cleared by a CCP] . In the view of the EBF, derivatives should be out of scope unless indeed they are packaged together with other types of financial instruments. In this context, the Federation also underlines that foreign exchange should be excluded from the scope.

European banks feel that the approach now proposed by the Commission is not sufficiently stringent in definition and would encourage the Commission to be consistent in focusing on the packaged elements of products, as targeted in its initial work around “PRIPs”.

Certainly, such a focus approach should be adopted at the outset. On the basis of a good amount of experience gathered with KIIDs for different products, the EBF would stand ready to discuss in due course whether an extension of the scope to some additional products would be appropriate.

As regards the focus of the Commission‟s work on “retail” investors, the EBF would request the Commission to clarify that this is to be understood in alignment with MiFID, i.e. to mean retail clients as opposed to professional clients. In the view of the EBF, such clarification is important to ensure alignment with MiFID and to prevent any confusion about the categorisation of clients.

The FSPA agrees with the EBF that the focus should be on packaged investments and not include equities and traditional bonds. Neither should standardized derivatives be included. But not all the derivatives should be excluded – like market warrants or non-exchange-traded derivatives. An example is when the option part of a structured bond is sold separately as a warrant.

Q. 2: Should a definition of PRIPs focus on fluctuations in investment values? Please justify or explain your answer.

European banks consider that a clear definition of PRIPs is essential to the success of the project. While it might not be possible to achieve absolute certainty with respect to every single product in the basic legal act, European banks are concerned that the Commission’s current thinking still seems far too unclear.

In progressing towards a better targeted definition, the European banking industry invites the Commission to refocus on products that are packaged, i.e. composed of a number of underlyings to achieve a certain risk profile; and that are managed or designed for retail clients. As opposed to this, European banks do not believe that fluctuations in investment values constitute an essential criterion to define PRIPs.

Q. 3: Does a reference to indirectness of exposure capture the ‘packaging’ of investments? Please justify or explain your answer.

A reference to “indirectness of exposure” is not sufficient to deliver legal or even conceptual clarity.

The FSPA agrees with this part of the EBF comments. 

Q. 4: Do you think it is necessary to explicitly clarify that the definition applies to fluctuations in ‘reference values’ more generally, given some financial products provide payouts that do not appear to be linked to specific or tangible assets themselves, e.g. payouts linked to certain financial indices, the rate of inflation, or the overall value of a fund or business?

The EBF is concerned that the Commission‟s current proposals for the definition of PRIPs imply greater uncertainty than its previous thinking, rather than to lead to clarification. The EBF recalls that the Commission proposed, in its Communication of 30 April 2009, the following definition:

  • They offer exposure to underlying financial assets, but in packaged forms which modify that exposure compared with direct holdings;
  • Their primary function is capital accumulation, although some may provide capital protection;
  • They are generally designed with the mid- to long-term retail market in mind; and
  • They are marketed directly to retail investors, although may also be sold to sophisticated investors.

The EBF believes that this was a good starting point. As opposed to this, a reference to “fluctuations in „reference values‟” is not seen to lead to essential clarification in the definition of PRIPs.

The earlier proposal of 30 April 2009 defined PRIPs in a fashion that would leave out derivatives completely. The FSPA does not agree with that. Please see our answer to Q1. Payouts are always connected to a specific underlying and even more exotic underlyings such as inflation and financial indices do have clear definitions and rules. 

Q. 5: Do you have any other comments on the proposed definition? If you consider it ineffective in some regard, please provide alternatives and explain your rationale in relation to the criteria for a successful definition outlined above.

Too rigid definition of a PRIP might lead to market actors finding new ways of offering products through different kinds of SPVs etc in order to try to avoid the new PRIP legislation. 

 

Possible exceptions 

 

Q. 6: Should simple (non-structured) deposits be excluded from the scope of the initiative? Please justify or explain your answer.

Yes. Applying the PRIPs regime to simple deposits would be disproportionate for simple savings products. There are no indications that depositors find it difficult today to understand the functioning of simple bank deposits, or if they do this is due to a serious lack of understanding of financial matters in general which would not be helped by providing the applicable information in a different format.

