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Document 52012SC0187
COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on key information documents for investment products
COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on key information documents for investment products
COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on key information documents for investment products
/* SWD/2012/0187 final */
COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on key information documents for investment products /* SWD/2012/0187 final */
COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the
European Parliament and of the Council
on key information documents for
investment products TABLE OF CONTENTS 1........... Introduction. 5 2........... Procedural
Issues. 6 2.1........ Genesis
of work. 6 2.2........ Consultation
of interested parties. 6 2.3........ Supporting
work. 7 2.4........ Related
initiatives. 7 2.5........ Impact
Assessment Steering Group. 8 3........... Problem
definition. 10 3.1........ Size
of EU retail investment markets, their regulation, and the policy context 10 3.2........ Problem
drivers. 13 3.2.1..... Driver
1: Proliferation of product types aimed at same investment needs. 13 3.2.2..... Driver
2: Patchwork of regulation. 14 3.2.3..... Driver
3: Failures to effectively mitigate asymmetries of information between retail
customer and the industry 17 3.3........ Scale
of the problem and consequences. 21 3.4........ How
would the problem evolve without further action?. 24 4........... The
EU's right to act and justification. 25 5........... Objectives. 26 5.1........ General
and specific objectives. 26 5.2........ Operational
objectives. 26 6........... Options. 27 6.1........ Identification
of options. 27 6.2........ Analysis
and comparison of options. 32 6.2.1..... Issue
1 – What scope of products should be covered?. 32 6.2.2..... Issue
2 – How far and in what ways should disclosures be standardised at EU level?. 34 6.2.3..... Issue
3: Responsibility for preparing document 38 6.2.4..... Issue
4: Ensuring effective provision of product disclosure information to retail investors. 39 6.2.5..... Issue
5: Flanking measures: civil liability and sanctions. 40 6.3........ Summary
of retained options and their interaction with the current legal framework. 42 6.4........ Choice
of the legal instrument – directive or a regulation. 45 6.5........ Overall
impact of retained options. 46 7........... Impacts
on other stakeholder groups, employment, SMEs, environment and third countries. 50 7.1........ SMEs. 50 7.2........ Employment
and social impacts. 50 7.3........ Environment
and third countries. 51 7.4........ Administrative
burden. 51 7.5........ Risks
and uncertainties. 51 7.6........ Monitoring
and evaluation. 52 8........... Conclusions. 52 Annex I 1........... List
of Acronyms. 54 2........... Related
Initiatives. 55 3........... What
are packaged 'retail investment products'?. 57 4........... How
big is the market for packaged retail investment products?. 59 5........... How
are packaged retail investment products distributed?. 59 6........... European
disclosure rules for retail investment products. 62 7........... Member
State approaches to the regulation of retail investment products. 67 8........... Evidence
on issues for retail clients from 2008 Call for Evidence. 68 9........... Nature
of product disclosures and their relationship with the sales process. 71 10......... The
Lamfalussy process. 73 Annex II 1........... Detailed analysis of options. 74 1.1........ ISSUE
1: What should the scope of any new regime be?. 74 1.2........ ISSUE
2: How far and in what ways should disclosures be standardised at EU level?. 76 1.3........ ISSUE
3: Responsibility for producing document 85 1.4........ ISSUE
4: Ensuring effective provision of product disclosure information to retail
investors. 86 1.5........ ISSUE
5: Civil liabilities and sanctions. 88 2........... Estimation
of administrative burden. 93 3........... Possible
impacts of horizontal PRIP act on existing sectoral legislation. 96 1. Introduction The focus of this impact assessment is
product disclosures in the retail investment market. This market is dominated by so-called
‘packaged retail investment products' (PRIPs) – financial product manufacturers
intercede between retail investors and financial markets, building products
normally designed to satisfy specific investment goals, with the intention of
being sold to retail investors either directly or through intermediaries.
Examples of PRIPs include investment funds such as UCITS, retail structured
products and unit-linked insurance contracts. To protect investors, measures have grown up
at the national and EU level that require defined information to be provided to
retail investors (termed ‘product disclosures’). These measures are however
uncoordinated and patchy – requirements vary according to the legal form of
products, not their economic nature or risks. This has made comparisons between
products and comprehension of product features harder for investors. The measures
have also not achieved the outcomes being sought for retail investors: product
disclosures have often focused more on reducing legal risks for the provider
rather than providing effective and balanced communication about products. In its April 2009 Communication on PRIPs, the
Commission concluded that this was an important problem with a European
dimension: inconsistencies at the European level underpinned regulatory
failings, which could only be addressed by legislative change at the European
level.[1]
(The Communication noted two areas of further work: rules applying to sales,
and rules on product disclosures. This impact assessment focuses on the latter
only[2]). Addressing these regulatory failings also
contributes to responses to the financial crisis. Following the crisis retail investors
lost money with investments that carried risks that were not transparent or
understood by those investors, partly due to deficient product disclosures. There
has, perhaps rightly, been a consequent collapse in investor confidence: a
recent survey of consumers across the EU showed they trust the financial
services less than all other industry sectors.[3]
Addressing weaknesses in product disclosures
will help rebuild confidence on a sound basis, improving the transparency and
efficiency of EU retail markets.[4]
Innovative steps have already been taken along these lines to improve product
disclosures for UCITS (through the 'key investor information' (KII) regime).[5] The task now is to address
options for similar improvements for other investment products. 2. Procedural
Issues 2.1. Genesis
of work The genesis of the work on PRIPs is a request
from the ECOFIN Council in May 2007 for the Commission to examine the coherence
of disclosure and distribution regimes in EU law applying to different types of
retail investment product. A first stage of work culminated in the adoption of
a Communication on PRIPs by the Commission in April 2009. This was accompanied
by a high-level impact assessment (hereafter, PRIPS Communication IA).[6] Following the Communication,
the Commission has been further consulting with stakeholders. The work has been
split into two workstreams – the current workstream, focused on product
disclosure requirements, and a second workstream focused on sales rules. 2.2. Consultation
of interested parties The PRIPs work has been based throughout on
extensive consultation with stakeholders, including a written call for evidence
in October 2007, a Feedback Statement in March 2008, a technical workshop was
held with industry representatives in May 2008, and a high-level Open Hearing
in July 2008. Following the Communication, a second, more concrete phase of
work and consultation began. A further technical workshop was held in October
2009, which was followed by the publication of an Update on the work in
December 2009. The three level three European committees of national
supervisors prepared individual reports to the Commission in 2009, followed by
a joint report in 2010. Finally, the Commission launched a public consultation
on concrete options in November 2010. Records of these phases of consultation,
which respected the Commission's minimum standards on public consultation, are
available on the European Commission website.[7]
In general, responses to the November 2010 public consultation showed support
from industry, consumer and Member State stakeholders for the initiative,
though there were differences of view on the scope of the work and the extent
to which the UCITS KII might be taken as a model for other retail investment
products. Table 1:
Preparatory Steps Major steps / inputs || Timing ECOFIN request || May 2007 Launch of Call for Evidence || October 2007 Publication of Feedback Statement on Call for Evidence || March 2008 Industry Workshop || May 2008 Open Hearing || July 2008 Communication || April 2009 CESR, CEBS, CEIOPS advice || October 2009 Technical Workshop || October 2009 Update || December 2009 Joint CESR, CEBS, CEIOPS advice || September 2010 Public Consultation || November 2010 These formal events have been supplemented by
a series of discussions with consumer representatives (FIN-USE, Financial
Services Consumer Group, and Financial Services User Group), regulators
(Financial Services Committee, European Securities Committee, European
Insurance and Occupational Pensions Committee) and industry representatives.
The consultation process revealed a variety of stakeholder views, which have strongly
informed the analysis that follows. 2.3. Supporting
work The following supporting work informs this
impact assessment: · A report produced by a joint task force of the level three
committees. (3L3 Report).[8] · A study on the costs of implementation of the KIID for UCITS. This
study provides a proxy (subject to adjustments) for costs of other industry
sectors for introducing similar disclosures for their products. (CSES).[9] · A study testing developing options for the KIID for UCITS on a
representative sample of EU consumers. (YouGov & IFF).[10] · A study seeking behavioural economics insights on the different
factors relevant to investor decision making. (Decision Technology).[11] · A study on the potential costs and benefits of different options for
change in the area of sales rules for the distribution of non-MiFID PRIPs; this
provides market mapping evidence and also evidence on cost drivers, though its
focus was primarily on product distribution. (Europe Economics).[12] · A study seeking to assess the quality of advice being offered across
the EU; this provides some market mapping evidence. (Synovate).[13] 2.4. Related
initiatives and scope of this impact assessment There are a number of related initiatives that link to the work on
PRIPs product disclosures, or can be expected to benefit EU retail investors. These include the review of the Markets in Financial Instruments
Directive (MiFID), the review of the Insurance Mediation Directive (IMD), work
on the Prospectus Directive (PD), current work in the area of asset management
(notably in relation to Alternative Investment Funds, but also the
implementation of UCITS IV), ongoing work on Solvency II, the Commission Green
Paper on pensions, and upcoming work by the Commission on the Single Market Act.
Other work underway can be expected to impact the retail investment markets,
notable work on the protection schemes for investors when those providing
investments are not able to meet their commitments to investors (deposit
guarantee and investor or policyholder compensation schemes). The baseline for this impact assessment takes into account the
likely evolution of measures in these other areas. Scope of the impact assessment and key interactions This impact assessment is focused solely on options relating to
improving information given to investors about PRIPs (their risks, costs and
features). This impact assessment does not address options related to sales
of PRIPs. This area, identified in the Communication on PRIPs as a second
priority alongside product information, relates to investor protection
measures for investment advice and sales services. Options for improving such
rules are being considered and assessed separately in the reviews of MiFID and
the IMD. The identification of options for improving product information and
assessment of the impact of these can be undertaken independently from measures
on sales, since the subject matter, impacted entities and underlying regulatory
and market failings are separte and there are no necessary dependencies between
the two areas. Measures on disclosure and distribution can expected nonetheless to
be mutually supportive, and indeed their contribution to addressing problems in
the retail markets can be expected to be greater in combination than in
isolation. Given this, the assessment of options and their overall
effectiveness and efficiency in this impact assessment takes into account
relevant synergies, and this impact assessment should be read alongside
assessments of options for the IMD and MiFID. Details on linked initiatives can be found in Annex I.2. 2.5. Impact
Assessment Steering Group An Inter-service Impact Assessment Steering
Group, chaired by DG Internal Market and Services, was established in November
2010, involving representatives from DG Competition, DG Taxation and Customs
Union, DG Justice, DG Economic and Financial Affairs, the Secretariat General,
the Legal Service and DG Health and Consumers. The Group met on 26th
October 2010, 2nd February 2011 and 2nd March 2011. The draft
impact assessment report was examined by the Impact Assessment Board, and
revised in line with its positive opinion of 15 April 2011. Amongst other
improvements, the interaction between the proposal and other measures on
investor protection was clarified, the scope of the proposal made clearer, the
analysis of options improved and the analysis of other factors that are
relevant for investor decision making deepened. Problem
Tree Retail packaged products offer similar economic contents but using different legal forms Patchwork of regulation Divergent EU and national approaches Gaps in regulation Unmitigated asymmetries of information between retail investors and market participants Unlevel playing field Barriers to single market
3. Problem
definition This chapter should be read in conjunction
with the 'problem tree' on page 9. The analysis builds on the impact assessment
completed for the April 2009 PRIPs Communication (hereafter, PRIPS
Communication IA). This identified the broad market context and problem drivers
for this initiative. It showed that existing regulatory requirements in the
retail investment markets failed to fully address 'information asymmetries'
(i.e. differences in comprehension of proposed investments between market
professionals and retail clients) and 'principle-agent' misalignments (i.e.
those manufacturing and selling products have incentives that are not always
aligned with those of the retail clients buying the products). The patchwork of
European regulation had failed to effectively reduce consumer detriment, and
acted as a barrier to member states addressing such detriment themselves, while
at the same time creating an un-level playing field between different products
and distribution channels and erecting additional barriers to a single market
in financial services and products. EU legislation was a source of the problem,
so legislative change at the EU level was necessary to effectively and
efficiently address these challenges. Two strands of work were identified:
improving consistency and effectiveness of the information about products from
product providers, and improving consistency and effectiveness of the rules on
distributors.As noted, this current impact assessment only addresses the
first of these two strands of further work triggered by the Communication: product
disclosure.[14] 3.1. Size
of EU retail investment markets, their regulation, and the policy context Size There is currently no definition of the
retail investment markets with the EU. If we understand this concept as the
market for investment products that can (and typically do) reach the retail
customer, a wide range of products can fall into this category. Examples
include funds of various types, unit-linked life insurances (and other
investment-based insurance products), shares and a miscellany of other kinds of
products that might be characterised as 'retail structured products'. Given that the boundaries of this market
are not currently determined under EU law its magnitude can only be estimated. At
the end of 2009, the European asset management industry managed assets worth around
€9 trillion in investment funds.[15]
Of this, EFAMA estimate that roughly €3 trillion had been contributed directly
by retail customers; a part of the remaining €6 trillion will also be ‘retail’
due to intermediation (where third parties intercede between the fund and its
end clients so the fund cannot determine the classification of the end client),
but it is difficult to assess the scale of this.[16] Looking at the insurance
sector (which offers a variety of products that provide retail investment
benefits), CEA data from 2009 shows insurers holding overall investments in the
range of €5 trillion (these
investments cover savings and pensions but also funds backing pure insurance
products, some of these investments will be institutional holdings of funds
such as UCITS; around a third can be roughly estimated to be held in as unit-linked
life insurance).[17]
Data providers linked to the retail structured product market suggest that
structured products taking securities and deposit forms amounted to less than €0.5 trillion in 2009. This suggests an
overall market of over €9 trillion in 2009, with a
breakdown according to Graph 1. Graph 1: Estimate
on PRIPs market breakdown, 2009 Source: EFAMA,
CEA, Arete Consulting; these figures do not distinguish between retail or
institutional business The Decision Technology study surveyed
householders and found roughly a split of around 36% cash, 7% funds, 13%
shares, 4% fixed income, and 37% insurances. However these figures are
self-reported by respondents, and the precise makeup of different categories is
difficult to assess, so these figures may not be reliable. The market in general appears to be
dominated by funds and insurance-based investment or savings products, with
structured products currently taking a relatively small slice of the market.
The Decision Technology survey suggests however that households maintain
significant holdings in the form of cash or deposits (which fall outside of the
retail investment market in this impact assessment). Box 1: What are PRIPs? In simplest terms, a PRIP is an investment
product sold to a retail customer. This captures the three key concepts: first,
the term 'investment product' captures the two key criteria that define PRIPs.
