On 14 September, the EU Parliament voted to reject the EU Commission’s Delegated Regulation on the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs). This is the first time that the EU Parliament has formally rejected technical rules on financial services legislation. The Delegated Regulation, based on the final draft Regulatory Technical Standards (RTS) prepared by the European Supervisory Authorities (ESAs), dated 31 March 2016, was rejected as “so flawed and misleading that it could actually lose [retail investors] money”. MEPs overwhelmingly passed the resolution rejecting the RTS (by 602 votes to 4, with 12 abstentions), calling for the EU Commission to submit a new RTS taking into account the EU Parliament’s concerns about the text. The Parliament also called on the EU Commission to postpone the application date of PRIIPs.
The PRIIPs Regulation requires that firms who manufacture, sell or advise on PRIIPs products (including investment funds, life insurance policies with an investment element, derivatives, structured products and structured deposits) must provide retail investors with a Key Information Document (KID). As such, the Regulation will apply to a wide range of firms, including banks, insurers, and investment managers. The RTS covers the presentation, content, review and provision of the KID, including the methodologies for risk and reward and cost calculations.
Will PRIIPs be delayed?
- PRIIPs is currently scheduled to apply to firms from 31 December 2016. It is possible that the RTS could be redrafted and agreed on an accelerated timescale e.g. in a matter of weeks, rather than months. However, this is unlikely given the process involved in finalising the RTS (discussed below).
- Consequently, the EU Parliament called on the EU Commission to consider a proposal postponing the application date of PRIIPs (without changing any other provisions in the level 1 text and therefore not opening any fundamental debates on the text) in order to ensure smooth implementation of the requirements and to avoid firms having to comply with the Regulation without the technical standards being in force in advance.
- The EU Parliament's vote does not formally delay the Regulation. A delay to PRIIPs would require the EU Commission to bring forward a new legislative proposal in order to change the level 1 text. The EU Commission is not obliged to do this and has previously expressed reluctance to bring forward any delay to PRIIPs. However, it will come under increasing pressure to do so, making a delay to PRIIPs a likely outcome in the event that the EU Commission cannot quickly satisfy the EU Parliament’s expectations.
- During the Eurofi Financial Forum conference on 8 September, the Chair of the European Insurance and Occupational Pensions Authority (EIOPA), Gabriel Bernardino, stipulated that he would like a nine month delay to the introduction of the Regulation. Another possible option would be to align the PRIIPs application date with that of MiFID II (i.e. 3 January 2018). This would be welcomed by firms, given the level of cross-overs there are between the two pieces of legislation.
What areas has the EU Parliament requested the EU Commission address in a revised RTS?
- Comparable products: consumer information on investment products should be comparable to promote a level playing field in the market, regardless of the type of financial intermediary which manufactures or markets them.
- Calculation of risk: it is misleading to investors to remove credit risk from the calculation of risk categorisation of insurance products.
- Multi-option products: the treatment of multi-option products should be clarified, particularly in relation to the explicit exemption granted to UCITS funds under the PRIIPs Regulation.
- Calculation of future performance scenarios: flaws in the methodology for the calculation of future performance scenarios do not fulfil the requirement under PRIIPs for information that is “accurate, fair, clear and not misleading”. In particular, it does not show for some PRIIPs, even in the adverse scenario, and even for products which have regularly led to losses over the recommended minimum holding period, that investors could lose money.
- Comprehension alert: the lack of detailed guidance on the “comprehension alert” creates a serious risk of inconsistent implementation of this element in the KID across the Single Market. Therefore, further standardisation of when the comprehension alert will be used should be introduced.
- Spirit of PRIIPs: left unchanged, the rules in the RTS risk going against the spirit and aim of the legislation, which is to provide clear, comparable, understandable and non-misleading information on PRIIPs to retail investors.
What does this mean for firms?
The fundamental requirements of the Regulation will not change. Firms should not pause in their PRIIPs implementation as, at this stage, it is not certain that there will be a delay and so continuing implementation is the conservative course of action. Firms will still need to produce KIDs and invest resources into ensuring compliance with these requirements. In the event that a delay is agreed, this will only provide a short breathing space, given the complexities involved in PRIIPs implementation and the fact that firms must also implement product governance requirements under MiFID II by 2018.
Currently, it is not yet clear precisely how the EU Commission may choose to redraft the RTS to take into account the EU Parliament’s concerns. However, in this uncertain environment, firms can still take “no regrets” actions in all other areas related to PRIIP compliance and preparation – template creation, product scripting, risk methodologies, costs, credit risk, technology infrastructure and software development, market data orchestration, KID production operating model and sales cycle delivery and customer journey.
- The EU Parliament has called on the Commission to redraft the RTS. The Commission will send the RTS back to the ESAs for revision, who will then send the redrafted RTS back to the Commission for endorsement. In theory, the Commission then has three months to decide whether or not to adopt the RTS. Upon adoption, the scrutiny for the Parliament and the Council starts anew. This will be one month if no substantial changes have been made by the Commission, or three months if the RTS have been changed. However, as this is the first time that the EU Parliament has formally rejected technical rules on financial services legislation, this is unchartered territory. Therefore, it is possible that the institutions could agree an accelerated timetable informally.
- The Council of the EU held a silence procedure on the RTS on 15 September, during which 19 delegations (accounting for 59.49% of the total population of the EU) indicated their intention to object to the RTS. This fell short of the qualified majority. Therefore, it was suggested that Coreper invites the Council to confirm that it has no intention to object to the RTS.
- If the Commission does determine that a delay of the PRIIPs package is necessary, it will need to prepare a legislative proposal which sets this out. The text of the proposal would then need to be agreed by the EU Parliament and Council separately and then as part of trialogue negotiations, before entering into force before the end of the year (i.e. the date on which the PRIIPs Regulation is currently due to apply to firms).