PRIIPs Review – the ESAs publish a wide ranging call for evidence

On 21 October, 2021, the European Supervisory Authorities (ESAs) published a call for evidence on the PRIIPs Regulation. This asks stakeholders for their views on a range of topics including:

• the practical application of the existing Key information Document (KID), such as its use by financial advisors or the use of digital media;
• the scope of the PRIIPs Regulation; and importantly
• performance scenarios and past performance.

The call for evidence is open until 16 December 2021.

Why is the call for evidence important?

The call for evidence forms a critical part of the Commission’s preparatory work in its overall review of the PRIIPs Regulation. From the outset, the PRIIPs Regulation has had its critics and the Level 2 measures made under it have long been the subject of discussion, argument, delay and postponement.

Some of the changes being called for could not be achieved by merely amending the Level 2 regulatory technical standards (RTS) but would, instead, need amendments to the Level 1 text.

This, then, is the first opportunity for the European legislative bodies, the European Parliament and the Council of the EU, to look properly at the Level 1 text with a view to amending it.

The call for evidence provides interested parties with the chance to make their views known and, by consciously going some way beyond the strict remit of their mandate from the Commission (as explained in more detail below), the ESAs have laid the groundwork for a wide ranging discussion.

The Final Report that the ESAs will submit to the Commission, drawing on the feedback they receive to the call for evidence, should certainly make for interesting reading, not least on the topic of inclusion of past performance.

So, those with views on the strengths and /or shortcomings of the current PRIIPs regime would be advised to respond to the ESAs’ call in time before the response period ends on 16 December 2021.

What’s the background to this?

In July 2021, the European Commission requested the ESAs to provide advice on a number of areas, in order to help it prepare a legislative proposal as part of its review of the PRIIPs Regulation. The areas on which advice was asked for included:

• a general survey on the use of the KID;
• a survey of the practical application of the rules laid down in the PRIIPs Regulation;
• an assessment of how effective the administrative sanctions and other enforcement actions for infringements of the PRIIPs Regulation are;
• how far the PRIIPs Regulation is adapted to digital media; and
• an examination of several questions concerning the scope of the PRIIPs Regulation.

However, as the call for evidence notes, work done by the ESAs since 2018 has led them to the view that changes to the PRIIPs Regulation are needed in areas that go beyond those included in the Commission’s call for advice. As a consequence, a number of questions contained in the call for evidence seek feedback on issues outside the ESAS’ formal mandate from the Commission.

The ESAs must submit their advice to the Commission by 30 April 2022 and responses to the call for evidence will help inform the ESAs’ final report to the Commission.

The ESAs also plan to hold a public event in Q1 2022 before they finalise their advice. More information about this will be published in due course.

What does the call for evidence cover?

The ESAs set out a total of 40 questions for respondents to consider, all but two of these being grouped into one of ten different topics. Taking these topics in the order in which they appear in the call for evidence:

1. General survey on the use of the KID

The Commission’s call for advice requires the ESAs to conduct a general survey on the use of the PRIIPs KID across the EU, including:

• the number, type and market share of products for which PRIIPs KIDs are produced and distributed;
• recent market developments and trends for PRIIPs and other retail investment products;
• how far PRIIPs KIDs “are used by product distributors and financial advisors to choose the products they offer to their clients” (The ESAs are taking this to mean how far the information in the KID is used by persons advising on, or selling, PRIIPs separate from the obligation to provide the KID to the retail investor); and
• how far marketing information aligns with, or differs from, information in the PRIIPs KIDs.

The call for evidence, in turn, incudes five questions seeking information to deal with these issues.

2. General survey on the operation of the comprehension alert

Article 8(3)(b) of the PRIIPs Regulation requires that, where applicable, a comprehension alert is included in the KID which says, ‘You are about to purchase a product that is not simple and may be difficult to understand’.

The criteria for when such an alert must be included are set out in Article 1 of the PRIIPs Delegated Regulation on the presentation, content, review and revision of key information documents (the PRIIPs Delegated Regulation).