As investments, they are propositions that expose the investor to risks; the
investor provides capital (whether in a lump sum or through regular savings),
and the investment promises returns on this capital. As products, they are
'manufactured' by financial services intermediaries, who construct the propositions
to provide cost effective access to investment propositions for retail
investors who otherwise would have neither the expertise or access to make such
investments. Secondly, the prescence of a retail customer. Measures designed to
address the needs of retail customers may not be relevant for professional
customers. The Commission has consulted on options for
defining PRIPs, including distinguishing them from ordinary savings products
(that do not carry investment risks) and sought input from miscelaneous
studies, so as to ensure coherent requirements apply to all the products of
relevance, irrespective of their legal forms, as set above in sections 2.2 and
2.3. The results from this consultation have
informed the identification of options on scope and assessment of their impact
in section 6.2 below. Regulatory context Regulations on product disclosures address,
in particular, the needs of investors for information on the nature, risks,
costs, and possible performance of specific products. Such regulation sits within a wider
context, both nationally and at the level of EU laws, with other rules covering
areas such as distribution and sales, including disclosures about distributors
and their costs, prudential requirements (capital and solvency rules), and
other sundry areas, such as rules on product providers to ensure they are
capable of undertaking the business they engage in, and rules on redress and
compensation schemes to ensure customers can obtain redress in relation to
fraud or return of investments in the case of the failure of firms. As will be discussed in greater detail
below, regulation of product disclosures is currently patchy and inconsistent,
with divergent approaches at the EU level according to the legal form a product
takes (rather than its level of risk for the investor). Some Member States have
sought to harmonise requirements cross-sector, in so far as EU legislation
allows. In practice requirements placed on product manufacturers vary
significantly between Member States: a CEIOPS survey concluded “there are a
striking number of detailed additional measures [on pre-contractual
disclosure], which are unique to individual Member States … suggesting that
Member States have sought to be more prescriptive than the terms of the CLD in
order to, for example, protect consumers”.[18] The UCITS market – a significant proportion
of the PRIPs market, and one with strong cross-border dimension – is currently
implementing Commission KIID requirements. These are strongly prescriptive and
standardised, and will introduce a common product disclosure document (with a
simplified but objective risk rating) across all EU markets for such funds.
There are no comparable requirements for other products at the EU level under
existing legislation. Box 2: Role of product disclosures within a
typical retail sales process Most investments sold to retail customers
in the EU are in practice sold through 'advised' channels (estimates vary, but
Decision Technology survey suggests between 60 and 80% of sales might be generally
described as 'advised').[19]
Product disclosures have an important role to play in such sales. Under an advised sale the intermediary
gives a personal recommendation to the client as to possible suitable
investments based on the client's needs and situation. The sales process
typically will have two logically separate aspects. The first aspect relates to
the sales process itself, and any services being offered by the sales person,
notably the service of providing advice to the investor. The advisor would
typically make disclosures to the customer about themselves, about the service
they are offering, and about any fees associated with the service. Following
discussions between the advisor and the customer, including gathering of
information by the advisor, the advisor might typical make a recommendation,
providing for instance a short list of products. Product disclosures – the focus of this
impact assessment – can be defined as the information provided to the customer
at this point, information about the individual products being proposed. The
purpose of these disclosures is typically to ensure comprehension of products
including their specific risks and costs, and, in some cases, to enable
investors to better compare between products. (For a fuller discussion of the practical
context of product disclosures, see Annex I.9). 3.2. Problem
drivers Three key 'problem drivers' underpin and
structure the problems covered by this impact assessment (as already discussed
in the PRIPs Communication IA): · Driver 1: there is a proliferation in (often
complex) investment products on offer to consumers, that take different legal
forms and structures yet which offer comparable risk/reward profiles; yet · Driver 2: these different products are
regulated in different ways according to their legal form rather than their
economic nature; as a consequence · Driver 3: there are powerful asymmetries
of information between retail customers and the industry which remain
unmitigated. These drivers are not independent. Drivers 1
and 2 contribute to Driver 3. 3.2.1. Driver
1: Proliferation of product types aimed at same investment needs The key types of PRIP identified through
earlier consultation and impact assessment are: · Funds (whether UCITS or non-harmonised, covering both open-ended or
closed-ended structures); · Investments packaged as life insurance policies (notably,
unit-linked, index-linked and certain other 'with-profits' products); and · Retail structured products (typically in the form of structured
securities or structured term deposits; so-called 'structured' products also in
some markets have taken the form of funds or life insurance policies).[20] Earlier market mapping by the Commission,
responses to consultation, and discussions with stakeholders have underlined
that functionally similar investment products are increasingly manufactured
('packaged') using a variety of legal forms, with similar investment
propositions being offered across different industry sectors. This 'packaging'
of products can make them appear very different for investors, even where
underlying economic purposes are similar (e.g. a fund, a deposit and a
unit-linked insurance contract look different, but might be equally used to
have the same investment exposuire, for instance to a particular stock index). There is a potentially bewildering variety
of products; for instance, during 2009 there were over 274000 tranches of
retail structured products brought to market and 36000 UCITS funds for sale.[21] Factors leading to a
proliferation in types of product could include differences in tax treatment,
regulatory arbitrage, and nationally specific market traditions. Yet all of
these products seek to address a relatively simple need: capital accumulation by
taking on risk so as to have the potential for beating a risk-free rate of
return. While these products vary in what they offer – some combine the
prospect of capital accumulation with a capital guarantee, while others do not;
some combine an investment element with another element (such as offering life
insurance benefits) – they all are offered as investments to retail customers
when they approach financial intermediaries or directly product manufacturers.
Responses to the PRIPs consultation,
including product providers, supervisors and consumer representatives, support
the view that the product types identified above are broadly competing for the
same investments of the same retail customers, offering similar investment
propositions but packaged in different ways. Respondents have generally agreed
that the identified product types above between them make up the vast bulk of
the retail investment market as it currently stands, though a number have noted
that other possible competing products or investments might emerge. Some
consumer representatives and national supervisory authorities have argued in
favour of widening the perspective on competing or substitutable products to
include deposits and simple savings accounts, which are subject solely to
interest rates. Also, some consumer representatives and national supervisory
authorities took the view that 'unpackaged' assets (such as ordinary corporate
equities or bonds) should be subject to the same disclosure requirements as
those that are packaged. More technical views have also been raised over the
details of where the 'line' between investments and products serving other
client needs might sit, particularly for products which combine investments
with other elements. In addition, there has been debate over the extent to
which pensions (notably, personal pensions, or ‘pillar three’ pensions) might
be considered to be competing with other retail investment products, and
whether or not these might be included or excluded with the PRIPs initiative. Nonetheless, despite differences over
technical 'boundary' issues, consultations with stakeholders have revealed a
general acceptance that investment products with different legal forms are
currently competing with one another, and that these legally different products
raise, despite their differences in form, similar needs for clearer information
on costs and risks that is capable of comparison between types of products. 3.2.2. Driver
2: Patchwork of regulation European and national regulation on product
disclosures already applies to most products (structured deposits excepted). However, Community law has developed on a
largely sectoral basis, at different speeds and with different outcomes in
mind. As a result, the rules governing what disclosures need to be prepared and
what these should look like vary materially according to the sector in which
the product is originated and in which an intermediary operates. Notably, most disclosure regimes are
relatively high-level and do not set out in detail the form and content (or the
'look and feel') of product disclosures. The UCITS KIID regime is an important
exception: this regime is very prescriptive and detailed, and was developed to
ensure disclosures in a short and investor-friendly manner capable of
supporting comparisons between funds (including those sold cross-border). The following table illustrates this
'regulatory patchwork'; see Annex I.6 and I.7 for further details on the
contents of the different existing regimes, and a summary of certain national
requirements that also apply to firms in this area. Table 2: Disclosure rules and
intermediary regulation in Community law for packaged retail investment
products || UCITS || Other Open-Ended Funds || Unit-linked life insurance policies || Structured securities and closed-end funds || Structured term deposits Rules on product information applying to manufacturers, issuers or intermediaries || Key Investor Information (KII) of UCITS Directive || MiFID (high-level product disclosure requirements apply to MiFID intermediaries when selling financial instruments) || Solvency II (CLD rules) || Prospectus Directive[22] || No rules at EU level MiFID[23] (high-level product disclosure requirements apply to MiFID intermediaries when selling financial instruments) || Insurance Mediation Directive[24] for some product disclosure requirements || MiFID (high-level product disclosure requirements apply to MiFID intermediaries when selling financial instruments) E-commerce Directive or Distance Marketing of Financial Services Directive This patchwork must also be understood
in the context of developments at the national level. Member States have
approached the retail investment market in different ways, to the extent that
EU legislation affords them discretion (notably for products other than UCITS).
The IMD and Consolidated Life Directive (CLD, now Solvency II) rules are not
maximum harmonising, permitting national rules that are more strict; however,
CEIOPS mapping work shows that the national approaches to product disclosures
for unit-linked life contracts that have emerged on the basis of the IMD and
CLD are not comparable with or consistent with the KII envisaged by the UCITS
Directive, with strong divergences in national approaches.[25] Requirements thereby diverge
strongly cross-border for non-UCITS PRIPs (an issue raised by some industry
stakeholders to the Call for Evidence and PRIPs Consultation). While common prospectus rules (under
the Prospectus Directive) govern part of the structured product market, these
rules are not comparable to the KII rules for UCITS (see Annex I.6 for more
detail), while prospectus information may not be used by distributors in
practice for informing retail clients when buying such structured products
(given the complexity and length of such disclosures, and the fact there is no
requirement on distributors to provide the prospectus). National rules vary in
regards information provided by the distributor about such products. Key
problem 1: An unlevel playing field develops between product manufacturers A regulatory
patchwork can lead to increased administrative costs and regulatory arbitrage. Different
levels of regulatory requirements can create an incentive for products to be
structured and marketed to take advantage of less onerous requirements – often
within one Member State, across product groups; but potentially even across
borders. Product proliferation has been indicated by some stakeholders,
including consumer representatives and national supervisors, as providing prima
facie evidence of regulatory arbitrage.[26]
Ongoing work has begun at the level of the European Supervisory Authorities on
financial innovation in relation to retail investment products in reaction to
these concerns. It is difficult to assess the extent to which differences in
transparency requirements are a sufficient motivation on their own for driving
market entry or exit, however they are likely to be one factor. In relation to
administrative costs, a number of consultation respondents from the industry commented
that duplication, overlaps in requirements or differences in requirements both
sectorally and between Member States (where they operate cross-border)
potentially raise administrative costs and reduce competition across markets.
They noted that a lack of clarity as to content of regulatory requirements and
associated liabilities could also lead to greater compliance costs for firms
(for instance, through the need to contract for legal advice). For UCITS,
defining cross-border business can be tricky (given complex delegation
arrangements by management companies related to funds); however, the fact that
41% of assets under management are domiciled in Ireland and Luxembourg
indicates the high degree of cross-border business.[27] There are no indications of
similar degrees of cross-border business for other PRIPs; for instance
estimates put total cross-border insurance business at 4 to 5%.[28] Even if the cross-border sales
of non-UCITS PRIPs are not so significant, the current legal patchwork poses a
threat in two respects: first, the existing internal market in UCITS is subject
to direct competition from products that are less strictly regulated in regards
product disclosures – or not regulated at all. Second, the current differences
in disclosure requirements are likely to be perceived both by investors and by
industry as a fragmenting factor along national borders, which do not help any
future positive development towards market integration. Key
problem 2: Increased barriers to the further development of the single market As noted, most
PRIPs are not currently sold cross-border in great volumes, with the notably
exception of UCITS. A regulatory patchwork of product disclosure requirements
is one barrier to further cross-border business across different product types.
