Agreeing to Disagree - ESAs fail to agree PRIIPs KID Level 2 proposals

What’s happened?

Well, that’s put something of a spanner in the works.

The asset management world has been waiting for months to see which side of the argument the Joint Committee of the European Supervisory Authorities (the Committee) was going to come down on when it comes to the various disputes to do with the form and content of the PRIIPs KID (not least, whether or not past performance information could be included in the KID).

The unexpected answer – revealed on 21 July – is that the Committee has failed to come down on either side. It was unable to get the qualified majority it needed to pass the draft proposals it had prepared, so can’t formally submit these to the European Commission to consider.

The Committee’s been reviewing – for a fairly considerable time - what changes were needed to the Delegated Regulation on the presentation and content of the KID in order to address issues identified since KIDs were introduced and to make changes in advance of the KID requirements being applied to UCITS (currently due to be from 1 January 2022).

What normally happens at this stage of the process is that the Committee publishes a Final Report. This takes into account feedback received to the consultation paper and sets out technical changes to the Delegated Regulation, which the Committee is proposing that the European Commission should adopt.

In this case, though, the Joint Committee reported that it had failed to reach the required level of agreement to pass its proposals (although the Boards of ESMA and the EBA had voted in favour, the Board of EIOPA was unable to reach a qualified majority).

As a result, the Joint Committee was not in a position to formally submit its advice to the Commission and its Final Report was published in draft only (ie, not approved). Which is a particular shame since – as explained below - the Report proposes a compromise which would have allowed past performance information to be included in the KID, as much of the funds industry has been wanting.

So, what’s the problem?

One of the main reasons why the draft proposals that came out of this consultation failed to obtain sufficient support within the Committee was that those who voted against generally argued that a partial revision of the Delegated Regulation is not appropriate at this stage, given that the Commission is in the process of undertaking a comprehensive review of the Level 1 PRIIPs Regulation.

If changes to the text of the PRIIPs Regulation itself are to be made, the Commission’s proposals at the end of its review would be the obvious starting point to set that particular ball rolling.

The Commission’s review was originally meant to have been completed by the end of 2019 but, because of delays and the COVID-19 pandemic, the timing has slipped and it is clear that the outcome of the review will not be known until 2021 (and, perhaps, beyond then).

What does this mean?

At the moment, it is far from certain where the Joint Committee’s failure to agree on a Final Report will leave things.

What does seem clear, though, is that this will hold up the overall process and delay the decision as to whether changes will be needed to the PRIIPs Regulation - meanwhile the status quo continues and the UCITS exemption for providing a KID remains set to expire on 31 December 2021.

Even though the minority (which favoured kicking the can down the road, leaving things to be considered as part of the review of the PRIIPs Regulation) was large enough to prevent the Committee from submitting its proposals, there was still a majority (just not a big enough one, as it turns out) on the Committee which was willing to support the compromise ‘second best approach’ included in the draft Final Report.

This proposed that UCITS and AIFs could include past performance information in the ‘Other relevant information’ section of the PRIIPs KID, though this would then require a change to the Level 1 PRIIPs Regulation to allow the KID to be expanded from three pages of A4 to four.

The asset management industry was keen to find out, in particular, whether or not information on past performance was likely to be allowed to be included in the PRIIPs KID – there has been an ongoing battle as to whether ‘comparability’ of PRIIPs KIDs (as seemingly provided for in the Level 1 Regulation) was paramount, regardless of the differences between the types of products covered or whether different content requirements would be allowed, which would take into account differences between these products.

This is of especial importance, given that the exemption which allows UCITS ManCos not to provide a PRIIPs KID in addition to the existing UCITS Key Investor Information Document (KIID) runs out on 31 December 2021. If the UCITS requirement to provide a KIID is to be ‘switched off’ in good time, changes to the UCITS Directive will be needed and legislative time to bring these about is very limited.

At very least, it seems clear that the Committee generally agreed that past performance information should be part of the KID – there is, though, nothing to show that the European Commission would have agreed!

The battle goes on and we’ll continue to cover it.