The EBF recognises the difficulty of defining PRIPs in an unambiguous way. However, the Federation would encourage the Commission to go back to the elements identified in its April 2009 Communication and seek further clarification on that basis.

Questions have also been raised regarding the meaning of “assets” proposed in the PRIPs definition. PRIP should just cover packaged and not “wrapped” products.

Besides, it has been noted that the scope of PRIPs should exclude products that are listed directly on the market, without an offering period.

The FSPA agrees with the EBF. Simple deposits are not packaged products and as they are the simplest forms of investment or saving. 

Q. 7: Do you consider option 1 or option 2 preferable for demarcating structured deposits from simple deposits? Please explain your preference, and set out an alternative if necessary, with supporting evidence.

European banks are not convinced that either option delivers the necessary clarity and ensures that “ordinary” deposits are clearly excluded from the scope, as should be the intention. At a minimum, it must be clear that exposure to changes in interest rates is a feature of ordinary deposits and does not turn products into “PRIPs”. Furthermore, the fact that deposits have a guarantee attached to them (e.g. provided by the government) does not mean that they are “structured”.

The Commission proposes the following two options:

Option 1

A deposit shall be a PRIP where [it is fully repayable, on terms under which] any interest or premium will be paid (or is at risk) according to a formula which involves the performance of:

  • an index or combination of indices, excluding variable rate deposits whose return is directly linked to e.g. EURIBOR, LIBOR or another interest rate index;
  • a MiFID financial instrument or combination of such financial instruments; • a commodity or combination of commodities; or
  • a foreign exchange rate or combination of foreign exchange rates.

Option 2

A deposit shall be a PRIP if either of the following conditions are met:

  • its principal is not repayable at par;
  • its principal is only repayable at par under a particular guarantee or agreement provided by the credit institution or a third party.

The FSPA believes that so called structured deposits should be included and out of above alternatives therefore prefers option 1. This option does not though deliver the necessary clarity for a retail investor. 

Q. 8: Should such an exclusion be extended to financial instruments which might raise similar issues as deposits (e.g. bonds), and if so, how might these be defined? Please justify or explain your answer.

The EBF believes that both shares and bonds should be excluded from the scope of the PRIPs project, including variable rate bonds whose return is directly linked to EURIBOR, LIBOR or any other interest rate indicator. The concerns raised by the Commission in respect of “PRIPs” are clearly linked to the packaged aspect of investment products, as opposed to direct financing instruments. However, bonds should already be excluded from the scope through the very criterion of “packaging” or “indirectness” of exposure. The EBF is unclear about what instruments and what issues the Commission is thinking of in its above question.

The FSPA is of opinion that products such as simple deposits, traditional bonds and equities should not be included in the PRIPs legislation. Structured bonds, even those with 100 % capital guarantee, should be included, in addition to such pension and insurance products that can be classified as PRIPs. 

 

Pensions

 

The EBF does not wish to comment on the pensions-related questions in detail. The Federation notes however that there are large divergences in the regulation of pension systems at national level which will require thorough consideration. Nevertheless, there are important level playing field considerations in respect of the treatment of pension products and care must be taken to ensure that pension products are generally subject to a comparable set of regulation, as regards substance and level of detail.

Q. 9: Should pensions be explicitly excluded from the PRIPs initiative at this stage? Please justify or explain your answer.

Pension products should certainly not automatically be excluded. The FSPA is of opinion that some market providers provide packaged investment products such as mutual funds and structured products in different pension and especially capital insurance wrappers. These products should certainly be included in the PRIPs definition.

Q. 10: Should annuities be treated in the same fashion? Again, please justify or explain your answer.

Q. 11: Do you have any comments on the proposed manner of achieving this exclusion?

Q. 12: Do you agree that variable annuities might need to be treated as a special case? If so, how should these be defined, and how do you think they should be addressed? 

 

Indicative list of products 

 

Q. 13: Do you see benefits from such an indicative list being developed? If not, please provide alternative proposals and evidence for why these might be effective.

Yes, the EBF would expect benefits from an – importantly – indicative list of products to complement a clear definition in the basic legal text. However their must still be a clear principles based definition of PRIP so that rules and the list just being indicative to guide manufactures and investors.