The impact of national differences over product disclosures was strongly
highlighted by UCITS stakeholders (prior to the development of the KIID), who
identified such differences as a key barrier to further development of
cross-border efficiencies. Failures to
effectively mitigate asymmetries of information at the EU level have encouraged
action at the national level to address emergent problems, and the financial
crisis has led to such action being more likely in the absence of further steps
at the EU level. Such action at the national level is necessarily
uncoordinated, leading to increased differences in approach across Member
States. In addition, current sectoral differences in requirements at the EU
level encourage Member States to address issues on a purely sectoral basis. In addition,
given the UCITS KIID, in the absence of further EU action some Member States
can be expected to seek to improve disclosure requirements for other investment
products, but in an uncoordinated way. It is difficult to assess the likelihood
of this, but it is important to stress that the technical details of how one
extends UCITS KIID-like rules to other segments are major drivers of compliance
costs, which means that coordination on this could be a significant means for
preventing the build-up of further regulatory barriers to market access. 3.2.3. Driver
3: Failures to effectively mitigate asymmetries of information between retail
customer and the industry The financial services are difficult to
understand even for professional market participants. This is in large part due
to their intrinsic complexity (exacerbated by drivers 1 and 2). This complexity
can take different forms with different consequences.[29] Low levels of financial
literacy and capability undoubtedly compound these issues – these however are
out of the scope of the current analysis and will be / are being addressed
elsewhere. In addition, for many retail customers
there are few opportunities to learn from experience in retail investment
markets: customers typically do not engage repeatedly in investment activities,
but do so only in relation to certain specific and widely-spaced life events
(inheriting money, or investing towards a specific future liability or goal,
such as buying a house, retirement or family planning).[30] Existing regulatory requirements (driver 2)
are designed to mitigate asymmetries in information.[31] However, these are ineffective
and inconsistent, and a proliferation in new products and market innovation
(driver 1) have also led to products being offered in forms that were not
envisaged during the development of the existing disclosure requirements. This third problem driver can be divided
into three specific components (sub-drivers):
1 -- Mandatory information currently provided is not sufficiently easy
to understand
Existing retail
disclosures about investment products have been very strongly criticised by a
wide range of stakeholders, including industry, consumer representatives, trade
bodies, and national supervisors.[32]
There are a number of elements that contribute to perceived failings. · Retail customers find financial services concepts and jargon
are opaque, difficult to understand and unfamiliar. This is in a
context where retail investors struggle to undertake even the simplest tasks
(in the Decision Technology study, almost half of respondents failed to
optimally allocated investments in a simple exercise).[33] Everyday connotations of words
complicate the picture: the concept of 'risk' has strongly negative
connotations for retail customers, though the financial services concept of
risk is not a wholly negative concept.[34]
Great care is thereby needed to communicate with retail customers in a clear
and effective way, yet documents for retail customers often are written in a
fashion that is only comprehensible for professional counterparts that takes no
pains to communicate clearly with the typical or average retail customer. A
lack of standardisation and thereby confusion between concepts, e.g., in
language used to describe investments, can undermine trust, comprehension and
comparability of information.[35]
Responsibilities for communicating clearly are too often placed on others, with
not enough ownership of such responsibilities by the senior management of the
firms that produce investment products. · Documents are very often too long, or suffer from 'information
overload'.[36]
Text and information is presented in a dense manner, without any effort to prioritise
what is important or what is not. Text can appear to be simply a collection of
'caveats' or legal / contractual information; documents are too often written
by lawyers rather than those trained in communicating effectively with retail
customers. Key information can be hard to identify. A respondent to the UCITS
KII put this well: '…documents are too long, so we just can't be bothered to
read them from the beginning to the end'.[37]
Financial services firms can take the view that making information available –
even if this is done in a manner that is not likely to be effective for the
average investor – is sufficient to discharge their responsibilities for
informing those investors. · Presentation can often be dull, confusing or unengaging,
suggesting the information provided is not vital or important, or that it is
not likely to be understandable for the average reader. There can be a poor use
of design techniques (e.g. white space, headings, emphasis, layering of
information). A desk-based survey of disclosures in the
UK showed that many of these were not as physically appealing or well presented
as other marketing information, so as to undermine their importance and
relevance for investors.[38] · Finally, information provided may be partial or misleading
in effect for the average investor, even if technically correct
details are included in small print. Evidence included in the PRIPs
Communication IA included the example of mis-selling of equity-linked insurance
products in the Netherlands where costs were insufficiently disclosed. This
problem can either be due to poor compliance standards, or due to more
subjective factors related to the presentation of information and the
positioning of key information in small print. For instance, one respondent to
the YouGov and IFF study noted the problem of overly highlighted positives:
'they would only present beneficial features of the products…I should have read
the additional information in the document but because it was written with
small font I ignored it'; another remarked (in relation to a savings product)
'it was an account that I thought paid 5% interest a year, when in fact it was
5% over 2 years…I was just displeased…it was in the small print so really was my
mistake'.[39]
Evidence on
impact The YouGov and
IFF study showed that investor understanding of risks was very sensitive to
details of the language used or presentation.[40]
Other research has shown poor understanding of basic concepts of 'risk reward',
and questioned the accessibility of even the basic concept of a percentage (%).[41] As another illustration, the
Decision Technology study explored respondents (who had invested in the recent
past) understanding of their investments, and found very strong evidence of
very basic misunderstandings: for instance, nearly 40% wrongly believed that
investments in equities they had made benefited from capital guarantees.[42] This evidence
(which is consistent with much other research in this area), and feedback from
consultation respondents, has confirmed the findings of work on financial
literacy: that average investors are currently poorly able to understand many
of the investment products offered to them. Of course, failings by investors to
understand investments are not solely a consequnece of poor disclosures. Low
levels of financial capability are clearly relevant; also, where an investor
seeks advice, the advisor takes responsibility for making suitable personal
recommendations. Nonetheless, research on consumer use of information shows
that respondents comprehension of information is sensitive to the presentation,
comparability and clarity of the information..[43]
Ultimately,
clear and understandable information is necessary (if not sufficient) for
informed decision making. Improving information would therefore lead to
improved decision making. In particular, the Decision
Technology study shows that standardisation and simplification of information can
drive such benefits.[44] Key
problem 3: Retail investors fail to understand the products they buy
2 -- Mandatory information currently provided is not comparable
The regulatory
patchwork in EU disclosure requirements effectively prevents firms from
providing consistent disclosure information to retail customers, which has the
immediate consequence that it is difficult for those customers to compare
different products.[45]
· General information about the nature and features of the product –
what it is, how it works, how you can redeem it, how you can find out more
about how it is doing – can be presented in very different ways, or use
different classifications of investments or terms, making it difficult to
compare. · Information about risks is presented in incompatible or difficult to
compare ways (this covers both market risk (price volatility), but also other
dimensions of risk, such as counterparty risk or operational risk). When
investors do try to compare information provided it can be misleading – it may
be very hard to see what it truly 'low' or 'high' risk, and there is no 'objective'
or neutral help available in assessing this. · Different products have different costs and mechanisms by which
costs are charged to the investor, and these costs can be presented in very
different ways or according to different calculations. Evidence on
impact Both the
Decision Technology study and the YouGov and IFF study showed that presenting
information in competing or different formats undermines investor comprehension
and confidence. Both demonstrated startling failures on the part of investors
to assess competing investment propositions. The YouGov and IFF study also
showed that presenting risk information in a structured way capable of
comparisons (i.e. placing each fund on a scale from 1 to 7) significantly
improved the ability of investors to compare between funds, even where complex
caveats might need to be taken into account.[46]
Research by the UK ABI supports this finding.[47]
Failures to
effectively compare products may be linked to the extent to which investors
shop around for investments. Decision Technology found little evidence of
extensive search behaviour in the retail investment markets; in part a lack of
'shopping around' might be related to infrequency of investment decision
making, or self-perceptions of investors as to their confidence in making
investment decisions.[48]
A lack of comparability of information is likely to be one factor in limiting
confidence, shopping around behaviour, and hence competition in the investment
product markets. While there is
much behavioural evidence on difficulties investors have comparing costs, some
important UK evidence supports a specific link between the introduction of
regulatory steps designed to improve the comparability and transparency of
costs and the manufacturer's future pricing of the products. Introducing a
price comparator into product information (the so-called 'RIY' figure) where
price information was otherwise complicated correlated with pricing changes in
the market for life products that might not be explained through other factors.[49] This may indicate increased
shopping around behaviour by customers or that firms themselves are choosing to
compete on price (possibly in the anticipation that price was going to be of
increased salience for investors). Other research also showed positive benefits
to the inclusion of measures to improve price transparency into mandatory
disclosures.[50]
Note that there
are no equivalent measures to those for UCITS KII available for other PRIPs so
as to facilitate comparisons between them and each other or UCITS. This may
distort the market between UCITS and other PRIPs. Key
problem 4: Retail investors fail to compare products
3 -- Mandatory information is not made available to investors in a
timely fashion
The best
information disclosures would be of no value if they were not in practice read
and used, or they were provided to investors too late in their decision making
process to be of value in that decision making. Evidence
suggests that these problems – of actual provision or the timing of provision –
are important. Notably, in the Synovate study, few participants recalled or
recorded being provided with product information.[51] While there is an enforcement
or compliance component to this issue there are also divergences in EU law in
regards the standards that apply as to whether product information prepared by
manufacturers must be used by intermediaries.[52]
The provision
of information to investors is of course only part a wider picture: the
information has to actually be used and read by the investor if it is to impact
on their behaviour. Sub-drivers 1 and 2 contribute to information that is
provided being unattractive or uninteresting, and consequently less likely to
be read, which is why the three issues should be looked at and tackled
together. Key
problem 5: Retail investors do not receive information 3.3. Scale
of the problem and consequences Investor side Micro (individual) level Investor
detriment in the retail investment market can take different forms: · Buying products which have a risk profile that is not suitable –
i.e. where the risk/reward profile of the product is not understood or
anticipated, leading to direct losses (e.g. during downswings, or where an
investment has higher volatility than expected), or to opportunity costs (where
an investor wishes to take on a higher risk/reward investment than they in fact
purchased). · Buying products with features that are not suitable (e.g. products
which include a lock-in period during which it is impossible to redeem or where
redemptions carry penalties). This can include paying for features that are
not appropriate or necessary given the investors' needs. The PRIPs
Communication IA already surveyed examples of these problems in practice
(summarised in Annex I.8). Looking across the EU market as a whole to assess a
possible scale for mis-selling is complicated by the fact that mis-sales are
not necessarily recognised as such at the time (or indeed later), so that
possible effects on competition, pricing and opportunity costs are difficult to
untangle. Issues typically arise where market movements expose a practice that
had hitherto gone unnoticed; such problems have been distressingly common.[53] The recent
Synovate study provides a basis for assessing the EU-wide scale of these issues
however. It concluded that around 60% of sales in a mystery shopping exercise
across all EU markets might be deemed 'unsuitable'.[54] In this context, a number of
aspects are certainly linked to non-compliance with existing point of sale
rules (for instance, insufficient gathering of personal information about the
client or superficial evaluation of suitability) while the study also noticed a
significant proportion of advice focusing on products that are less regulated
at the point of sale (for instance, certain savings products) which may
indicate a form of regulatory arbitrage. However, the study also identified
problems with disclosures concerning the products recommended to clients, which
is the aspect of particular relevance in this context. In addition, the
provision of clear and comparable information about products and their prices
could be expected to contribute to greater salience being placed on product
features and prices at the point of sale, impacting the scale practices related
to these other factors. Given the complex
interaction of factors at the point of sale, estimating the specific
contribution of product disclosure failures to mis-sales (especially where
sales are accompanied by advice) is in practice difficult; the only reliable
techniques are ex poste in nature rather than ex ante, and such
data is not readily available across the whole EU retail investment market.[55] Where a personal
recommendation is made, the quality of that recommendation will clearly be of
key importance. External factors too can be important, including the impact of non-professionals
(friends and family, for instance), or 'cultural' factors (such as brand
loyalty). Nonetheless, it
is clear that poor transparency and reduced comparability of information
contribute or enable mis-selling. Even taking into account potential caveats on
the scale of mis-sales and their link to imperfections in product disclosure
requirements, given the volume of the retail investment market (estimated to be
around EUR 9 trillion in 2009), the impact of potential mis-sales would represent
a very significant and material potential source of consumer detriment. Even if
the Synovate figure of 60% was revised signficantly downwards, impacts are very
material. This is compounded by the fact that detriment relates not only to
losses borne – which typically drives perceptions of when a mis-sale has occurred,
and only comes to the surface when risks crystalise – but also to opportunity
costs and impacts through reduced competition and reduced market efficiency. For these reasons,
and given that effective product disclosure is a necessary (if not sufficient)
condition for informed decision making, it is difficult not to conclude that
failures in these disclosures are likely to have a substantial impact. Even if
only 10% of sales in the retail investment market could be considered as
'unsuitable' this still amounts to almost 1 trillion EUR of potentially misheld
products; to put this in context, even if product disclosure contributed only
1% to this, this would still amount to around 10 billion EUR (4 billion EUR for
the non-UCITS part of the market). These figures need to be borne in mind when
considering costs of changes. Macro (aggregate) level As noted, mis-sales or poor comparability of information can reduce
competition and shopping around. This is clearest when considering poor
comparability of products: a lack of readily comparable information by
definition creates a barrier to comparing products. The UK FSA price
transparency study noted above showed how improving cost transparency can lead
to reduced costs overall. Price sensitivity on the part of a proportion of
consumers can have benefits for the remainder of consumers. In addition, firms
anticipate such sensitivity under conditions of greater price transparency (and
also may independently compete more on price). Even
small impacts on price can lead to a large overall benefit for consumers given
the scale of business. For instance, a 0.5% reduction of annual management costs might seem
small, but in a market of EUR 9 trillion this would amount to EUR 45 billion
benefits to investors, though of course lower costs would also equate to
reduced surpluses for investment product manufacturers and distributors.This is
in a context where research from Lipper demonstrates an EU fund market
overburdened by small, relatively costly funds: in general they conclude
(amongst other things) that a greater focus by investors on costs could drive
important benefits.[56]
Industry
side An unlevel playing field between firms has the direct impact of
varying costs of business, distorting competition. Regulatory arbitrage could
encourage the development of products or sectors that are subject to the lowest
levels of regulation, also undermining the effectiveness of regulation. While
many stakeholders – including industry voices – have raised concerns relating
to such effects it is very difficult to establish how far the design,
commercialisation and marketing success of products is in practice determined
by the nature of regulatory disclosure requirements, given the range of other
commercial factors that can apply (such as tax regimes, culturally specific
factors in particular national markets, internal firm strategies, and other
regulatory requirements, such as authorisation, conduct of business or
oversight requirements). However, as noted above, small steps on improving the
salience of cost information, for instance, could have a large impact on
consumer welfare in aggregate. A number of industry stakeholders indicated in the recent
consultation that a lack of standardisation and consistency across different
sectors can raise compliance and administrative costs, especially for firms or
groups operating across sectors or national markets. Other more direct impacts of failings in regulation are also
important. Mis-sales can also have a strong impact on firms, raising levels of
compensation claims and complaints and internal costs related to managing
these, and damaging brand identities. More generally, reduced retail trust of
the investment markets could reduce liquidity and vital investment in economic
growth and jobs. 3.4. How would the problem evolve without further action? Irrespective of the Commission's commitment
to make proposals for legislative changes in this area, it is possible to assess
the counterfactual of no action at the European level. Under this scenario,
problems would be likely to persist, and inconsistencies at the level of
Community law would not be able to be addressed at any other level. Some Member States have already indicated
that they would take further action in the absence of an intervention at the EU
level. This may have a beneficial impact with respect to investor protection
and the level playing field within the Member States in question. However, it
would also lead to further divergence of regulatory approaches across Member
States, thereby potentially impeding market cross-border business and further
complicating the legislative landscape, while, differences in regulatory
approach cannot be addressed effectively at Member State level as they relate to
differences in approach in Community law (for instance with highly standardised
disclosures for UCITS, high level requirements only for insurance PRIPs, and a
mixture of these for securities subject to the PD). Also, it is unlikely that all
Member States would take unilateral action, leaving some markets without
adequate regulation. Inconsistencies in approach between Member States would
raise adminstrative and legal costs for firms operating in different Member
States, and increase uncertainty for investors buying cross-border. Some self-regulatory initiatives on the part
of the industry can also be expected to emerge without further stimulus from
the EU; evidence from the Call for Evidence and the Consultation indicates a
certain willingness to take such steps, though it is difficult to assess the
likelihood of such steps coming to fruition. In addition, self-regulatory steps
are unlikely – as they would tend to continue to be sectorally discrete and
vary between different Member States – to effectively achieve a consistent
approach between sectors and across Member States. At EU level, in the absence of new
initiatives, existing workstreams would also contribute to mitigating the
problems in certain sectors and for certain products. These include: · Implementation of KII requirements for UCITS following adoption of
new standard under UCITS IV; · New implementing measures on summary prospectus and key information
it must contain for the PD; · Work on improving financial education, in conjunction with Member
States; and · Reviews of IMD and MiFID. However, taking together these developments
would not be able to address regulatory fragmentation and inconsistencies in
approach between different sectors and different legislative initiatives, since
these different initiatives and measures are designed to address a wide range
of other regulatory challenges, other than the problems of comparability and
comprehensibility of pre-contractual information addressed in this impact
assessment. For this reason it is unlikely the comparability of different PRIPs
would be improved; by definition tackling this would require a coordinated
approach across product types. UCITS KII requirements would only apply to part
of the PRIPs market, while measures on the summary prospectus are not likely to
lead to documents that are directly comparable to the UCITS KII. Strengthened
rules on distributors and those providing advice also would not in themselves
improve the comparability of information about products, notably on costs or
risks. In fact, fragmentation and its consequences
would likely worsen, following the introduction of prescriptive rules aimed at
a short document for UCITS KII but no comparable rules elsewhere. As noted, the
reactions of Member States to the introduction of these requirements are also
likely to vary, raising additional coordination challenges. Even where all
Member States seek to tackle level playing field issues between UCITS KII and
disclosures for other products, it is probable that different Member States
would develop their own alternative solutions to these challenges, thereby more
deeply embedding fragmentation across the single market. 4. The EU's right to act and justification Possible measures for addressing the problems
identified in this impact assessment would be based on Article 114 of the TFEU.
