Had Brexit-supporting delegates been looking in the direction of financial markets this week, they will have found further grist to their mill in the form of growing criticism of the bloc’s core retail financial services regulation, the packaged retail and insurance-based investment products regulation, or Priips. Whatever you think of the UK’s role within the EU, this particular Brussels directive has few supporters on either side of the debate, and remains a rare example of draft European Commission legislation to be rejected by its parliament.
The regulation’s intent is, of course, a noble one – as the FCA describes it, to make sure retail investors have the information they need “to better understand and compare the key features, risk, rewards and costs”. But its execution has been at best poor, and at worst damaging, with much of the angst directed at the so-called Key Information Documents (KIDs) that sits at the heart of the legislation and which, in theory, should help investors better understand what they’re buying.
In response to calls over the summer for input into an FCA review of the Priips regulation, this month has seen cries from all three major trade bodies focused on the retail investment industry – the IA, the AIC and Pimfa – to either scrap KIDs altogether or have a major rethink about how this aspect of the Priips regulation works. Every investment trust and ETF now sold to retail investors must offer one of these documents – with open ended funds to follow next year – but there is unanimous agreement that for all the detail they require, the output does little to help private investors make better decisions.
In fact, critics say, the way in which possible future returns are illustrated is positively misleading, potentially causing buyers to overestimate expected returns. Some in the industry have suggested KIDs could create “a future misspelling scandal” that could lose investors money rather than protect them from losses. Worse still, feedback from our own readers suggest that Priips is limiting what they can buy: either overseas ETFs that don’t produce a KID, or domestic investment vehicles deemed too complicated for retail investors to safely buy.
This latter consequence suggests that regulators have once again fallen victim to the idea that it is possible to remove risk from the investment process – as if this was even desirable. And Pimfa’s concern that the European Commission will defer its own planned review of Priips due to be delivered by the end of this year suggests it is in no hurry to admit its error. Plus ça change!