The FSPA agrees that a list would be helpful. There will also be a question of producing and updating the list – who will bear the responsibility? What is the status of a new product that is not on this list? Will the list be a “positive” or a “negative” list? 

Q. 14: Do you have any suggestions on the possible contents for such a list, including on how to define items placed on the list?

As a general consideration, the list should contain categories of products, rather than a list of individual products. It should be considered to design a “negative” list of products excluded from the scope, instead of a positive list with all products considered to be in scope. It is imperative that ESMA has resources to develop such lists timely. The list could be divided by “PRIP-classes”.

The FSPA agrees with EBF. If a positive list will be used the list should contain the following:

Products that should not be included in the legislation:
  • Simple deposits
  • Equities
  • Traditional bonds
etc.

Products that should be included in the legislation:

  • Structured bonds – both capital guaranteed and non-capital guaranteed
  • Mutual funds
  • PRIPs products in insurance and pension wrappers
  • Structured deposits
  • “Market warrants” (non exchange traded)

etc. 

 

Legislative approach

Sales rules 

 

Q. 15: Should direct sales of UCITS be covered by means of including the relevant rules within the UCITS framework?

European banks generally support that the direct sales of UCITS be subject to the same rules as the sale of UCITS through intermediaries. It is important to ensure a level playing field in this respect. The EBF does not however have a preference for the legal vehicle to deliver this outcome.

Q. 16: Do you have any comments on the identified pros and cons of this approach, and any evidence on the scale and nature of impacts (costs as well as benefits)? 

A new pre-contractual product disclosure instrument 

Q. 17: Should the design of the KIID be focused on delivering on the objective of aiding retail investment decision making? If you disagree, please justify or explain your answer.

Clearly, the objective of the KIID must be to facilitate retail investors‟ choice. In the view of the EBF, the first and most essential aspect of simple pre-contractual disclosures is to help investors understand the key characteristics of products and how they relate to retail investors‟ investment needs and preferences. While standardisation can help to compare different products, comparability must not be forced to an extent that could blur the differences between different financial solutions. Furthermore, as acknowledged by the Commission, a high degree of simplification in the KIIDs crucially requires an appropriately shaped liability regime which provides legal certainty to product issuers and product distributors and exempts them from any legal claims unless information provided in the KIIDs is false or misleading.

The FSPA certainly welcomes the KIID as an aid in investment decision making. The KIID should provide a standardized way of describing investment alternatives but it should never replace investment advice and should never be the only document upon which an investment decision is taken.

Aim of the KIID should be a full comparability within a product family but the FSPA is aware that a full comparability between different product families will be a challenge to achieve.

It is important that the development of KIID does not limit liability for the issuers. 

Q. 18: Should the KIID be a separate or ‘stand alone’ document compared with other information that might be necessary, e.g. background information, other disclosures, or contractual information? Please justify or explain your answer.

The FSPA is of opinion that the KIID should be a part of the marketing documents and not a separate document as the investor should never make his/her investment choice based on the KIID alone. The KIID as proposed might have less information than what the structured product materials already have in Finland.

Q. 19: What measures do you think will be necessary to ensure KIID remain streamlined and focused solely on key information?

There should be a defined framework for each product family on what the KIID should include, such as risk description, scenarios, cost transparency etc that already are in place in Finland. 

 

Level of standardisation 

 

Q. 20: While the same broad principles should be applied to all PRIPs, should detailed implementations of some of these principles be tailored for different types of PRIP? Please justify or explain your answer, and provide examples, where relevant, of the kinds of tailoring you might envisage.

As the Commission rightly notes, the specifics of different types of products will necessitate flexibility in the specific content of the KIIDs for different products. The most appropriate way to display risks and rewards, costs, and guarantees will need to be analysed and targeted by group of products.

Notably, it is questionable that the synthetic risk-reward indicator which has been designed for UCITS would be useful for other types of products (cf. response to Question 36). It might have to be replaced by a narrative description of the risks and potential upward returns of an investment. Furthermore, the UCITS KII includes a section on past performance. This would be of little meaning for retail investor certificates, whose payout structure is designed in respect of an underlying product rather than being actively managed. Instead, performance scenarios would be more suitable for this type of products.

However, tailoring should only be with respect to the characteristics of different types of products, as opposed to goldplating at national level to which the EBF would object.

