Is the PRIIPs Regulation Fit-For-Purpose?

When the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation came into force in January 2018, the hope was that it would encourage more efficient markets in the EU by helping investors better understand the key features, rewards, risks and costs of the different PRIIPs available to them. However, in the time since the Regulation came into force, concerns have emerged around the Key Information Documents (KIDs) mandated by PRIIPs. These are stand-alone, customer-facing information sheets that firms must prepare for every PRIIP they offer. The worry is that KIDs are not fit-for-purpose and can, in fact, be misleading.

At the end of June, these concerns reignited when the European Fund and Asset Management Association (EFAMA) published evidence that the cost and performance disclosures of KIDs may mislead investors. Providing examples from members currently using KIDs, EFAMA suggested that the methodology used for calculating transaction costs and performance are flawed. As a result, the organization has called on policy makers and regulators in the EU to look again to ensure the Regulation is delivering correct information to investors.

Part of the challenge with KIDs is the complexity of the methods used to calculate costs and performance. Take cost as an example. Firms need to report on the transaction costs incurred by the PRIIP over three years. This calculation is based on a formula relating to historical transaction costs.

However, in cases where PRIIPs have been available for fewer than three years, firms must estimate earlier transaction costs using a prescribed formula and a suitable reference index. This is a complex calculation requiring monthly index constituents and their weights for a specified day of the month with 12 months’ history, and bid-ask prices for each of the constituents. As this data is not available from a single source, this process is a burden for firms.

At present, firms offering PRIIPs can mitigate the complexity of the PRIIPs Regulation by partnering with managed data service providers that can provide the underlying price history and ongoing data feeds with the required bid and ask prices to calculate the index transaction costs. In fact, the best managed service providers can carry out the calculation of behalf of firms and can provide the new monthly data points in an existing or new data feed.

Such partnerships will help firms respond to the current requirements of the Regulation. However, firms are also advised to keep a weather eye on the regulatory environment. With pressure around the PRIIPs Regulation growing, it is possible that the Regulation will undergo significant changes in the future that will impact firms’ compliance efforts.

To receive more information about RIMES’ PRIIPs/KIDs Estimated Transaction Cost (Index Data) Service, please contact us.

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