PRIIPs – the ESAs bow to Commission pressure to vote through draft RTS

On 3 February, the Chairs of the three European Supervisory Authorities (ESAs) - ESMA, the EBA and EIOPA - responded to the European Commission's letter of 18 December 2020, confirming that they had agreed a Final Report containing advice to the Commission under the PRIIPs Regulation.

As we have previously reported, the Commission had given the joint Committee of the ESAs six weeks in which to agree draft Level 2 measures (Regulatory Technical Standards or 'RTS'), which the ESAs would then submit to the Commission for adoption.

If they failed to do so, the Commission's letter made clear to the ESAs that it, the Commission, would 'take all necessary steps' - basically, it would do their job for them!

The threat worked.

In July 2020, draft RTS regarding the Key Information Document or "KID" had been agreed by ESMA and the EBA, but EIOPA's Board was unable to find a large enough majority to follow suit.

As a result, the ESAs published a draft Final Report, containing their preferred (but not formally agreed) text.

What made the difference?

It seems fair to say that there remain some national competent authorities who still have reservations about the draft RTS. Enough, though, have now been persuaded to vote in favour of the draft RTS by 'further details' which the Commission provided on its approach to the broader review of the PRIIPs Regulation.

These confirm that the review will thoroughly examine the application of the PRIIPs framework, including:

• how to achieve better alignment between PRIIPs, IDD and MiFID II in respect of provisions on costs disclosure

• the scope of products covered by the PRIIPs Regulation

• how to ensure that the KID contains the key information necessary for retail investors while avoiding too much or too complex information for these investors

• how to allow the creation of a digitalised KID allowing layered information and reviewing the default paper basis of the KID, taking into account the specific challenges for different types of products (e.g. multi-option products (MOPs))

• the need for a more tailored approach, such as for MOPs, in order to maximise understanding and use of the information, while continuing to allow for comparability of similar products.

Where does that leave us?

Possibly with a major battle over one of the most keenly debated issues of all - the inclusion (or otherwise) of past performance in the KID.

To recap:

• the PRIIPs Regulation requires PRIIP manufacturers to include "appropriate performance scenarios" in different market conditions and information about the assumptions made to produce these scenarios, while

• the Delegated Regulation (a Level 2 measure which sets out a number of supplementary measures concerning the presentation and context of the PRIIPs KID (the Delegated Regulation) requires that performance scenarios should only be forward looking (i.e., covering only a stress scenario, an unfavourable scenario, a moderate scenario and a favourable scenario, with no apparent allowance for the inclusion of historic performance data).

The stance taken by the ESAs to date hasn't been exactly straightforward:

• their November 2018 consultation paper proposed the inclusion of "information on past performance in the PRIIPs KID whenever it is available" (though without proposing changes to the requirement for the inclusion of the methodology as to how future performance scenarios must be generated)

• their resultant Final Report then confirmed that, in light of feedback to the consultation paper, the Joint Committee would not be proposing to introduce past performance (at least for the time being)

• their October 2019 consultation paper then set out proposals for including past performance in the PRIIPs KID for certain types of PRIIPs (including UCITS, AIFs and unit-linked insurance-based investment products) alongside future performance scenarios

• and now, their Final Report tries to find a way round the tension between (a) the ESAs' preference for including past performance information and (b) the intention of the PRIIPs Regulation that performance scenarios, rather than past performance, should be included, by proposing a 'second best' approach

• this takes the form of a requirement that investment funds include a reference to the past performance chart currently used in the UCITS KIID in the 'Other relevant information' section of the PRIIPs KID itself, but that the chart is published in a separate publication

• at the same time, the ESAs note that, based on both consumer testing study and responses to their earlier consultation, they "would still recommend, as a preferred approach, to include the past performance chart itself within the main contents of the KID".

So .. what next?

This leaves us with two problems.

(Well, three, if you include the fact that time is running out - UCITS have an exemption from having to provide a PRIIPs KID as well as a KIID under the UCITS Directive, but this is due to run out on 31 December 2021 and the Final Report recommends avoiding the co-existence of the PRIIPs KID and the UCITS KIID. Which means that industry still doesn't know whether the exemption will be extended or whether new rules - still to be finalised - will have to be implemented in the space of a few months.)

The problems, though, are that:

1. One consequence of the adoption by UCITS of the PRIIPs KID is that the requirement to provide a UCITS KIID arises pursuant to Article 80 of the UCITS Directive itself and so that must seemingly be “switched off” to avoid the doubling up of the requirement to provide both a UCITS KIID to all investors and a PRIIPs KID to retail investors from 1 January 2022 (or later if the exemption for UCITS is extended by the Commission).

2. The Commission (along with elements of the European Parliament), to date, has been opposed to the inclusion of past performance. While the ESAs were mandated to submit their technical advice to the Commission in the form of draft RTS, there is no obligation on the Commission to approve these and formally propose them to the European Parliament and the Council of the EU. Further disagreement will mean further delay in the passing of the RTS - leaving even less time for industry to implement if no extension to the UCITS exemption is permitted.

With possible battles still to be fought on the RTS and the Level 1 review on top of that, there is much still at stake and, so far, very few clear answers available.

We continue to keep a careful eye on developments so .. watch this space.