The FSPA agrees that the UCITS synthetic risk-reward indicator might not be an optimal indicator for other types of products. Different product classes will most probably need different indicators. The FSPA has already developed another risk-reward classification based on a similar type of classification from EUSIPA. The Finnish classification has three levels at the moment. The FSPA agrees that there should be a classification but combining the scales with UCITS scales would probably only generate more classes which might disturb the purpose for such indicator. 

Q. 21: Do you foresee any difficulties in requiring the KIID to always follow the same broad structure (sequence of items, labelling of items)? Please justify or explain your answer.

A priori, the EBF expects that it should be possible to broadly follow the same structure of presentation for all KIIDs, and certainly the EBF would support that detailed work for the design of all KIIDs start out with this aspiration. However, the variety of products to be covered is large and will require a certain degree of flexibility. Clarity of presentation and the display of a product‟s most essential characteristics must be prioritised over a high degree of standardisation of the KIIDs.

The FSPA is of opinion that standardized documents do make product comparisons easier for investors, but like the EBF we believe that a certain amount of flexibility is needed between different product families. Within product family though there should be a rigid standardization of the KIIDs.

There will also be a risk that a short (2 page) KIID will not have enough information for retail investor to base the investment decision on, that is why a KIID should be a complement to other documents.

Q. 22: Do you foresee any difficulties in requiring certain parts of the key information and its presentation (e.g. on costs, performance, risks, and guarantees) to be standardised and consistent as possible, irrespective of tailoring otherwise allowed? Please justify or explain your answer.

The work on the UCITS KII has already demonstrated the difficulties of designing a consistent synthetic risk-reward indicator, even for a harmonised group of products. While supporting in principle the objective of consistency of presentation in the KIIDs, the EBF is sceptical that the same degree of consistency could be achieved for other types of products. Rather, trying to do so would likely risk leading to misinterpretations and other unintended consequences. Risks will most likely have to be described in writing, for most types of instruments.

As regards costs, it will certainly be possible to consistently display the costs of the active management of products. On the other hand, it will be more difficult to deal with costs of distribution as these will differ between distribution channels, while the EBF expects that the substance of the KIID would normally be provided by product issuer. Similarly, where custody costs vary by distribution channel they could not be included in the KIID. It could however be considered to state the maximum cost of distribution on the KIID.

It should be clarified that custody costs should not and cannot be disclosed in the KIID since that is based on the clients agreement with its custodian of which the “manufactor” has and should have no knowledge.

While guarantees can likely be displayed in a standardised way, thought will have to be given to explain the potential limits of guarantees. One way of doing so could be to indicate the rating of the guarantor, which might however run counter to currently ongoing efforts of reducing the use of external ratings in regulation.

As different countries and different product families have traditionally presented product details in different ways there is a clear possibility of difficulties in standardizing key information. Presenting costs in a clear fashion will likely require legislation. The FSPA proposition on costs is that structuring costs are presented. Thought should also be given to the transparency of funding spreads.

Presenting capital protection in a standardized way will also be difficult as differences in ratings mean that the capital protection will not be worth the same in every case – this means that there should be a clarification of ratings in the KIID.

As structured products have various different pay-out structures, making easy-to-compare different scenarios on performance might also present a challenge. 

Q. 23: Can you provide examples and evidence of the costs and benefits from your experience that might be expected from greater standardisation of the presentation and content in the KIID?

European banks support the objectives of a reasonable degree of standardisation in the presentation and content of the KIIDs with the objective of helping retail investors understand the functioning of the products, against the background of a current overload with rather than shortage of information. Most importantly, this should support investors in making the right choices and should lead to greater confidence in their choices. From the perspective of advisers and distributors, these benefits could in turn lead to greater customer satisfaction. However, these potential benefits are subject to the proper crafting of the documents and to avoiding misunderstandings and mistaken expectations.

Examples and concrete estimates of costs and benefits are best provided by individual firms.

Q. 24: Should the content of the KIID be controlled so that there is no possibility for firms to add additional information unless expressly allowed for?

European banks are concerned about the meaning of the term “control” of contents. Banks would clearly object to a requirement for the pre-marketing authorisation of the KIIDs.