Given the identified problems, possible options for measures would necessarily relate
to improving the conditions for the establishment and
functioning of the internal market: establishing uniform
conditions for the way investors in the Union are informed about investment
products and how the information is provided to them, so as to harmonise operating
conditions in relation to the information on investment products for all relevant
players in the retail investment market, product manufacturers, persons selling
and investors. As set out in
section 3.4, in the absence of such possible measures there would be a risk
that obstacles to the functioning of the Single Market would emerge. Member
States have already taken measures on the national level to address
shortcomings in investor protection measures. It is likely that this
development would continue in the absence of measures at the European level. Measures
at the European level would counteract the development of divergent national
approaches to investment information which would constitute an obstacle to the
Single Market. While there is
increasingly cross border trade in retail investment products, divergent
national approaches will also lead to different levels of investor protection,
increased costs and uncertainties for product providers and distributors which
represent an impediment to the further cross-border development of the retail
investment market. Such further development would also require easy comparisons
between products of different types across the Union. Divergent standards to
investor disclosure make such comparisons very difficult and would therefore
also create an obstacle to the further development of the Single Market for
retail investment products. Possible
measures to address these obstacles to the Single Market would, if they were to
be effective, need to apply for all relevant market players in the retail
investment market. They would thereby contribute to improving the conditions
for the establishment and the functioning of the Single Market in accordance
with Article 114 TFEU. According to
the principle of subsidiarity laid down in Article 5(3) of the TFEU, action on
the EU level should be taken only when the aims envisaged cannot be achieved
sufficiently by Member States alone and can therefore, by reason of the scale
or effects of the proposed action, be better achieved by the EU. The problems to
be addressed in this impact assessment relate to an unlevel playing field
across the EU among different product manufacturers and persons selling
investment products and consequent uneven levels of investor protection. While some Member States have already acted
on the national level, there are considerable differences in these national
responses including Member States which have not yet undertaken any steps to
improve retail investor disclosures. Responses are necessarily limited in their
geographical scope and cannot be compared with or substitute a co-ordinated or
systematic response on the EU level. Significant divergences exist and can, in
the absence of action, be expected to continue to exist. Inconsistencies between Member States and across product sectors
impede the growth of the single market, raise costs for firms operating across
the Union, and reduce competition between product sectors and providers, whilst
weakening the effectiveness of existing measures to aid investors in comparing
between different investment propositions. Achieving
greater consistency in measures on transparency across
Member States and product sectors is central to addressing the problems
identified in this impact assessment. Yet such consistency cannot be achieved
by action taken solely on the Member State level. Member States cannot create a
Union wide level playing field for investment product manufacturers and persons
selling and an even level of investor protection in relation to investor
disclosures across the EU. Therefore,
action on the European level is needed. In accordance
with the principle of proportionality (Article 5(4) TEU), it is necessary and
appropriate for the achievement of the objectives of this initiative to lay
down principles relating to the content and form of the disclosure for retail
investment products, as well as rules on drawing up and provision of these
disclosures to retail investors. Such requirements should be further developed
on level 2, so that a requisite level of consistency in measures can be
achieved to facilitate comparisons between investment products originated in
different industry sectors. 5. Objectives 5.1. General
and specific objectives The initiative seeks to improve the quality
of investor decision making and the functioning of EU capital markets, tackling a breakdown in confidence and trust in the retail market. More concretely, it aims to: · reduce levels of consumer detriment (mis-sales and mis-purchases of
investment products); and · create a more level regulatory playing field between competing
products while tackling potential barriers to the single market. 5.2. Operational
objectives The operational objectives focus in on the
steps needed to improve the quality of product disclosures. These steps can
also tackle creating regulatory consistency, so as to achieve level playing
field benefits and remove potential barriers to the single market. · Improve comprehensibility of disclosures · Improve comparability of products using disclosures · Ensure disclosures are provided at the
right time in sales processes · Improve regulatory consistency 6. Options 6.1. Identification of options Before assessing options, it is important to note that it is
envisaged that any new measures to be proposed would follow a 'Lamfalussy'
approach (see Annex I.10 for some further detail on this), with level 1
measures determining the objectives, broad approach, and outcomes being sought,
and level 2 measures determining the detailed application of the level 1
framework to specific PRIPs. This is consistent with the approach adopted for UCITS for the KII and
in other areas of the financial services, and reflects the need for detailed
technical measures (founded on expert technical advice) that may be readily
adjusted in the face of market developments. On this basis, the questions to be
addressed in this impact assessment relate not to the detailed content of
proposed product disclosures (e.g. different options on the presentation of
risk information, including through a risk rating and the underlying
methodology for calculating it), but rather to the approach to be adopted in
general to the product disclosures (e.g. the extent to which all PRIPs product
disclosures should contain a risk rating). As the problem description makes clear, product information impacts
investment decision making in the context of specific sales processes with
their attendent dynamics, whether the sale is an advised sale or a non-advised
sale. It is difficult to isolate individual factors in assessing such dynamics.
For much of the retail investment market, the actions of the sales person are
crucial, by means of the recommendations they make, the products they may
highlight or not even where a recommendation is not made, and the subtle ways
in which they interact with the retail investor. Yet this should not be taken
as relegating product disclosures to a purely ancilary role. Product
disclosures have a wide range of both indirect and direct impacts on sales
outcomes. This includes impacts on the behaviour of sales people (providing
objective benchmarks that may impede uninhibited pushing of products), on the
behaviour of product manufacturers (supporting greater competition on product
costs and features), and, indeed, on the behaviour of retail investors (better
assessing products). The problem description has already set out the relevance
of improving product information as a means for addressing mis-sales in the
retail market. Given this wider context and the strong synergies between different
factors in a typical sales process, it is important to underline that while
this impact assessment relates solely to addressing the identified issues
relating to information about products, other proposals by the Commission with
supporting impact assessments, notably on the reviews of MiFID and the IMD, are
underway separately, so as to ensure a coherent overall approach is taken to
all the factors in sales processes that are amenable to regulatory
intervention. The reviews of MiFID and the IMD address in particular measures
on the provision of services of advice and the retail investor's understanding
of these services and the management of conflicts of interest related to these
services, so as to seek to align the interests of those selling products to
retail investors with those investors. As noted, the PRIPs initiative was
undertaken to assess the overall coherence and effectiveness of all measures
regulating retail investment markets, and identified the key areas of product
information and the regulation of sales as priority areas for intervenion. This
IA delivers on the former of these two areas; the MiFID and IMD revisions on
the latter. The Communication on PRIPs already identified, on the basis of
existing legislation and prior work, the broad areas that would need to be
addressed by options for addressing the problems identified above:[57] · the broad scope and purpose of requirements (i.e. focus on informing
investors’ decision making, rather than, say, on providing contractual
information); · how information might be presented, including length of documents,
or the kind or style of language to be used; · the key areas of information to be included in documents, and the
possibility of detailed measures (at level 2) for standardising the form and
content of such information; · who should prepare information and how to keep it up-to-date; · steps for ensuring provision of information to the client (the
medium to be used for information, and the timing of provision). The policy options examined in this impact
assessment build on this existing work, and have been
grouped as follows: (1)
Scope of initiative. The precise scope of products that might be covered is key for
ensuring all competing or comparable products are included, vital for
addressing regulatory consistency objectives and comparability of information
objectives. Description of options The scope of the regime is fundamentally bound up
with its purpose: in improving comprehensibility and comparability of
investment products, it is important to identify the products that can
practically be compared with one another, otherwise measures to improve comparability
could be misleading. Linked to this, the scope of the regime is central for
considering possible regulatory arbitrage and level playing field impacts. Previous work in the PRIPs initiative led to the
development of a concept of ‘packaged’ investment products: under this issue we
assess therefore whether this concept remains valid. Following consultation,
the identified options are: (1) to set the scope wider than packaged products;
(2) to maintain the focus on packaged products (see Annex I.3 for definition of
these); (3) to combine (2) with a commitment to review and expand (or contract)
the scope if necessary. (2)
Degree and nature of standardisation of
product disclosures. Standardisation relates both
to the degree of prescription imposed on firms in regards the content and
format of disclosures provided to retail customers, and to the degree of
consistency in requirements between products and financial sectors. This area
is central for determining the overall approach to be developed, and is key to
driving costs and benefits. Description of options The objectives of achieving regulatory
consistency, improving comprehensibility and improving comparability of
documents are linked directly to the extent of consistency of approach across
different products, and the degree to which this consistency is used to achieve
standardisation of the content and format of documents. Increased
standardisation is (generally speaking) likely to increase benefits for
investors but may increase costs for industry. (Standardisation may also reduce
legal risk reducing some costs for industry). The many possible detailed options on content and
form can be broken down according to the areas identified in the problem
definition relating to comprehensibility and comparability (language and length
of disclosures impeding comprehensibility, and different presentations of
product features, risks and costs impeding comparability). In each area, the
specific options explored (outlined in table 3 below) broadly sit on a spectrum
between greater and lesser degrees of prescription and standardisation. (3)
Responsibilities for preparation. Stakeholders and consultation respondents have broadly underlined
the importance of clarity over who is responsible for preparing (and updating)
disclosures. Description of options When assessing responsibilities for preparation,
options range according to the degree of prescription applied in regards who
should prepare the information. The identified options are: (1) not specifying
who should be responsible, but leaving this to market participants to decide;
(2) not prescribing responsibilities, but requiring agreements between market
participants over responsibilities; (3) placing a general responsibility on the
product manufacturer, but allowing for some targeted exceptions; and (4) [not
mutually exclusive with other three options] requiring disclosures of
responsible parties and product manufacturer in document. (4)
Timely provision. Ensuring effective and timely provision of product disclosures to
retail investors is vital if disclosures are to be used. Description of options Different models for disclosure
provision can be found across existing product disclosure measures, broadly
ranging from (1) a ‘soft’ requirement whereby product disclosures are prepared
by manufacturers and provided to distributors, but distributors are not
required to use these for discharging their responsibilities, to (2) a ‘hard’
requirement whereby product disclosures prepared by the manufacturers must be
given by distributors to the investor (as is now the case with UCITS). Given
the variety of distribution channels across PRIPs, an additional option (3) can
be identified where some flexibility is introduced as to the what counts as
‘providing,’ to ensure practicality requirements for all channels. (5)
Flanking measures: civil liability and
sanctions. How should civil liabilities associated
to the document be clarified, and are there steps to be taken on further
harmonising the use of sanctions by competent authorities when supervising the
regime? Description of options The UCITS KIID regime, as with the PD disclosure
regime, contains specific measures to clarify the liabilities associated with
the KIID, designed to ensure the document is practically treated as a
pre-contractual communication document by product manufactures – the simplified
prospectus had earlier become bloated through the inclusion of too much fine
print. The UCITS KIID regime and other measures in the area of the Financial
Sercices also take or are proposing to take steps on better coordinating the
sanctions that apply at the national level following breaches of measures.
Options for addressing these areas for PRIPs include: (0) remaining silent on
liabilities / sanctions (baseline); (1) use of non-legislative techniques to
ensure access to and use of redress; (2) clarifying liability regime attached
to PRIPs product disclosures; (3) approaching sanctions in a high-level way;
and (4) taking steps to harmonise aspects of sanctions. Table 3: Summary of options Issue || Objectives addressed || Policy options 1 Scope (products for which disclosure requirements should be aligned and improved) || All || 0 – Take no action 1 – Set the widest possible scope 2 – Only 'packaged' products 3 – Only 'packaged' products, but set firm review date [Options are mutually exclusive] 2 Degree of standardisation · || a || Plain language, engaging quality of document || Comprehensibility || 0 – Take no action 1 – Apply high-level principles only 2 – Prescriptive rules to standardise elements of language, ‘look and feel’ of document 3 – Use of non-legislative tools 4 – Clarify liability attached to document [Options 1 and 2 are mutually exclusive; option 4 also addressed under issue 5] b || Length of document || Comprehensibility || 0 – Take no action 1 – Set a ‘soft’ limit on length; prescribe contents and length where viable at level 2 2 – Set a ‘hard’ limit on the length of all documents (e.g. 2 pages A4) 3 – Use layering of information / signposting to other documents [Option 3 is not mutually excusive with 1 and 2] c || Accuracy, balance of information || Comprehensibility || 0 – Take no action 1 – Set high-level principles only 2 – Use prescriptive requirements on form and contents to ensure balanced presentation [Options are mutually exclusive] d || Comparisons of product features, risks, costs || Comparability || 0 – Take no action 1 – Seek consistent structure, layout to aid comparisons 2– Standardised risk, cost, and performance disclosures for all PRIPs [Options are not mutually exclusive] 3 Responsibility for preparing product disclosures || All || 0 – Take no action 1 -- Flexibility over who prepares the document 2 -- Flexibility over who prepares the document, but requiring agreement on responsibility 3 -- Product manufacturer normally responsible for preparing the document 4 – Require disclosures of responsible parties in document [Options 1 - 3 are mutually exclusive; 4 is not mutually exclusive with 1 - 3] || 4 Requirements on delivery of product disclosure || Ensuring provision || 0 – Take no action 1 – ‘Soft’ requirement on provision and its timing 2 – ‘Hard’ requirement on provision and its timing 3 – Broadly follow 2, but allow for some targeted exceptions [Options are mutually exclusive] || 5 Flanking measures: civil liabilities and sanctions || All || 0 – Take no action 1 – Non-legislative steps to ensure access to redress 2 – Clarifying liability attached to document 3 – Clarify sanctions in high level manner 4 – Clarify sanctions in more detail [Option 3 is mutually exclusive with 4] || 6.2. Analysis and comparison of
options For a full
discussion of each issue, the identified options, and assessment of the costs
and benefits of the different options, please see the relevant section in Annex
II. 6.2.1. Issue
1 – What scope of products should be covered? Defining which products are 'competing' for
retail investments has been hotly debated throughout the PRIPs work. The
Commission proposed in its Communication a focus on 'packaged' investments.
Stakeholders have generally recognised the practical validity of the concept of
packaging, and that packaged investments share features amongst themselves (and
differ in important ways from non-packaged investments), and likely need
stronger consumer protection measures, including steps to enhance
comparability. Some take the view that the scope of the initiative should
nonetheless be as broad as possible. Box 3: Defining Packaged Products The Commission consultation on PRIPs has
steadily refined a possible definition of retail investment products of the
packaged form. At its core, the definition refers to the investor's exposure to
uncertainties in outcomes, and the intervention of financial engineering in
this regard: A PRIPs is any investment where the amount
repayable to the investor is exposed to fluctuations in the performance of one
or more assets or reference values, and where the investor does not directly
purchase or sell these assets. Products solely linked to interest rates or
where outcomes are wholly guaranteed and known beforehand would be excluded, as
would financial products that are pure insurance products (general insurance
products, or pure protection insurance products). Many stakeholders have views (positively or
negatively) on the precise application of the concept of packaged products to
particular products, e.g. as may exist in particular national markets. Option || Effectiveness || Efficiency Comprehension || Comparison || Regulatory Patchwork 0 – Take no action || 0 || 0 || 0 || 0 1 -- Set the widest possible scope || + Effective approach would still require boundary to be drawn between 'packaged' and 'non-packaged' products; wider scope could allow for overall better coherence. || + Effective approach would still require boundary to be drawn between 'packaged' and 'non-packaged' products; wider scope could allow for overall better coherence. || + Existing unlevel playing field is practically focused on 'packaged' products, but wider focus || Depending on approach, costs for industry may be comparable to focus on packaged regime, but marginally greater due to wider impact. Benefits for consumers depend on extent to which regime still segments between packaged and non-packaged products; effectively challenge of demarcation of products cannot be avoided. 2 -- Focus on 'packaged' products || + Key benefits relate to packaged products, so only likely to be marginally less effective than 1. (May be more effective in practice due to more focused approach.) || + Key benefits relate to packaged products, so only likely to be marginally less effective than 1. (May be more effective in practice due to more focused approach.) || + Existing unlevel playing field is practically focused on 'packaged' products || Costs likely to be lower than for 1, as impact targeted on those products that are most relevant, and option 2.1 would likely still need to demarcate in measures between packaged and non-packaged investments. Core benefits achieved in relation to packaged products, so likely to be equivalent to option 2.1 3 -- Focus on 'packaged' products, but set firm review date (e.g. five years following coming into force) || ++ Key benefits relate to packaged products, so only likely to be marginally less effective than 1. (May be more effective in practice due to more focused approach.) Review of scope allows possible future arbitrage and consumer detriment to be addressed || ++ Key benefits relate to packaged products, so only likely to be marginally less effective than 1. (May be more effective in practice due to more focused approach.) Review of scope allows possible future arbitrage and consumer detriment to be addressed || ++ Existing unlevel playing field is practically focused on 'packaged' products Review of scope allows possible future arbitrage and unlevel playing field issues to be addressed || Costs likely to be lower than for 1, as impact targeted on those products that are most relevant, and option 1 would likely still need to demarcate in measures between packaged and non-packaged investments. Core benefits achieved in relation to packaged products, so likely to be equivalent to option 1. Review mechanisms allows for possible regulatory arbitrage, countering possible weakness with option 2 As the table makes clear, all approaches to
scope have their merits and their problems. Costs are likely to be similar for the bulk
of the market across all options, though the precise form and cost/benefit
impact of the first option is difficult to assess (it could be developed in a
manner which was extremely impactful or without major impact, depending on the
choices made for other options below, e.g. the degree of standardisation
chosen). However any distinction between packaged
and non-packaged investments is subject to changes due to innovation.