The call for evidence asks for views as to respondents’ experiences with the comprehension alert, including the extent to which retail investors take it into account and the extent to which financial advisors consider it.

3. Survey on the practical application of the rules

The Commission’s call for advice also requires the ESAs to conduct a survey of the “practical application of the rules laid down in the PRIIPs Regulation”, taking account of developments in the market for retail investment products.

The call for evidence, in turn, asks respondents for information which will assist the ESAs advise the Commission on:

• the costs per PRIIP of complying with the requirements of the PRIIPs Regulation (including costs of manufacturing, reviewing, revising, and publishing PRIIPs KIDs and what these costs amount to as a proportion of total PRIIP costs);
• the percentage of cases where inaccurate PRIIPs KIDs were identified by NCAs; and
• how many mis-selling cases there have been before and since the introduction of the PRIIPs KID.

4. Use of digital media

Article 14 of the PRIIPs Regulation specifies that where a PRIIP is offered to a retail investor on a face-to-face basis a paper format should be the default option, but a different durable medium or a website can be used in certain circumstances (such as where the retail investor has been given the choice between paper and the other durable medium or website).

For a KID under the PEPP Regulation, though, electronic distribution is the “default” approach, though customers must be informed of their right to request a copy on another durable medium, including paper, free of charge.

An electronic format allows for the layering of information for the PEPP KID, so detailed parts of the information can be presented through pop-ups or through links to accompanying layers.

The Commission has requested the ESAs to advise on how far the PRIIPs KID is adapted to digital media and to consider, among other things, the appropriateness of the PEPP KID approach.

5. Scope of the PRIIPs Regulation

The Commission’s call for advice asks the ESAs to assess:

• whether the products referred to in Article 2(2)(d), (e), and (g) of the PRIIPs Regulation should still be exempted, “in view of sound standards for consumer protection, including comparisons between financial products”; and
• whether the PRIIPs Regulation’s scope should be extended to additional financial products.

In their 2019 Supervisory Statement on the application of the PRIIPs Regulation to bonds, the ESAs recommended, as part of the PRIIPs Review, the Regulation should be amended to specify more precisely which financial instruments fall within scope.

The ESAs also recommended “to reflect more expressly the stated intention of the PRIIPs Regulation to address packaged or wrapped products rather than assets which are held directly, to avoid any legal uncertainty on this point”.

With this in mind, and going beyond the formal request from the Commission, the ESAs invite feedback on a number of questions regarding possible changes to the scope of the PRIIPs Regulation.

6. Differentiation between different types of PRIIPs

The ESAs’ Final Report of February 2019, which followed a targeted consultation that ran from 8 November to 6 December 2018, noted that taking into account challenges in applying the KID to specific product types, the ESAs intended to analyse whether “some additional differentiation” should be introduced as to “how the rules apply to different types of products, while still adhering to the overarching aim of comparability between substitutable products”.

Although this issue was considered when the PRIIPs Delegated Regulation was under review (starting in 2019), such work was conducted within the constraints of the existing PRIIPs Regulation.

As part of the review of the PRIIPs Regulation itself, the ESAs believe (and seek respondents’ views on) that the following types of approaches should be considered:

• developing broad product groupings or buckets of similar products. A more tailored approach could be taken for each of these groupings, so information provided is meaningful and comparability within these groupings is prioritised;
• reducing the degree of standardisation in the KID template; and
• allowing supervisory authorities to grant exemptions or waivers from the requirements where justified.

7. Complexity and readability of the KID

Noting that some stakeholders have argued in the past that the information in the KID is overly complex and contributes towards an information overload for the retail investor, the ESAs seek suggestions on how the KID could be improved in this respect. This could include, for example, changing the structure, format or presentation of the KID through the use of visual icons or dashboards at the top of documents.