However, the EBF would support a high degree of definition of the content of the KIIDs, including certain restrictions for additional information. Nevertheless, this must be subject to ensuring that the KIIDs leave sufficient flexibility to highlight the specificities of each category of products.

Whilst such flexibility is necessary to allow the faithful representation of the most significant characteristics of products, this is as opposed to the possibility for Member States to modify the KIIDs. National divergences should rather be avoided, and most importantly for products that are marketed cross-border.

However, if by control is meant that it is only the manufacture that can set up and change the KIID, that is desirable in order to avoid confusion and misunderstanding for the investor if there would be more than one KIID per instrument.

The KIIDS should be standardized within each product family and they should be “controlled” by the manufacturer so that they can not be changed by other parties. 

 

Content of PRIPs KIIDs 

 

Q. 25: Do you foresee any difficulties in applying these broad principles to the KIID for all PRIPs, as the building blocks on content and format for a ‘level 1’ instrument? Please justify or explain your answer.

The proposed principles seem overall appropriate.

However, the EBF expects that there are limits to the requested use of “plain language”. Whilst agreeing that the KIIDs should seek to describe products in the most straight-forward way possible, the Federation notes that questions of financial investments are in themselves complex, implying the need to refer to some complex notions. Avoiding such terms would mean to fail to accurately describe the products and would evoke liability concerns, notwithstanding the clarification of the limited liability that may at all be attached to the KIIDs.

Furthermore, the requirement to keep products up to date should only apply to products that are offered on a continuous basis. As the KIIDs are pre-contractual documents, it would not be appropriate to require their updating once that distribution has taken place and no new products are offered.

Furthermore, the EBF understands that the objective that the investor can “rely on the KIID without reference to other information” is meant to indicate that the information provided in the KIID can be read and understood without reference to additional information. As opposed to this, it must be clearly understood that the KIIDs only provide a very limited amount of information and that only the full documentation is meant to describe the product in a comprehensive way.

The FSPA agrees with the EBF that the proposition is acceptable. In addition the FSPA is of opinion that there can be problems with the roles of the issuers, manufacturers and the distributors of the PRIPs. How shall the responsibilities be shared and how can it be assured that the distributors of investment products provide the required information to investors? 

Q. 26: Are there any other broad principles that should be considered on content and format?

The proposed list is extensive, the EBF has not spotted any important omissions. However, the EBF notes that it will be essential to ensure consistency with the requirements applicable to distributors under MiFID, as well as to avoid duplicative requirements.

The issuer or other person for which the investors have the direct credit risk must be clearly identified.

Reference must be made to the formal legal text, such as the prospectus, or other more in-depth description, such as the information brochure.

Standardization is needed, and the issuer or other party for which the investors have the direct credit risk must be clearly identified. 

 

Responsibilities for the production of the KIIDs 

 

Q. 27: Should product manufacturers be made generally responsible for preparing a KIID? Please justify or explain your answer.

The EBF agrees that product manufacturers should be generally responsible for preparing the KIID, as they have all the applicable information about the functioning of the product. Certainly the content must be provided by them. Making the documents available on paper or through another durable medium, on the other hand, could also lie in the responsibility of the distributor.

It will however be necessary to ensure that it is clearly stated which entity is the product manufacturer, for each product. For instruments that fall under the Prospectus Directive, the responsibility for the KIID should clearly lie with the issue who is also responsible for the summary prospectus and for the final terms.

The FSPA finds it challenging for the investor that the product manufacturer can be either the issuer or an arranger. They should both bear the responsibility of preparing the KIID with the aim that the information provided consist to the maximum level of the information that is required of the issuer of a PRIP. That assures that all the necessary information is provided to the investor.

Q. 28: Are you aware of any problems that might arise in the distribution of particular products should responsibilities for producing the KIID be solely placed on the product manufacturer?

The EBF underlines that as a result of the fact that the KIIDs are provided by the product manufacturers and will be used in a range of distribution models, it will not be possible to include distribution costs. Rather, distribution costs are subject to separate disclosure and information requirements, notably pursuant to MiFID but also other pieces of regulation. The same is true for custody costs, where these vary by the choice of custodian by the investor.