Experience has shown that wherever the boundary is drawn, the risk remains that
investment propositions might be developed which are economically similar or
the same as those captured by the defined scope but which fall nevertheless
outside defined boundaries or sit at least at the edges of that scope. The
determination of a boundary may well thereby encourage or facilitate regulatory
arbitrage, contributing to further complexity in the market. This is of course
without prejudice to providing the necessary legal certainty on scope (which
can be achieved in a variety of ways at level one, supported as necessary
through detailed implementing measures). Nonetheless, the case for maintaining an
initial focus on packaged investments is also strong, and seems more
proportionate than a wider scope, as it focuses action on the products that are
likely to deliver the main benefits from better disclosure regimes, without
overly diluting the regulatory design process in order to address marginal
cases. These are mostly directly comparable products, where a common product
disclosure regime can be readily envisaged. Given the broad issues that might arise in
regards arbitrage, the option of a two step approach is strongest: to focus for
now on ‘packaged’ products, being as these are financial products that are
manufactured for the purposes of providing investments to retail customers, but
to reassess whether a wider scope might be appropriate at a predetermined point
in the near future. The scope of products that would be caught by this approach
and a possible way of defining them more in detail e.g. with respect to the
future legal instrument on disclosure is presented in Annex I.3. Box 4: Pensions: a special case? Given ongoing work following the Green
Paper (see Annex I.2) it may be premature to determine the appropriate EU
dimension of rules on disclosure for these, particularly as regards Pillar II
pensions, but some respondents to the consultation strongly argued that
products that might be determined as pensions, particularly under Pillar III ,
were directly, in their view, substitutable for other PRIPs in some markets. In
addition, it can be argued that decision making in relation to pension and
retirement planning raise additional consumer protection issues compared to
other PRIPs that warrant even stronger consumer protection measures tailored to
national pension systems, but at least subject to similar standards of
disclosure as other investments. Issues include, for instance, achieving
clarity on possible restrictions on how pension investments might be used, on
the specifics of individual tax treatments, and on the typically long term
nature of the investment and the need to assess the likely income that the
pension might deliver in the future, which makes the calculation or assessment of possible future
benefits, such as retirment income backed by an annuity, more complex and
difficult to explain than for ordinary investments, and also raises additional
specific factors such as the impact of changes to longevity. Certainly,
therefore, there are
additional information requirements that should apply for investments used as
pensions compared to other investments. 6.2.2. Issue
2 – How far and in what ways should disclosures be standardised at EU level? As it has been mentioned above, the UCITS KII regime is highly
prescriptive and strongly standardises the "look and feel" and
contents of UCITS KIIDs, so as to promote comparability of information and
comprehension. This approach also has benefits relating to regulatory
consistency (potentially reducing costs for firms, given the cross-border
nature of the UCITS market, and the role of the KIID within notification procedures
for marketing cross-border). Given that here we address other products, which are prepared and
offered by different manufacturers and distributors, we should now examine how
far (and in what ways) such a standardised approach might be applied more
widely. This issue relates also to specific policy options for improving comprehensibility
and comparability of product disclosures. Comprehensibility Improving use of plain language and making information more engaging Option || Effectiveness || Efficiency 0 – Take no action || 0 || 0 1 – Apply high-level principles only || – Experience with UCITS simplified prospectus showed that high-level requirements were not sufficiently effective in ensuring comprehensible information in documents. Ensuring firms, supervisors approach standards in consistent way would be difficult to achieve, leading to inconsistencies in outcomes. || Effective engagement by supervisors with firms could be costly / inconsistent, given lack of guidance in a high-level approach. Some lack of legal clarity for firms as to necessary standards; inconsistencies cross-border would erect barriers to single market. Flexibility may be valuable for allowing innovation in terms of communication practices. 2 – Increased prescription || + + Experience with developing UCITS KII requirements is that higher standardisation allows for setting better 'minimum standard' for all, so that best practices can be more immediately reflected into generalised industry practice. Greater consistency in approach across all markets / sectors. || Consistency and better clarity could lead to reduced costs for firms and supervisors. Benefits for investors through wider adoption of better practices enshrined in binding EU level requirements. May be seen as a 'tick-box' approach by firms, or a regulatory 'safe harbour' if they follow the letter but not the spirit of the rules. 3 – Use of non-legislative tools || ++ Can support 2, e.g. national regulators, firm trade bodies, consumer associations may be best placed to develop practical guidelines on better language, common glossaries, will better address continued scope for poor language. || Costs expected for developing and improve industry practices, but benefits for consumers from better addressing possible weaknesses Allows flexibility for allowing innovation in terms of communication practices Can overcome tick-box approach possible under 2 on its own 4 – Clarify liability attached to document || + UCITS experience was that success (shortness, clarity of language) of document requires some comfort for firms that they may focus only on 'key' information and not include all possibly relevant information. || Lack of clarity could undermine document, as firms' concerns over liability lead to inclusion of all possibly relevant information, rather than sole focus on key information. As our problem definition outlined, typically firms have approached
product disclosures in a legalistic manner (minimizing legal risk of breach by
flood of information), rather than as an opportunity to communicate effectively
with potential clients in a plain manner. For the UCITS KIID therefore measures
were adopted to ensure the disclosure was approached as a ‘communication’
document, including a clarification of legal liability and relatively strong
prescription of the form and content of the document. However, some
stakeholders (both industry and consumer representatives) have commented that
such an approach needs careful support, e.g. through the development of common
glossaries of terms, sharing of best practice, and careful supervision by
competent authorities. This option appears most proportionate, as it would
better guarantee benefits, at relatively low additional costs for developing
such support. Clearly, any intervention into the current practice of disclosures will
have a significant adjustment cost impact on industry compared to the baseline.
Acting on the language of the disclosure alone, would trigger approximately the
same magnitude of costs as action on all components of the problem driver
together (i.e. language, information overload, accuracy and balance,
comparability). On the other hand, benefits to consumers would increase with
each additional field of action. Therefore, in this impact analysis, we decided
to carry out the final cost benefit analysis of all components together as a
package (under section 6.3) and explain - mainly qualitatively - marginal costs
and benefits under each section. As for marginal costs: while high level standards (1) may leave some
more scope to current disclosure practices, and would therefore have lower cost
impacts, it would not address the problems identified as effectively as options
2 and 3. The consumer benefits expected from more prescriptive and standardised
rules will clearly be highest, while some industry benefits are also expected
from this option in terms of more level playing field and less legal
fragmentation to market access. Under either approach, the magnitude of costs
will still greatly depend on the technical implementation at Level 2. (Liability is analysed separately under issue 5 below). Addressing information overload This analysis considers the specific issue of overly complex and
long documents. Option || Effectiveness || Efficiency 0 –Take no action || 0 || 0 1 – Set a soft limit on length: prescribe contents and length where viable at level 2 || + In practice may be similar (due to impact of prescription on content) to option 1, but flexibility may allow for better tailoring of requirements to specificities of non-harmonised products. || Varied requirements lead to inconsistencies in approach between supervisors and firms. 2 – Set a hard limit on the length (and content) of all documents (e.g. 2 pages A4) || +/- For UCITS a hard limit on the document could be readily considered because UCITS are harmonised across the EU. With other PRIPs which are not harmonised, the product features or benefits may not be always covered in 2 pages (even for UCITS this is not always possible; structured UCITS are provided with a derogation from the 2 page limit). Given this, enforcing a 2 page limit could lead to documents that do not cover all information clearly or comprehensibly. Setting a hard limit may be an effective tool for ensuring firms write in a concise manner: evidence suggests longer documents may not be read. || Simple requirement straightforward for competent authorities to supervise: consistency in approach. 3 – Use layering of information / signposting to other documents || + Layering may be useful for targeting key information and more detailed information appropriately. Layering might undermine extent to which KIID must is capable of being used 'stand alone' (i.e. on its own) to make an investment decision – ensuring this does not happen raises risks for supervisors || Use of 'layering' or 'signposting' may require more careful supervision and assessments of compliance raising some costs,, however may allow same documents to better target range of different investors needs. The length of disclosures – as set out in the
problem definition – has long been considered a major impediment to their
effective use by retail investors. On this basis, the UCITS KIID requirements
set a hard limit on document length (though with a derogation for structured
funds). While theoretically a hard limit would deliver the greatest consumer benefits,
it is difficult to apply this approach to non-harmonised products in practice.
Therefore the preferred option is a soft limit. An additional technique to soft limits that
may serve to address length problems is the use of ‘layering’ or signposting, raised
by both consumer and industry stakeholders. Such a technique can allow
different investors with different degrees of financial literacy to be served
by the same document – those requiring further information can be directed
effectively to find it. It is vital however that cross-references are not used
to fragment access to key information, which would undermine the effectiveness
of the whole regime for investors. In all cases, that is, the KIID should be
able to function on a standalone basis, as relying on other documents for key
information would defeat the overall purpose of the KIID). In terms of marginal costs, a soft limit with
specific requirements tailored for particular PRIPs at level 2 might not be
significantly different in impact to a hard limit at level 1. Ensuring accuracy and balance of information This analysis focuses on the problem of accuracy and balance in
information in product disclosures. Option || Effectiveness || Efficiency 0 -- Take no action || 0 || Issues identified in problem definition would continue, as set out in 3.4. 1 – set high-level principles only || - While in general the principle of being 'not misleading' covers such issues as a lack of balance in information or inaccuracy in information, without more detailed requirements inconsistencies between firms and between Member States would emerge, reducing comprehensibility of information for customers It is likely, given difficulties in enforcing principles, that presentation of information could be 'gamed' (enabling subtle investor biases to be exploited) || Could raise supervisory costs, given potential subjectivity of standards Inconsistencies in approach between supervisors or lack of legal certainty might raise compliance costs for some firms, and negatively impact consumer benefits 2 – use prescriptive requirements on form and contents to ensure balanced presentation || + Reduced misunderstandings by investors: YouGov and IFF testing of KII proposals for UCITS suggested that precise positioning of information (e.g. putting cost information on front page, performance on back page) can be material in impacting consumer comprehension of relative importance of messages; specifying these in prescriptive rules could lead to higher minimum standards across all PRIPs || Consistency in approach could reduce some supervisory costs Legal certainty for firms Accuracy and balance are generally applicable
high-level principles across the financial services in regards communications
between firms and potential investors. However, subtle juxtapositions and
hierarchies of information (for instance, placing cost information on a back
page) can have strong impacts as to how salient information is taken to be for
retail investors. On this basis, the UCITS KII was designed carefully to
prescribe a specific order to information. Given the risk of subtle biases in
information, the use of prescription for other PRIPs is the preferred option;
some consumer stakeholders have specifically underlined this point. In terms of
marginal costs, this would likely reduce costs over a more flexible approach
for both supervisors, and to a degree, firms. Comparability This analysis focuses on the central
objective of enhancing comparability between products, and assesses the
effectiveness and efficiency of standardisation / prescription in this regard,
along two axes: (A) the 'layout' of the documents (order of information
and labelling of information in the document), and (B) the specific area of
potentially quantitative or objective information that can be used for comparisons
(on product risks, costs, and performance). || Option || Effectiveness || Efficiency A LAYOUT || 0 -- Take no action || 0 || 0 1 – Prescribe consistent document structure to aid comparisons || + Consistency in structure will benefit investors in comparing between products, potentially improving comprehension and confidence in using information. Consistency in structure may run the risk of taking a ‘one-size-fits-all’ approach that reduces effective communication of specific features of some products – care must be taken to test approach to ensure effectiveness for consumers. || Consistency may reduce some aspects of compliance costs (through simplicity) and supervision costs, though likely to be marginal in impact on costs Benefits for investors, better decision making B INFORMATION || 0 -- Take no action || 0 || 0 2 – Standardise risk, cost and performance disclosures || + + Comparable disclosures crucial to informed decision making: improving capacity of investors to compare risks, performance and costs is fundamental to this initiative. Choice and technical development of information capable of guiding comparisons (including calculation of numbers where quantitative information is provided) must be very careful undertaken. Presentation also needs to be tested with investors. Improving comparability of disclosures may impact competition between providers, sectors NOTE: improving comparability of information may entail public policy choices: identification of the elements of investment products that are most salient for retail investors and which elements should be highlighted likely to have impact on consumer behaviour (e.g. question of relative balance between risks, costs, benefits). || Comparators should lead to better decision making, broader market efficiency benefits Costs may be material for providers if new methodologies for calculation are unfamiliar or require new resources to be developed/obtained Comparators may aid distributors and advisors in making personal recommendations or assessing the suitability of different products for retail investors Standardisation appears fundamental to
improving comparability, as identified by the Decision Technology and YouGov
and IFF studies. The policy options in this instance relate less to the use of
standardisation as such, and more to the clarification of the areas in which
standardisation can be effectively applied. In practice, technical work at
level 2 (to identify the methods (and possible limits to these) for achieving
comparability in product features, notably in relation to risks, performance
