Although existing directives (such as MiFID, the IMD and the UCITS Directive) regulate product sales and disclosure practices, there are inconsistent rules in relation to disclosure, selling and investor protection, which the Commission considers may lead to a risk of regulatory arbitrage and investor detriment. Therefore, the Commission committed to standardise investor protection standards by taking a 'horizontal' regulatory approach to provide a basis for the regulation of mandatory disclosures and selling practices at European level, irrespective of how the product is packaged or sold. This will require legislative change. The Commission’s work to achieve these objectives will focus on two key regulatory areas:
1. Rules on pre-contractual disclosures (the benchmark being the improved key investor information document (the KII) being developed for UCITS, although this would need to be adapted to reflect the particular features and legal forms of the other products); and
2. Rules on selling practices (the benchmark being the conduct of business and conflicts of interest requirements in MiFID addressing conflicts of interest and inducements, appropriateness, suitability, and relevant disclosures about these).
The Commission committed to working on detailed proposals for delivering the legislative approach, and to publishing a first outline of the possible form and content of the proposed measures by the end of 2009.
December 2009 Update on the Commission’s Work
On 16 December 2009, the Commission Services published an update on the ongoing PRIPs work, as well as further detail on how the Commission will take forward the commitments it made in the April 2009 communication. The areas to be considered have been broken down into three separate but linked areas:
1. the scope of the initiative (which products should be included);
2. pre-contractual disclosures (how to adapt/apply the key features of the UCITS KID); and
3. selling practices (how to adapt or apply MiFID requirements to all PRIPs and also whether MiFID requirements on sales might need to be refined so as to better achieve investor protection outcomes).
The Commission Services are still considering input from stakeholders. The paper sets out some preliminary conclusions drawn from the work carried out so far:
Scope - Definition of ‘PRIPs’
Products to be classified as a ‘PRIP’ should:
1. Have an element of packaging;
2. Be capable of meeting an investor need for capital accumulation; and
3. Create exposure to investment risk.
Further work is necessary to define the precise scope. It is important that the scope captures the core market for retail investment products. It is likely that direct investments in “plain” assets (‘pure’ shares, bonds, commodities, property) will be excluded. Unit-linked or index-linked insurance-based investment products are in scope. A strong case has yet to be made for ruling out other insurance-based investments. Inclusion or exclusion of pensions and annuities will require further analysis.
Application of the disclosure framework:
Any disclosure framework should be applied cross-sectorally, with detailed requirements containing both common elements and tailored elements. Detailed contents of disclosures need to be subject to consumer testing so that document requirements fully reflect investor needs. Detailed requirements will be necessary for standardisation of certain elements, including common risk, cost and performance metrics. Some tailoring of disclosure requirements will be necessary for investor protection. Responsibilities of delivery of the document will sit on the seller.
There are two potential options being considered re disclosure requirements necessary for investor protection:
1. Detailed rules setting out responsibilities for the preparation of the document, to generally sit with the product originator. However, given the role of distributors in relation to bringing certain PRIPs into the retail market, responsibilities will also be placed on distributors; or
2. A more flexible approach relying on the cooperation between product originator and distributor.
The same principles and overall framework (high-level rules) should apply to all sales of PRIPs, irrespective of the sector of the PRIP or the channel by which it is being sold. The same detailed requirements (on conflicts of interest, inducements, appropriateness, suitability and disclosures about these) should in general apply to all sales, but some tailoring of the detailed requirements to reflect different distribution arrangements may be necessary. Certain aspects of these detailed requirements are likely to need further refinement so as to ensure the desired investor protection outcomes.
Impact on the FSA’s Retail Distribution Review (“RDR”)
As is obvious from the information above, the RDR and the PRIPs work cover similar ground. The FSA has been engaged in discussions with the Commission in relation to the RDR and the PRIPS work, and it has stated several times that it considers the RDR and the Commission’s PRIPs work to be compatible. However, given the Commission has not yet finalised its proposals, and is still in the consultation stage, it is unclear how the full impact of the PRIPS work can be ascertained.
Next Steps and Timelines
The Commission Services are now working on preparing legislative proposals consistent with the conclusions above and the commitments made in the Communication. The Commission Services plan to consult in the forthcoming months on a draft of the PRIPs proposals.
To date, no timelines have been provided for implementation of any PRIPs related legislation. However, Commission services has said that it recognises that there is strong interaction between the PRIPs initiative and other ongoing work (such as amendments to the Prospectus Directive, finalising the Solvency II framework, finalising the UCITS IV framework, the AIFM Directive, and the Investor Compensation and Deposit and Insurance guarantee schemes). The Commission services involved in these different initiatives are working together to ensure consistent time lines and approaches where necessary or appropriate.
Click here for the April 2009 Commission Communication
Click here for the December 2009 Commission Update