Furthermore, the EBF would invite the Commission to clarify the situation where a product manufacturer is located outside the EU, and to clarify in particular that such a situation could not lead to impose the responsibility for the KIID on the distributor.

The FSPA finds it important that both the manufacturers‟ and the distribution costs are disclosed. The distributor should be responsible of disclosing also manufacturers cost that are known to them. This ensures that the investor is aware of both manufacturer and distributor costs and can make an informed decision.

Q. 29: If intermediaries or distributors might be permitted to prepare the documents in some cases, how would these cases be defined?

The EBF is sceptical that intermediaries or distributors would have all relevant information to prepare the KIIDs. Rather, the Federation agrees with the requirement on product manufacturers to provide the substance of the KIIDs.

The FSPA agrees with the EBF that the product manufacturers should bear the responsibility of preparing the KIID. 

 

Interaction with and amendments to existing legislation 

 

Q. 32: Should the summary prospectus be replaced by the KIID for PRIPs? Please outline the benefits and disadvantages you see with respect to such an approach.

The EBF strongly agrees that the summary prospectus under the PD should be replaced by the KIID (for stand-alone issues). There is evidence that the summary prospectus is currently little used by retail investors. It still has an important role for the passport, but should be replaced by the KIID also in this respect. Otherwise, requiring a third document for products regulated under the PD would clearly not serve any purpose in terms of investor protection but would only place an unnecessary burden on product issuers.

However, thought will have to be given to a number of specific aspects around the PD. For example, in the case of base prospectuses the KIID will have to be based on the final terms of the offering. In order to use the KIID for passporting purposes, it will also be necessary to require its translation into a language common in international finance.

Accordingly amendments to the Prospectus Directive will have to be made in parallel with developing the PRIPs initiative.

The FSPA is of opinion that the KIID alone does not contain enough information for the investor. The summary prospectus should not be replaced by the KIID – both must be available to the investor. The aim of this is to guarantee that the investor has the required information to make informed decisions. 

Q. 33: Should Solvency II disclosures provided prior to the investment decision be replaced by the KIID for PRIPs? Please outline the benefits and disadvantages you see with respect to such an approach.

The insurance industry will be best placed to consider this question.

Q. 34: Do you agree with the suggested approach for UCITS KIIDs?

The EBF agrees that the UCITS KIID should not be amended for the pure sake of providing consistency with non-UCITS KIIDs. The UCITS KIIDs are the result of year-long thorough research and have already received much praise. Going forward, adjustments should be considered as and when better practices are identified as a result of the practical application of the UCITS KIIDs or as a result of the work on non-UCITS KIIDs.

Q. 35: Are there any disclosures, e.g. required by the existing regimes, which you believe the PRIPs KIID should not include, but which should still be disclosed, e.g. separately to the KIID? Do you have any practical examples for such elements?

Elements that concern local aspects should be disclosed in separation from the KIIDs. This would notably include relevant information about the product‟s tax treatment.

 

Appropriate implementing measures 

 

Q. 36: What in your view will be the main challenges that will need to be addressed if a single risk rating approach is to work for all PRIPs?

It must be assumed that a large number of investors will use the KIID as the most important source of information to guide their investment decision. Importantly, the KIID must not include a skewed indicator or mislead investors with respect to the riskiness of certain products.

The EBF is sceptical that it would be possible to apply the same method for a synthetic risk-reward indicator to the whole PRIPs universe. As rightly pointed out by CESR, the types of risks to be considered are different. For example, it will be very difficult to appropriately incorporate counterparty risk into the current two-legged methodology of either historical volatility, or value at risk. On the other hand, re-calibrating the UCITS risk indicator would likely mean to blur the distinction between different UCITS funds, i.e. the risk indicator would lose much of its meaning in helping investors to choose between different UCITS.

The EBF also agrees that it would be difficult to integrate liquidity risk into the risk-reward indicator, as e.g. evidenced by the fact that liquidity is even not taken into consideration by classical risk ratings.

The FSPA is of opinion that it is difficult to use a single acceptable risk rating that would provide all the necessary information. In Finland there is already a different system in use. Also EUSIPA has introduced a system that differs from both of the existing systems.

Q. 37: Do you consider there are any other techniques that might be used to help retail investors compare risks?

The EBF suspects that a narrative description of the events that might negatively impact on the investment‟s performance might be the preferable option to a synthetic indicator.

