The Commission gets tough with the ESAs over PRIIPs

In December 2020, the European Commission wrote to the Chairs of the three European Supervisory Authorities (ESAs) - ESMA, the EBA and EIOPA - giving them six weeks in which to reach agreement among themselves on draft Level 2 measures covering the presentation of cost and performance scenarios under the PRIIPs Regulation.

As the letter was dated 18 December 2020, this means the ESAs have until this Friday 29 January 2021 to approve an agreed Level 2 measure - the so-called "Regulatory Technical Standards" or "RTS" - regarding the Key Information Document or "KID". Failing this, the Commission has warned them, it will take "all necessary steps" - essentially saying, 'if you can't reach an agreement, then we'll do it for you'.

This is a real concern, if the Commission does not extend the UCITS exemption from implementing the PRIIPs KID which expires at the end of this year. Even if the Commission does extend the exemption it is thought that it is likely only to do so for a further 6 months which still wouldn't leave UCITS with much time to implement the necessary changes to systems in order to roll out the KID across their ranges of UCITS and to replace the Key Investor Information Documents (KIIDs) that they are required to provide under the UCITS Directive.

What's the background to this?

The PRIIPs Regulation introduced the KID, which must be provided to investors in packaged retail and insurance-based investment products.

At the moment, UCITS have an exemption and don't need to provide their investors with a PRIIPs KID until 31 December 2021 - they do, though, still need to provide UCITS KIIDs to their investors.

However, the contents and format of the PRIIPs KID have faced widespread criticism since their introduction in 2018. Not least because the PRIIPs KID, unlike the UCITS KIID requires fund managers to include a future performance scenario for their product.

This has been a divisive issue from the start - while the Commission's stance (and that of many MEPs) is that investors need future performance scenarios if they are to compare products meaningfully, others (not least many in the management sector and ESMA) think it would be damaging to investors if managers were forced to stop producing past performance scenarios for their products.

In October 2019, the Joint Committee consulted on proposals to address some of these issues and to make changes ahead of the PRIIPs KID requirements being applied to UCITS.

Ordinarily, the next step in the process would be a Final Report in which the Joint Committee sets out a series of proposed Level 2 measures which it had agreed to submit to the Commission (and which the Commission would then be expected to endorse and adopt).

Instead, though, on 20 July 2020, the Joint Committee reported that they had failed to reach agreement on the proposals they'd been working on (although ESMA and the EBA had voted in favour, EIOPA's Board wasn't able to reach a qualified majority to do the same).

The upshot, then, was that the Joint Committee couldn't formally submit its advice to the Commission, so published its Final Report as a draft only (ie, not approved).

One of the main stumbling blocks is that not all the concerns about what the PRIIPs KID should contain can be resolved at Level 2 - some are policy related and so would require amendments to the Regulation itself. And this can only be done by the Council of the EU and the European Parliament, not by the ESAs.

Also, one of the main reasons why the Joint Committee failed to reach a consensus was that those who voted against generally argued that a partial revision of the PRIIPs Delegated Regulation is not appropriate when the Commission is about to undertake a comprehensive review of the PRIIPs Regulation itself.

So, the result was that the expected Level 2 measures for PRIIPS weren't forthcoming. Time is ticking and the Commission has clearly reached the stage where it wants to get things rolling again - hence the letter sent to the Chairs of the three ESAs. And the veiled threat to reach agreement... or else!