8. Performance scenarios and past performance

The ESAs’ draft regulatory technical standards (RTS) to amend the PRIIPs Delegated Regulation, (which were submitted in February 2021 and adopted by the Commission on 7 September 2021), proposed a new requirement for certain types of investment funds (including UCITS) to publish information on past performance and this would then be referred to within the KID.

However, the Final Report under which the ESAs submitted their draft RTS noted their preference for including past performance information within the main contents of the KID given that such information is key to informing retail investors about the risk-reward profile of certain types of PRIIPs.

The ESAs, though, are aware of the argument that, when finalising the PRIIPs Regulation, the intention of the Council of the EU and the European Parliament was for performance scenarios to be shown instead of past performance – to allow for past performance information to be included in the KID, then, would require an amendment to Article 8 of the PRIIPs Regulation.

A further, consequential amendment would also be needed as including past performance information within the KID would mean that it went over the three-page limit set out in Article 6(4).

Leaving aside the past performance issue, the call for evidence highlights some of the “significant challenges” the ESAs have encountered in their work on the methodology underpinning the performance scenarios.

This work has been going on since 2014 and, to quote the call for evidence:

“it has proved very difficult to design appropriate performance scenarios for the different types of products included within the scope of the PRIIPs Regulation that would allow for appropriate comparisons between products, avoid the risk of generating unrealistic expectations amongst retail investors and be understandable to the average retail investor”.

The call for evidence seeks views on:

• whether respondents agree with the ESAs’ assessment that past performance should be included in the KID, as proposed in the Final Report; and
• what changes respondents suggest on the requirement in Article 8(3) of the PRIIPs Regulation concerning information on potential future performance.

9. PRIIPs offering a range of options for investment (Multi-Option Products or “MOPs”)

In their October 2019 consultation paper on proposed amendments to the PRIIPs KID, the ESAs flagged that they had seen “some significant challenges regarding the clarity and usefulness of the information provided to retail investors” when the rules were implemented for MOPs.

A generic KID can, for example, make it difficult for an investor to identify the total costs related to a particular investment option since it shows a range of costs but does not always identify which costs are specific to an investment option and which relate to the insurance contract.

One of the ESAs’ proposals was the introduction of a differentiated treatment for the ‘most commonly selected investment options’ these were not included in the resultant draft RTS following respondents raising “various implementation challenges”.

Even though the ESAs introduced some specific changes to the approach for MOPs (for instance, requiring the costs of the insurance contract or wrapper to be disclosed separately in certain cases), the ESAs still feel that material issues exist which they have not been able to address within the constraints of the review of the PRIIPs Delegated Regulation and which would require changes to the PRIIPs Regulation itself.

Accordingly, the ESAs seek feedback on a number of questions regarding potential alternative approaches for MOPs that might require a change of the PRIIPs Regulation, such as:

• whether a KID should be prepared for each investment option in all cases, ie for all products and for all investment options; and
• whether there are benefits in an approach where KIDs are prepared for certain investment profiles or standard allocations between different investment options, or for the most commonly selected options?

10. Alignment between the information on costs in the PRIIPs KID and other disclosures

The ESAs submitted their draft RTS to amend the PRIIPs Delegated Regulation to the Commission in February 2021 and the Commission adopted these (with minimal changes) in September.

One of the ESAs’ proposals was for a change to how cost information is presented in the KID, in order (among other things) to better alignment this with disclosure requirements under MiFID and the Insurance Distribution Directive.

Some stakeholders, though, have raised concerns that there may still be inconsistencies between the PRIIPs KID and disclosure requirements in other legislation, an issue related to the question of how best to differentiate between different types of PRIIPs (see section 6 above).

The issue of consistency between different disclosure requirements for retail investment products crops up already in the Commission’s separate calls for advice to ESMA and EIOPA as part of its work to develop a retail investment strategy. Accordingly, the ESAs plan to coordinate this work and consider which is the appropriate mandate within which to address any issues that arise.

To this end, the ESAs ask respondents to flag up any further inconsistencies that they consider need to be addressed regarding the information on costs in the KID.