From a general perspective, financial education to all kind of investors is key for making the best investment decisions.

We believe that on broad level it is possible to compare risks. On detailed level there are too much differences. What investors in general need is more information and education on financial products and issues. 

Costs 

Q. 38: What in your view will be the main challenges that will need to be addressed in developing common cost metrics for PRIPs?

The EBF agrees with the difficulties identified by the Commission in assessing the value of e.g. guarantees. Generally, it is not clear that there is an objective way of assessing “value for money”. The EBF is not aware of any metrics that could be used in this respect.

In Finland we already disclose this information but it has not been without problems. The main challenge is how to value the differences in credit ratings, how to value otc-derivatives and how to value the costs of a supply chain from a manufacturer through one or several distributors to the end clients. 

Q. 39: How can retail investors be aided in making ‘value for money’ comparisons between different PRIPs?

The EBF is not aware of a methodology that would allow to calculate the “value for money” of different illiquid products with individual product features in an objective and comparable way. Rather, there is a concern that forcing such a methodology on insufficiently developed grounds would mislead consumers in their investment decisions.

Investors should be made aware of costs that the differences in issuer credit ratings make as shown in different funding spreads. The longer the distribution chain is the less transparent it might become. 

 

Performance 

 

As a general observation, care must be taken to ensure that requirements to indicate performance, as well as other key elements of investment products, are fully in line with the respective MiFID requirements.

Q. 40: Do you consider that performance information should always be included in a KIID?

Performance is one of the most important pieces of information for an investment decision, and for many PRIPs the single most important element. While the uncertainty of returns must be clearly pointed out to investors, refraining from giving an indication about possible returns would likely be perceived as a major shortcoming of the KIID and reduce its value for especially those investors that make use of few other information sources. Nevertheless, the EBF does not exclude the possibility of omitting such information for certain exceptional products.

The FSPA agrees with the EBF. Performance information is very important, though not always available. Different market actors might also have different views on expected performance. The most important is that the future projections are within reasonable limit to what the future could be expected to be. Naturally, there should be a balance between risk and performance information.

Q. 41: What in your view will be the main challenges that will need to be addressed in ensuring performance information can be compared between different PRIPs?

Due to the uncertainty around future performance, the EBF believes that there is a natural limit to making such information comparable. Generally, it will be important to clarify for potential investors the link between risks and return linked to all investment products, i.e. if comparability is being sought, it should be in relation to both aspects at the same time. However, it must also be clearly stated that all indications of risk and return are only indicative and based on a number of assumptions, and that real outcomes will unavoidably deviate from the scenarios provided or from historical outcomes. I.e., investors must understand the limits of the information provided to them so that they do not feel misled if an investment does not perform as expected.

The FSPA agrees with the EBF. 

Q. 42: Do you agree that a consistent approach to the description of guarantees and capital protection in the KIID should be sought, e.g. through detailed implementing measures, for different PRIPs?

European banks agree that it is of major importance that retail investors understand well the nature of any guarantees provided for investment products, and especially the circumstances under which the guarantee might not provide capital protection.

The EBF is not however convinced that limiting the term “guarantee” is necessary or appropriate. “Guarantee” is a widely used terms also outside the financial services industry and it is generally understood that a guarantee on a non-financial product loses its value in the case of the product provider‟s bankruptcy.

As of now there are major differences between countries. There should certainly be a consistent European-wide approach to descriptions of guarantees and capital protection. As these products are normally not “guaranteed” by anybody therefore the word is not used in Finland where a certain category of products is called “capital protected”. Product information must be clear in pointing out and explaining the credit risk for all products, including “capital protected”.

Q. 43: What information should be provided to retail investors on the cost of guarantees?

Retail investors could generally be informed that guarantees have an opportunity cost, i.e. that they lower the upside chances of their investment. The EBF does not however believe that the specific cost of guarantees is of particular importance to the investor, and certainly the EBF does not believe that such information should be considered “key information”.

It should be added that it most cases there is no guarantee (the term implies that it is a third party that guarantees the undertakings of the issuer), but a capital protection at maturity and thus clarifying that the obligor is the issuer.

The FSPA agrees with the EBF.