and costs, will determine the practical extent to which standardisation can be
used. It is vital that assessments of the specific application of
standardisation at level 2 are built on the basis of robust consumer testing of
different options. Marginal costs related to detailed options on
standardised risk cost and performance disclosures are likely to vary
significantly; analysis of this will be central to the level 2 impact
assessment. Summary Putting all these areas together, an approach
which might be termed 'targeted standardisation' emerges. Full standardisation (the application of the
UCITS model to all other PRIPs unchanged, or the application of a similarly
standardised / prescriptive approach) would be difficult to practically achieve
given the heterogeneity of PRIPs other than UCITS. Following this approach
could lead to misleading information, undermining the objectives of improving
comprehensibility and comparability. Yet standardisation where used in an
appropriate way is a strong effective and efficient tool for addressing
comprehensibility and comparability objectives, whilst it also can be a strong
tool for ensuring regulatory consistency. Indeed it is difficult to see how
comparability objectives can be achieved without at least standardisation of
(at the least) risk and cost information. The impact of this approach for different
stakeholders is discussed in detail under section 6.4 below. Under this option,
standardisation would be applied as far as is possible to the structure of
product disclosures, the use of labels and some warnings, and risk, cost and
performance or benefits information. Precise application of standardisation
would be established through level 2 measures, which will be the main
determinants of the costs of such a regime (as technical details of how the
PRIPs regime is designed will impact on the one-off / switching costs), as well
as a key to reaping the highest potential benefits (through the optimal design
of what precisely disclosures should contain and look like). As referred to
above, the cost impact of intervention is not as accumulative in nature as the
benefits are. The overall cost-benefit analysis of preferred options is carried
out in section 6.4. 6.2.3. Issue
3: Responsibility for preparing document In the UCITS framework, there is a clear
allocation of the responsibility for preparing the information to the product
manufacturer or provider; a similar allocation can be found in relation to
insurance products; for securities PRIPs, however, current practice does not
always rely on the security originator for the preparation of information for
retail customers; distributors can take a stronger role. Respondents to the PRIPs Consultation broadly
supported an approach which placed responsibility for preparing the product
disclosures on the product manufacturer. Consumer representative respondents
(amongst others) to the PRIPs Consultation noted the importance of clarity in a
product disclosure document itself as to who produced the product and who
produced the information. Option || Effectiveness || Efficiency Comprehension || Comparison || Regulatory Patchwork 0 -- Take no action || 0 || 0 || 0 || 0 1 -- Flexibility over who prepares the document || - For the much of the PRIPs market, this may reduce clarity || - May lead to differences in approach to information about the same product || - Lack of consistency in allocation of responsibilities likely to lead to different supervisory practices between Member States and sectoral supervisors || Allows for tailoring of requirements for market realities / responsiveness to changing distribution arrangements May exacerbate legal uncertainty over responsibilities, undermining 'ownership' of the KIID and undermining its practical development in some market segments 2 -- Flexibility over who prepares the document, but agreement on responsibility || - As above || - As above || - As above in regards consistency || As above, though there would be clarity as to individual responsibilities in regards specific arrangements. Impact could be significant for providers and distributors where agreements have never been established in the past 3 -- Product manufacturer normally responsible for preparing the document || +/- Reflects existing approach in much of PRIPs market Determination of allowed exceptions would need to be subject to detailed implementing work and impact analysis in this regard to avoid impractical solutions that lead to misalignment between responsibilities and capabilities || +/- Reflects existing approach in much of PRIPs market. || + Greater consistency depends on care taken in regards targeting of exceptions || Allows for some adjustments for practical scenarios where responsibilities and capabilities might not otherwise be appropriately aligned (split responsibilities, handling of delegations); this could mitigate possible unintended consequences, whilst still allowing for broad legal certainty for much of the remainder of the market. 4 -- Require disclosures of responsible parties in document || + Important for investors in relation to possible complaints, also ensuring clarity as to who is actually producing product || n/a || n/a || Identification of product manufacturer may require supporting clarification work in some instances (complex chains of intermediation and 'remanufacturing' possible in some areas in PRIPs market) For a relevant
part of the PRIPs market a model that places requirements strongly on the
provider both accords with current requirements and has the benefit – according
to many respondents to the PRIPs consultation including from the industry – of
securing legal clarity, which supports carrying across this model into a new
PRIPs regime. It is not clear how this model might be applied in some
circumstances however in practice; in order to reflect this, situations where
responsibility for preparing the document is not practically possibly or should
be shared in a different way might be clarified at level 2. We conclude
therefore that while options 2 and 3 might be seen as equally capable of
achieving the same outcome, option 3 has the benefit of establishing a broad
principle that product manufacturers should in general have responsibilities
for the products they produce, while also reflecting the normal situation that
product manufacturers can best placed to prepare information about their
products. In terms of
marginal costs, options 2 and 3 could be similar, depending on the precise
details of level 2 measures. Note, for clarity, that the preparation of the document would only
be necessary where a product was to be sold or distributed to retail clients. 6.2.4. Issue
4: Ensuring effective provision of product disclosure information to retail
investors The UCITS framework contains what might be
called a 'hard' requirement on provision of KII to investors. Effectively,
whoever is selling must provide the KII in good time before a sale is
transacted. (In line with MiFID and the IMD, a 'durable medium' must be used
for this purpose, but this can include the use of a website so long as certain
conditions are followed.) This contrasts with other possible models – for
instance, where information is 'offered' or 'made available' by product
manufacturers, but where intermediaries are not required to use this
information to inform retail investors about the products. Some industry respondents to the PRIPs
consultation noted that requirements on provision of KII for PRIPs would need
careful assessment against the practicalities of different distribution
channels, e.g. taking into account electronic, telephonic and postal sales
processes. Option || Effectiveness || Efficiency 0 -- Take no action || 0 || 0 1 – Information made available, but not required to be actively provided, e.g. by intermediaries || -- This could potentially weaken requirements, e.g. compared with the standard now in UCITS; this is incompatible with ensuring disclosures are made to improve investment decision making Possibilities of mis-selling likely would lead to ad hoc arrangements for provision between distributors and firms, and variations between member states would emerge || Would appear low cost for firms and distributors, but mis-buying could raise costs more widely. 2 – ‘Hard’ requirement on provision and its timing – following UCITS model || +/- In the context of advised sales, actual provision of KII relating to proposed investment is key to effectiveness of these documents – a strong requirement on this would make clear responsibilities on this, able to act as a better basis for effective supervision, compliance and redress in this area || Hard provision may clarify legal responsibilities between providers and distributors over what information can be used to discharge responsibilities of the distributor. Hard provision may reduce flexibility over how to provide information for some distributors. Hard provision could however improve the control of providers over the information given to investors about their products. 3 – Broadly follow 2, but allow for some targeted exceptions || + Allowing additional flexibility over and against option 1 would allow certain execution only and other specific distribution scenarios to be better addressed (e.g. where timing is critical). || Additional element of flexibility could mitigate potential consequences of applying hard requirement across all distribution channels. Under this analysis, the operational
objective of ensuring provision of information would seem to militate for a
hard requirement on provision; however, the application of such a requirement
to different sales circumstances (such as on-line purchases, or purchases
without advice) might require some residual flexibility on timing of provision
to ensure measures can be practical. (The Distance Marketing in Financial
Services Directive and MiFID already provides for certain targeted exemptions
along these lines). 6.2.5. Issue
5: Flanking measures: civil liability and sanctions In terms of legislative design, two issues remain, both of which
have been addressed in the UCITS KIID regime that need to be considered in
relation to other PRIPs: the clarification of the civil liability attached to
PRIPs product disclosures, and the sanctions regime applying through the
relevant competent authorities. Civil liability On this issue, three main options emerge,
(0) taking no action (that is, remaining silent on liabilities); (1) supporting
non-legislative measures to build capacity for consumers to seek and obtain
redress; and (2) clarifying civil liability rules. (1 and 2 are not mutually
exclusive) Box 4: The UCITS KIID experience In regards civil liability, the UCITS KIID
approach on this was developed in response to failings in regards the
simplified prospectus, where uncertainty as to the liability for the
'simplification' of information (that is, whether the simplified prospectus
must contain all elements in the prospectus that might be taken as material for
an investment decision) had led to firms including too much information in the
notionally simplified prospectus so as to avoid liability. There were cases of
simplified prospectuses that were longer than the full prospectus that they
were supposed to simplify. For this reason, a delimitation of
liability, modelled on that in the PD in relation to the summary prospectus,
was included in UCITS IV – civil liability attached to the KIID only in
relation to consistency with the prospectus. The aim was to ensure that the
KIID was approached as a communication document by firms, not as a legal or
contractual document. Take no action: It would be possible to take no comparable steps on civil liability
for other PRIPs, remaining silent in this regard, leaving liability to existing
sectoral and national requirements. However, while prescription of the form and
content of PRIPs product disclosures reduces the risk that the document be used
by firms primarily as a contractual rather than communication document,
respondents to the PRIPs consultation raised concerns that if liability were
not clarified in some form – in particular, so as to support the requirements
to use plain language and to only include key information – the PRIPs regime
could be undermined in just the same way as the simplified prospectus. Clarifying civil liability rules and
facilitating redress: Two possible further options
can be identified, which are not mutually exclusive. The first option would be
to support the development of (non-legislative) measures to build the capacity
of retail investors to seek and obtain redress in relation to failures linked
to the PRIPs product disclosures. (This might include work on access to
alternative dispute resultion mechanisms, facilitating national steps to inform
consumers of their rights, etc.) The second option would draw on the UCITS
approach, to establish explicit (legislative) requirements on civil liability
(since other contractually relevant information might be contained in a variety
of documents rather than a single prospectus, a simple copy of the UCITS
approach is not possible). Under this option, civil liability would be attached
to firms where PRIPs disclosures are not provided, or are not clear or
sufficiently plainly worded (which would cover where the document includes
extraneous information that obscures the key information), contain misleading
or inaccurate information, or omit information that would be necessary for the
average retail investor to make an informed investment decision. On this basis,
the focus would be on establishing clearly that the PRIPs product disclosure is
a communication document designed to address the provision of summary
information pre-contractually, which does not presuppose the form of other
documents that contain fuller information as may be necessary. Option || Effectiveness || Efficiency 0 -- Take no action || 0 || 0 1 – Supporting non-legislative measures (to build capacity for consumers to seek and obtain redress, collective redress work, etc.) || + builds practical capacity directed at retail investors themselves and their behaviour . || Targeted and proportionate. 2 – Clarify civil liability (but adjusted as necessary; to establish clearly that the PRIPs product disclosures on its own is a communication document and is designed to address pre-contractual rather than contractual issues) || + could reduce uncertainty, encourage clear commitments in relation to production of product disclosure. || Likely to lead to greater confidence in industry, and ensure benefits of changes more likely to be realised. Could reduce costs related to cross border activity. Given the need for legal clarity but also
for flexibility, options 1 and 2 are both preferred options. Clarifying civil liability would also
contribute to better achievement of an effective remedy for consumers, as
enshrined in the Charter of Fundamental Rights, article 47. As such this would
help achieve the aims under article 38, which seek a high level of consumer
protection. Sanctions UCITS contains a high-level requirement on
sanctions, which provides for only limited convergence in this area amongst
competent authorities. Other Community legislation (such as the Distant
Marketing in Financial Services Directive and the e-commerce Directive) also
contain regimes on sanctions, though both of these directives focus on
different issues to this current initiative and exist in parallel to it (as
they do already with the UCITS KII regime). Given experience in other areas,
this means there could be significant differences in the sanctioning measures
that Competent Authorities in those Member States are able to apply. In
addition, with regard to consistency, other work is underway at the Commission
on sanctions (as set out in Annex I.2), that has identified efficient and sufficiently
convergent sanctioning regimes as a necessary corollary to the new supervisory
system, calling for steps to this end to be taken across all sectoral financial
services legislation.[58] No action:
If no action was taken for non-UCITS PRIPs on sanctioning regimes, leaving
these to sectoral and national legislation, then this could lead to material
inconsistencies across sectors and Member States in approaches for PRIPs
(including between approaches for UCITS and non-UCITS PRIPs in so far as
harmonisation of sanctions for UCITS product disclosures remains). Experience
from the UCITS sector is that increased convergence as regards the contents and
the form of disclosure requirements alone would not create more convergent
outcomes without consistently effective and deterrent enforcement. Divergences
between the powers of Member States to sanction non-compliance with the new
requirements could diminish their effectiveness. Clarifying sanctions: Two possible options arise – following the high-level approach in
UCITS, or specifying the form and content of possible sanctions in more detail
so as to allow for greater consistency in these across the EU. In practice it
would appear that product disclosures are seldom a direct target for sanctions
in themselves, so overly prescriptive alignments of supervisory activities here
would seem disproportionate. Under this option, consistent powers for Member
States to impose sanctions (according to their view on the gravity of the
breach and the necessity of action) can be perceived in a two broad areas:
where a sale has occurred without a PRIPs
disclosure being provided;
where a PRIPs disclosure is provided but is
incomplete, unclear, inaccurate, or misleading..
Assessment
of existing powers suggest that where such breaches occur, sanctions typically
could include – as necessary in light of the gravity of the breach -- banning
further product sales, requiring restitution to investors for sales that have
been made, requiring or making public statements, for instance in relation to
deffective information, or requiring information disclosures to be made again
to existing investors. Option || Effectiveness || Efficiency 0 – Take no action || 0 || 0 3 – Take high level approach on sanctions || +/- A high-level approach to sanctions might leave material differences in use of sanctions across Member States that reduce consumer protection standards overall and could contribute to continued barriers to the single market || Largely neutral for industry compared to current requirements, but may reduce effectiveness of new regime, thereby limiting scale of possible benefits (e.g. in regards those involved in cross-border business or active in more than one national market). 4 – Clarify sanctions (as regards the areas and breaches against which sanctions might need to be used and the broad kinds of sanctions that might thereby apply in these areas) || + allows consistency with commitments in Sanctions communication Allows tailoring of liability regime to specifics of different PRIPs Level playing field between different areas of financial services business || Likely to lead to greater confidence in industry, and ensure benefits of changes more likely to be realised. Could reduce costs related to cross border activity. Given the importance of proportionate sanctions
to underlining the importance of the PRIPs product disclosure regime, and given
the PRIPs regime would create consistent duties on firms across all Member
States, option 4 appears most effective and efficient. 6.3. Summary
of retained options and their interaction with the current legal framework The retained
options outline the establishment of a new PRIPs disclosure regime modelled on
that recently developed for UCITS, though with additional flexibility and
tailoring of requirements at level 2 to address the variety of non-UCITS PRIPs. The proposal is
to use a new regime (delivered through a separate legal instrument) to introduce
a new PRIPs product disclosure with a common 'look and feel', and to establish
comparability between PRIPs through the development of detailed prescriptive
implementing measures at level 2 on the layout, content and presentation of the
new document, tailored as necessary for different types of PRIP. The
prescriptive measures at level 2 on the new documents would be set (in the
light of testing of options on consumers) so as to allow for objective and
balanced comparisons of the investment features of different PRIPs, notably in
regards areas open to the use of objective indicators or 'metrics' (risks,
costs and potential benefits). In line with
this IA, the new regime should clearly set out at level 1 that the
responsibility (in the main) for preparing the information should sit on the
manufacturer of the product, and the responsibility for providing the
information to retail customers should sit on the sellers (be these the
manufacturers themselves or intermediaries), subject to only minor exceptions,
e.g. to the timing of the provision. It would of necessity including supporting
measures setting out liabilities for the clarity, accuracy and completeness of
the information and its provision, and the range of sanctions that should be
available to competent authorities (as a minimum) for breaches of the
requirements. The detailed form and content of KIIDs
would necessarily be determined by technical level 2 measures, as was the case
with the KIID for UCITS. In developing such measures, further steps will also
be necessary to identify how to apply it in a proportionate manner to certain
specific scenarios that have been raised by stakeholders, such as the
relationship between 'wrappers' and underlying 'funds', where a product takes
the form of an account which enables access in turn to underlying investment
products, the information that might be needed where investments are intended
for specific uses such as retirement planning, and the application of
requirements to PRIPs distributed on-line and within secondary markets. As set out in this IA, the supported option
is for a form of targeted standardisation: to seek, through detailed level 2
measures, the greatest possible degree of comparability, but to allow also some
flexibility so as to reflect the wide range of products available. The degree
of standardisation of information through level 2 measures will necessarily
need to vary according to the kind of information involved. Information and its
presentation on product risks, costs, guarantees, and performance can be
invisaged in a strongly standardised format (following experience with the
UCITS KIID) so as to best aid comparisons, while information on the nature and
goals of a product or ancilary benefits it might provide cannot be standardised
to the same degree. Nonetheless, even for areas where full standardisation is
not possible, a common presentational template is envisaged in line with
findings from consumer research that shows the positive impact of
standardisations of layout. It is intended that level 2 measures would
be developed strongly under the guidance of such research, and that impact
assessments related to level 2 measures would clearly justify the areas in
which standardisation is or is not achieved, and the extent and nature of that
standardisation, under the broad principle set at level 1 that the greatest
degree of standardisation should be sought, so long as it is consistent with
avoiding providing misleading information to retail investors about specific
products. Interactions with existing disclosure
requirements This new PRIPS KIID is conceived as a
‘communication’ document, focused on providing investors with the key
information needed to make investment decisions in a form they can actually
use: it is not intended to form a contractual document (as such), though of
course the information contained in the document may form part of a contractual
arrangement. This focus implies a separation of some form between the KIID and
other more legal or contractual documents. The intention is not to address or
alter requirements that might apply at European or national level or under
contract law in regards these other documents or disclosures but to ensure the
effective targeting of requirements relating to investment decision making, to
ensure a summary disclosure capable of being used to compare different
investments (the same for all products) is always available. This naturally raises the question as to
the interaction of new KIID proposals for PRIPS with existing requirements, for
instance in regards the PD and Solvency II. Such existing requirements by
definition do not seek to address comparability of information between
different types of product. In so far as the requirements in the PRIPs
initiative are the same or can serve the same function as requirements under
the PD (e.g. in regards key investor information to be contained in the summary
prospectus) or Solvency II (e.g. in regards information about the contract, its
costs, and its risks, as addressed in the requirements consolidated into
Solvency II from earlier life directives), then in order to avoid duplication,
where a firm satisfies the requirements placed on it in the PRIPs initiative,
then fulfilling the PRIPs requirements could be taken as also satisfying matching
obligations under the other instruments. The legal instrument on disclosure
will clarify the extent of such interactions in order to provide legal clarity
to market participants. Currently the PD and Solvency II include
measures that cover a wider range of information areas than intended under the
PRIPs regime, which focuses on comparability, comprehensibility and tackling
'too much information' challenges for retail investors. For this reason, it is
not effective to simply replace requirements in the PD or Solvency II
frameworks; it is likely more proportionate therefore to permit product
manufacturers to rely on certain elements of the information prepared for the
PRIPs KIID when preparing these other disclosures, but to keep the relevant
frameworks separate. In practical terms, PRIPs requirements will
exist in parallel to the existing law, and the satisfaction of the PRIPs KIID
requirements will in specific cases be capable of "discharging"
matching obligations under other instruments; it will be for Member States to
assess the interaction in accordance with their transposition of other
instruments.[59] The intention is to achieve a clear separation between the
pre-contractual product disclosure information in the KIID – to 'ring fence'
this disclosure document – from more formal contractual information/ This is in
the interests of ensuring key information is more likely to be read and understood
by keeping it separate and identifiable. Multiple disclosures, marketing
documents and contractual documents are currently the norm for most investment
products, with their relative importance or role difficult to ascertain for the
retail investor; the policy goal is that the PRIPs KIID stands out from other
documents and is clearly identifiable as a simple summary information sheet for
retail investors. Mandatory provision of the KIID under issue
4 option 3 (with other documents offered or available on request) is a key tool
for achieving this standout quality.Under this option, it would be ensured that
MiFID and the IMD intermediaries are required to use and provide the KIID
disclosures (current requirements under MiFID are not so explicit except in
regards the KIID for UCITS). This will ensure consumers are better and more
consistently protected, and will ensure a level playing field and reduce
regulatory arbitrage across product types. Table 4:
Proposed new rules || UCITS || Other Open-Ended Funds || Unit-linked life insurance policies || Structured securities and closed-end funds || Structured deposits Standardised Product Disclosures || New PRIPs KIID product disclosure regime (UCITS KII regime coexists for a transitional period) Other rules (sectoral) on information about the product or product manufacturer || UCITS (Prospectus, annual reports, etc.) || MiFID (information requirements apply to MiFID intermediaries when selling financial instruments; provision of KIID part of this) || Solvency II (CLD rules) Apply in respect to disclosures not related to PRIPs KIID || Prospectus Directive Apply in respect to disclosures not related to PRIPs KIID || MiFID (information requirements apply to MiFID intermediaries when selling financial instruments; provision of KIID part of this) MiFID (information requirements apply to MiFID intermediaries when selling financial instruments; provision of KIID part of this) || IMD (information requirements apply to IMD intermediaries when selling insurance products; provision of KIID part of this) || MiFID (information requirements apply to MiFID intermediaries when selling financial instruments; provision of KIID part of this) E-commerce Directive or Distance Marketing of Financial Services Directive Note that given timing issues related to
UCITS KII implementation, UCITS shall be subject to a transitional arrangement.
UCITS will fall under the same KIID product disclosure framework as other PRIPs
once the level 2 measures for the new framework have been completed.[60] Experiences from the implementation of KIID for UCITS (which is
ongoing as of the writing of this IA) should be taken into account whilst
preparing the level 2 measures for 6.4. Choice
of the legal instrument – directive or a regulation As
the option of a non-legislative instrument has been discarded, this leaves the
options of pursuing the objectives of this initiative through either a
directive or a regulation. Traditionally, the EU
financial services legislation has largely taken the form of directives. This
was because the legislative proposals mainly sought to approximate national
rules on the taking up of business and the provision of services in a gradual
manner. The choice of a directive enables Member States to integrate rules into
their different legal systems. However, the recent development in the
regulatory framework prompted by the need to lay down detailed rules of
technical nature which should be applied in the same manner in all Member
States is marked by the increasing use of regulations, not only at level 2.[61] The objectives of this
initiative relate directly to the standardisation of the detailed content and
form of disclosures, such that a harmonisation of requirements to this effect
(for instance on disclosures of risks and costs), rather than simply a harmonisation
of objectives is necessary. If the choice of the precise measures for raising
and standardising the level of investor protection with respect to investor
disclosure was left to a harmonisation of national legislation of Member
States, this would incur the risk that the content and the form of disclosures
would continue to diverge from a Member State to a Member State and between
industry sectors, which would not address the existing un-level playing field
for market participants and uneven levels of investor protection and thus
undermine the objectives of this initiative. On the other hand, it
needs to be taken into account that any initiative in this area would interact,
to some degree at least, with existing investor protection measures that take
the form of directives, including measures related to civil liabilities. Given the core objectives
of this initiative are to achieve a new level of standardisation and
comparability in product disclosures across the EU and across different product
types, it would appear that a regulation might be the most appropriate legal
form for the new measures, however given the interactions noted in the
preceding paragraph, this must be subject to some further legal analysis. 6.5. Overall
impact of retained options Costs Product manufacturers In principle the new regime would require
new disclosure documents to be introduced by all PRIP providers across the
whole EU. Given that the KII for UCITS is currently
being implemented, and these costs were assessed separately in relation to
UCITS IV, these costs are disregarded in relation to the estimates here. Any
subsequent adjustments to requirements for UCITS KII in the light of the work
on KII for other PRIPs will be subject to separate impact assessment, specifically
in relation detailed level 2 measures. The CSES study on the costs of
implementation of the UCITS KII offers a good benchmark for the impact of
introducing a new disclosure regime of this type. Overall, the study estimated
that the changes necessary for bringing in the KII – systems changes, training
costs, printing costs, drafting costs, etc. – were expected to lead to an
increase in ongoing costs of product disclosures on average of around 7.5%. The
study estimated that a maximum for the overall one-off costs for introducing
the KII for UCITS could as a maximum be in the region of 0.016% of assets under
management, or EUR 730 million, but the report estimated that after adjusting
for certain factors (such as the proportion of closed funds to open funds in
the UCITS market, and the impact of transitional arrangements), the cost figure
could instead be as low as EUR 290 million. As discussed in Annex II.2, these figures
can be adjusted for the PRIPs market as a whole (on the basis of business
volumes rather than product counts), giving a one-off costs figure of EUR
171 million for non-UCITS PRIPs, and on going costs of around EUR 14 million
per year. As noted in the Annex, the dependency of final costs on
options selected at level 2 necessarily limit the accuracy of any assessment
possible at this stage. Since the CSES study focused on costs for
the UCITS, some peculiarities of that industry may pattern these costs: · There may be a distinction between costs of change for products on
continuous offer (such as funds, where a new regime requires new disclosures
for existing funds), and products that are not open to continued new business
in this way. · The UCITS industry is characterised by a large number of funds,
including many sub-funds. Costs for other sectors will depend on the number of
discrete products on offer, and could be lower than for UCITS (the detail on
this however depends on the final form of level 2 measures). One-off costs are strongly dependent on the
flexibility of transitional arrangements, and the extent to which the new
regime can be introduced through pre-existing product cycles. Some larger
individual industry respondents to our consultation and to the CSES study even
noted that in their view that flexibility in this regard could allow changeover
costs for the new regime to be more or less absorbed into normal disclosure
review cycles. (Existing disclosures for continuous offer products would
naturally be updated each year, for instance for annual cost or performance
information). However, the new regime would clearly replace existing
requirements, certainly triggering significant one-off costs in terms of
drafting, IT systems, channel training, and so forth. Distributors Pure distributors (that is distributors who
do not act as product manufacturers) are likely to face training costs related
to the new regime, and they would likely bear systems costs in addition (in
preparing to handle and disseminate new disclosures). The YouGov and IFF study
surveyed intermediaries in relation to the development of the KII for UCITS,
and these respondents noted possible benefits from greater standardisation,
though views were varied and the discussions were qualitative. Supervisors The new regime is likely to require greater
supervisory resources, in particular during the transitional period. However,
the extent that this reflects a marginal change in costs for supervisors
depends strongly on pre-existing national regimes, which may already have put
in place resources for targeting the quality of disclosures in the retail
market. Retail investors Costs borne by the industry would likely be
passed on to investors, at least in part. However they would also lead to
higher transparency and comparability on product features and costs, with
potential increase in competition. It is difficult to weigh up the impact of
increased costs, on the one hand, with possible increased competition effects,
on the other (evidence on the latter is discussed below). But it should be
noted that it is more difficult to pass on costs to consumers in a more
competitive market. Vorteile Retail investors The benefits of standardisation and
comparability have been underlined by the Decision Technology study, which
concluded that using these techniques in relation to investment decision-making
is likely to lead in practice to changes in investor behaviour that contribute
to better decision making. Given mis-selling on the potential scale of
60% in a market worth around EUR 9 trillion, such an impact, even if relatively
small (e.g. even a 1% reduction in mis-purchases), would be of
great significance in terms of consumer welfare: this alone could contribute to
mitigate EUR 10 billion in possible mis-held products (or EUR
4 billion if UCITS is not included). While such figures are highly approximate,
they simply illustrate that incremental impacts in the retail market can be
very significant when examined from an aggregate viewpoint, and to underline
the scale of potential mis-purchases in this market. In addition, if findings
related to price impacts of transparency are borne out more widely, additional
benefits could impact all retail investors (not just those who mis-buy). Of course, as set out in the problem
definition section and already noted above in section 6.1, there are many
factors that impact mis-selling, and failings in product information are only
one. However, the availability of product information the average investor can
actually understand and use is a fundamental basis of empowered consumers in
the retail investment market, without prejudice to the role and
responsibilities of intermediaries at the point of sale. Ultimately, if
products cannot be explained clearly in terms investors are able to understand,
then the question arises as to whether such products could be suitable for
retail investors. The explanation of products to retail investors is a
responsibility of the person selling the product, however this is clearly
facilitated by the effectiveness of product information. For this reason, demonstrably
clear disclosures are one of the necessary foundations of the retail investment
market; even though on their own they cannot guarantee the soundness of the
market, in their absence a sound market is not possible. Product manufacturers It is difficult to assess the scale of benefits
for manufacturers. One factor mentioned by some respondents to
our consultation was that greater consistency (between sectors and between
Member States) ultimately benefits firms that operate across sectors and
cross-border, ensuring they can put in place consistent approaches themselves,
with some possible economies of scale or removal of duplication (e.g. where
very different documents are needed for different markets). Without EU intervention, a proliferation in
different standards across Member States and sectors would tend to fragment the
market, impacting competition between sectors and erecting fresh barriers to
the growth of the single market. In the context of the UCITS market (an
avowedly cross-border market), differences in national approaches to retail
disclosures (the simplified prospectus) were identified by stakeholders during
the development of UCITS IV as a major factor serving to fragmenting that
market and raise costs. This experience can be expected to be replicated
across other markets as they develop deeper cross-border elements. Consistency in requirements that allows for
better comparisons between products would likely have an impact on competition
in the market (as outlined above in regards pricing, for instance). This may
lead to changes in sectoral competitiveness, to the benefit of one sector over
another, by reducing current inconsistencies in treatment at the European
level. Other factors – notably, the impact of specific tax regimes, and
peculiarities of national distribution networks – can determine the prevalence
of different product types and their predominance across different distribution
channels. Contributions of improved disclosures to
reduced mis-buying would directly reduce cost impacts for firms, e.g. in terms
of complaints, reputational damage, costs of redress and so forth. Linked to this, a more general area of
potential benefits is clear however. This relates to the low levels of 'trust'
in the retail market so clearly evidenced in the latest Consumer Markets
Scoreboard results. Tackling this – by facilitating more direct, clear and
straightforward communications between product manufacturers and their clients
– could benefit providers by encouraging retail clients to invest, driving a
transfer of savings into the capital markets. This could grow the retail
investment market (for all providers) whilst also providing much needed capital
liquidity for investment. Whether this would in fact happen is difficult to
assess. Distributors Some respondents to the consultation
indicated that the new regime should simplify the situation faced by
distributors, so that their compliance with disclosure requirements would be
easier (given new consistency in information provided to them across all
PRIPs). This could also impact the provision of services, allowing advisors
themselves to comply better with their obligations to understand the products
they deal with and to make clearer comparisons between products on offer. Supervisors Supervising disclosures on the basis of consistent
requirements across the entire market is likely in practice to be less costly
than doing so on the basis of less consistent requirements. In addition, improved comparability of
products will likely contribute to better supervisory monitoring of market
developments and product suitability. Given mis-sales scandals in the past, and
the impact these have had for supervisors (requiring extensive after-the-event
work), preventative measures are likely to be strongly beneficial in so far as
they work in practice. (Assessing the counterfactual is however rather
difficult). The following table summarises the expected
net effect of the preferred proposals on various stakeholders: consumers,
industry (originators and distributors of products), and national regulators. Table 5:
Impacts on Stakeholders Stakeholder Issue || Consumers (retail investors) || Originators || Distributors || National regulators Pre-contractual disclosure || + (↑ investor protection, ↑ confidence in market) || + (↑ investor protection , ↑ market activity, ↑ certainty and consistency offsetting ↑ costs) || + (↑ investor protection, ↑ market activity, possibly ↓costs through better availability of quality, consistent product documentation) || + / - (↑ market conduct and relation with investors, may be ≈ where effective pre-existing requirements already in place, may be ↑ supervisory costs) Legend: +
overall positive effect, - overall negative effect, +/- overall mixed effect,
≈ effect not significant, ↓ decrease, ↑increase 7. Impacts
on other stakeholder groups, employment, SMEs, environment and third countries 7.1. SMEs In general it
is not clear that these proposals would impact SMEs that are distributors
directly in any significant regard. The proposals introduce changes / greater
standardisation in information, but these costs are largely borne by product
manufacturers as the parties mostly responsible for preparing and disseminating
the disclosures. The research on costs for asset management companies of UCITS
already to a degree reflected differential potential costs for SMEs, as that
survey was carefully designed to take account of the size of the asset
management firm. Consistency and
better availability of information suitable for the use of retail investors
could well reduce costs for SME distributors, who would no longer need to
search for such information or prepare their own information in some cases. In general for
product manufacturers that are SMEs (though these may to a degree cluster in
the asset management sector and already be covered by UCITS changes) costs can
be expected to be proportionately higher than for larger entities (though of
course in absolute terms smaller); though the CSES study did not show a simple
pattern in this regard in the UCITS market, data from other sectors and in
respect of other requirements suggests such a relationship. The true nature
of these costs will only be capable of being analysed once detailed measures
are finalised at level 2, since the selection of options at that level could
have an important impact on costs for SMEs. The impact on SMEs will therefore
be a vital criterion for assessing options at that stage. 7.2. Employment and social impacts Impact for employment
will, as for SMEs, likely be low, given that the initiative is more focused on
changes to content and form than introduction of wholly new requirements that
might have general impact. In general terms, new requirements may have some
marginal impacts (training needed, some higher costs and thereby possible
manpower consequences, particular in the niche case of the new requirements for
structured deposits), but it is not expected that direct impacts could be
material. Indirectly, as
with SMEs, more efficient capital markets and greater levels of investor
confidence should contribute to growth in EU financial services more generally.
In regards
social impacts, these are expected to strongly positive to the extent this
initiative better protects consumers, by reducing the extent of mis-buying of
investment products. As such this measure contributes to Article 38 of the
Charter of Fundamental Rights, which calls for a high level of consumer
protection. 7.3. Environment
and third countries Environmental impact is likely to be minimal.
(Simpler, more focused information could in practice reduce 'paper weight' of
financial services). In regards third countries, the application
of requirements relating to who may or may not produce disclosures is of
particular significance, given that in some cases a product that would be a
PRIP in the EU, but produced in a third country, is sold in the EU. The
proposed option relating to the preparation of information seeks to address
this circumstance; distributors in these cases might prepare the KIID. 7.4. Administrative burden Annex II.2 contains a detailed analysis of
the possible administrative burdens associated with the preferred options
identified for this initiative. In general terms, since this initiative would
by definition seek to require a new product disclosure to be prepared,
disseminated and provided to retail customers for all PRIPs, this would impose
one-off costs for this change on all PRIPs manufacturers (and to a lesser
degree distributors). Ongoing costs are also likely to be impacted. The Annex
outlines how the CSES study on the costs of introducing the KII for UCITS can
be used to estimate the administrative burden for the remainder of the
industry, but notes that an estimation of impacts at level 1 for an initiative such
as this is necessarily going to be rather rough; more accurate estimations will
only be possible once analysis of possible level 2 measures has been
undertaken. The estimate on the basis of the CSES figures is a one-off cost of
EUR 171 million, and incremental on-going costs (per year) of EUR 14 million. 7.5. Risks and uncertainties Proposals for
improving product disclosures face certain important limitations in regards
their direct capacity to improve investor decision making. The timely provision
of information in a comprehensive and comparable format does not guarantee that
that information will be in fact used by retail investors, while other factors
might be also vital in determining the behaviour and choices of retail
investors. In practice
consumer protection measures in the retail investment markets must be
understood in a holistic manner: a variety of tools (product regulation,
product controls by supervisors (banning, 'naming and shaming', conduct of
business and conflicts of interest requirements on product manufacturers,
conduct of business and conflicts of interest requirements on intermediaries
(distributors and advisors), and improvements in financial education and
capability amongst retail customers) are important and support one another. However, it is
clear that effective product transparency is a vital foundation stone for many
of these other regulatory tools. Without effective product information in a
form that retail investors can use to understand and compare products, it is
unlikely that the certain other steps will be effective. Also, there are
synergies: improvements in financial education and in the quality of sales
processes would likely support greater and more effective use of and reliance
on product disclosures. The converse also may hold. The
effectiveness of requirements on product disclosure depends on commitments by
supervisors and firms across the retail investment markets to commit resources
and develops skills. While this impact assessment has underlined a case for greater
prescription and standardisation, this does not make the production of
effective disclosures for retail customers a simple exercise. No amount of
prescription can absolve firms of taking the commitment to find new and
effective ways of communicating with retail customers about the nature and
features of their products. The detail – on what products are and how they work
– that is crucial for investors cannot be codified into a simple 'tick-box'
recipe for firms (or supervisors) to follow. Using plain language – finding
simple ways to explain complex products – is a skill that takes commitment of
resources to develop. Further tools and supporting work by supervisors at the
EU and national level as well as engagements with all relevant stakeholders
needs to be explored to ensure effective implementation (cf. also Annex II) This dimension
of the outcome being sought by this initiative remains uncertain: it is not
clear whether the steps outlined in this work including possible supporting
work on the European and national level as mentioned will be sufficient to
address this challenge. 7.6. Monitoring
and evaluation Table 6: Monitoring
and ex poste evaluation Issue || Indicators || Sources Comprehensibility || Levels of complaints Mis-selling scandals Controlled assessments of quality || Stakeholder feedback Supervisory / ESA monitoring Follow up survey Comparability || Market impacts of new 'comparators' || Baseline survey and follow up survey to monitor market evolution (linked to that on monitoring market evolution) Technical evaluation of efficacy of underlying calculation methodologies Ensuring provision || Is document used in practice || Mystery shopping to assess compliance / timing of provision Regulatory coherence || Regulatory arbitrage || Baseline survey and follow up survey (5 years) to monitor market evolution around boundaries of scope 8. Conclusions Clear and
comparable information about products is a necessary foundation for informed
decision making, and key to empowering retail investors. Effective product
information will also aid distributors in serving their retail clients. The EU retail
investment market remains beset by market, and, importantly, attendant
regulatory failings. The emergence of increasingly complex products across a
range of different sectors has undermined the effectiveness of existing product
disclosure frameworks, which have not been designed with cross-sectoral
comparability in mind. Currently EU law imposes a patchwork of regulation which
Member States are unable to sufficiently address at their own level. New
requirements, developed on the basis of testing with consumers themselves, and
designed to improve comprehension and comparability of information, have
already been introduced for UCITS; these requirements apply across the whole
EU, and are highly prescriptive. In assessing
options for the remainder of the PRIPs market in the EU, the preferred policy
options that emerge clearly build on the approach developed for UCITS –
following that model in introducing much greater standardisation and prescription
in requirements at the EU level – but do not entirely follow the UCITS model. The
heterogeneity of non-harmonised products entails a need for some wider
flexibility in the requirements for other products. This is termed 'targeted
standardisation' in this impact assessment. The analysis concludes that
such an approach offers the best chance to achieve clearer and more comparable
product disclosures whilst reflecting the practical realities of complex and
varied products. If clear and
comparable information is not made available, informed decisions cannot be
taken. The wider significance for the regulation of retail markets of any
continued failure to enable better, more informed decision making should not be
understated. For this reason, the effort and care needed to develop
effective disclosure requirements and the costs and effort needed to implement
them in practice are small prices to pay for putting retail investment markets
onto a surer footing. ANNEX I 1. List
of Acronyms 3L3 || Lamfalussy Level 3 Committees AFM || Dutch Financial Markets Authority AIMA || Alternative Investment Management Association AILO || Association of International Life Offices BIPAR || European Federation of Insurance Intermediaries CEBS || Committee of European Banking Supervisors (now EBA) CEA || European Insurance and Reinsurance Federation CEIOPS || Committee of European Insurance and Occupational Pension Supervisors (now EIOPA) CESR || Committee of European Securities Regulators (now ESMA) CLD || Consolidated Life Directive EBA || European Banking Authority EEA || European Economic Area EFAMA || European Fund and Asset Management Association EIOPA || European Insurance and Occupational Pensions Authority EVCA || European Venture Capital Association ESMA || European Securities Markets Authority FECIF || European Federation of Financial Advisers and Financial Intermediaries FSUG || Independent expert forum, comprising consumer protection and small business experts, academics and consumer organisation representatives FSA || Financial Services Authority (UK) FSAP || Financial Services Action Plan IFA || Independent Financial Adviser IMD || Insurance Mediation Directive IOSCO || International Organization of Securities Commissions MiFID || Markets in Financial Instruments Directive PD || Prospectus Directive PFSA || Polish Financial Supervision Authority SME || Small- and Medium-Sized Enterprise UCITS || Undertakings for Collective Investment in Transferable Securities 2. Related
Initiatives ·
Review of MiFID The MiFID framework is currently subject to
review on a number of issues including investor protection rules. Proposals
were adopted by the Commission in Autumn 2011, and are currently subject to
negotiation by the European Parliament and the Council. Given that the MiFID
framework has been identified as a key element and benchmark of the horizontal
approach being sought for the regulation of all sales of PRIPs, consistency
between the review of MiFID and the PRIPs initiative was of key importance in
the development of the Commission proposals. The review of MiFID is thereby
being used to deliver certain elements of the PRIPs initiative as regards
selling practices. ·
Review of IMD The Insurance Mediation Directive (IMD) is also under review. The
IMD currently determines the regime for sales for a significant element of the
retail investment market – investments packaged as life insurance products. For
this reason, the development of policy on sales rules for insurance products
more widely through the review of the IMD will be relevant to the development
of policy for PRIPs. Moreover, it is envisaged to use the IMD to deliver the
part of the PRIPs work on sales rules for insurance based PRIPs. ·
Sanctions The Commission launched further work on
sanctions by means of the Communication of 8th December 2010.[62] The Communication highlights that sanctions provided for by Member
States diverge as regards the types of sanctions and the level of fines. It has
therefore been concluded it is necessary to strengthen the sanctioning regime
by further convergence of rules. The measures foreseen for the effective
implementation and enforcement of the new provisions as regards product
disclosure should therefore be coordinated with such sanction work. ·
Prospectus Directive Due to the recent amendments[63] to the Prospectus Directive 2003/71/EC the concept of key
information within the summary prospectus review was introduced so as to ensure
effective standards of investor protection. This concept needs further
development on the level of delegated acts. Given that some securities subject
to the Prospectus regime are also going to fall into the scope of the PRIPs
work, it is important to coordinate the work in these two initiatives, so as to
ensure a coherent overall approach from the perspective of investors and so as
to avoid unnecessary duplication. ·
UCITS IV implementation UCITS IV is currently being transposed by
Member States,[64] and the key investor information document defined within the KII
regulation is currently being implemented by firms (it comes into force on 1
July 2011, though there is a 12 month transitional applying in some cases, so
in practice the new document will only be used throughout the EU from 1 July
2012. UCITS funds fall within the scope of the PRIPs initiative. Given the
current implementation of the KII by firms, and given that the UCITS KII
functions as the 'benchmark' for product disclosures for other PRIPs, it is
crucial to underline that the PRIPs initiative would not apply immediately to
UCITS (the timing of the PRIPs inititiave could provide a sufficient transitional
period, to minimise incremental changes and disruption). During the development
of the KII for other PRIPs, any necessary consequential adjustments to
requirements on the KII for UCITS will be made, bringing UCITS KII under the
same harmonised requirements as all other PRIPs. In addition, it will be
important to reflect on practical experiences with the implementation of the
KII for UCITS during the development of detailed requirements on KII for other
PRIPs. ·
Pensions Green Paper The Commission consulted in 2010 on a Green Paper on next steps in
the EU pensions landscape.[65] The consultation period ended in mid-November 2010, and the
Commission is considering the responses and its future direction in this area. This
consultation addresses, amongst other things, transparency and disclosure
questions relating to different kinds of defined contribution pensions
(including personal or individual pensions under Pillar III). The same
disclosure approach as developed for other PRIPs might be applied to many pensions
(though additional disclosures may also be necessary in relation to the sale of
pensions compared to non-pension investments). A pensions White Paper has now
been published. ·
Solvency II Solvency II[66] which
is a recast of life and non-life directives consolidates among others high
level measures on disclosures to be made to clients. While work is ongoing on level
2, this work does not relate to these measures. The work under PRIPs could
overlap with requirements for disclosures under Solvency II; as with the work
under the Prospectus Directive, it will be important therefore to ensure no
unnecessary duplication of requirements on firms. ·
Single Market Act Under the Commission work to improve the functioning of the single
market and its effectiveness for citizens, steps have been identified to
specifically improve the EU framework relating to social business, including
possible ways in which the investment industry (including its retail wing)
might contribute. 3. What
are packaged 'retail investment products'? There is
currently no definition of a 'packaged retail investment product' in Community
law, nor is there a common definition in Member State legislation. We define
the concept here with reference to the characteristics of the products on offer
and the set of investors to whom they are sold. The core characteristics are as
follows: · They are 'packaged' products which combine investments in (usually)
multiple financial instruments; · They are typically held for a medium to long term period; · Their core economic function is capital accumulation; and · They are normally designed for and sold to retail investors. This set of products should not be confused
with retail financial products or services in general, which may include
credit products (mortgages, loans), insurance products, payment services etc.
PRIPs are however a sub-set of retail financial products. Determining a definition of PRIPs has formed
a strong part of the Commission's consultation with stakeholders. From this
work a broad approach has emerged which uses an 'economic' definition (to be
supported as appropriate by targeted exceptions): The Commission services consulted on the
following definition (as a refinement of earlier work and drawing on input from
the 3L3 joint task force on PRIPs): A PRIP is a product
where the amount payable to the investor is exposed to fluctuations in the
market value of assets or payouts from assets, through a combination or
wrapping of those assets, or other mechanisms than a direct holding. Such a definition of
PRIPs would include products with capital guarantees, and those where, in
addition to capital, a proportion of the return is also guaranteed. However,
products where the precise rate of return is set in advance for the entire life
of the product would be out of scope, since here the amount payable is not
subject to fluctuations in the values of other assets. It would rule into
scope all investment funds, whether closed-ended or open-ended, and all
structured products, whatever their form (e.g., packaged as insurance policies,
funds, securities or deposits). Derivative instruments would also be in scope.
The definition would appear to rule out – as required – many 'vanilla' shares
and bonds, insofar as these do not contain 'a mechanism other than a direct holding
of the relevant assets'. It would also rule out deposits which are not
structured deposits (explicit clarification of the definition however may be
needed in this regard). Pure protection
products would not be covered since they do not have a surrender value. Other
insurance products would not be covered where any surrender value offered is
not wholly or partially exposed, directly or indirectly, to market
fluctuations. On the other hand, the range of insurance products caught would
include those whose surrender values are determined indirectly by returns on
the insurance companies own investments or even the profitability of the
insurance company itself. The mechanisms by
which pay outs are made would not be relevant for determining scope: products that
yield an income, or provide a single pay out at maturity, or that adopt some
other arrangement, would all be in scope in so far as they satisfy the general
definition. The definition does
not include any reference to a product being intended for retail use. This is
due to the fact that the retail element is relevant at the point of sale in
particular, when the distributor sells a certain investment product to a retail
customer, or provides advice on it. A KIID would only be required however where
a retail sale is underway. Note that while all of the product families covered
by such a definition offer comparable economic functionality, there is still considerable
variation in product characteristics both within and between product families.
The key differences include: · The products are structured differently. For instance, investment in
a fund entails the delegation of fiduciary responsibility to a fund manager,
and with actively managed funds the return is affected by the decisions taken
by that manager over the lifetime of the investment. By contrast, the
calculation of the return on a structured security at maturity is determined in
advance by a fixed algorithm. · The legal relationship between the investor and originator varies.
The client remains the beneficial owner of the assets in a fund investment,
whereas this is not the case when an investment is made through an insurance
wrapper: the underlying assets are legally owned by the insurance company. The
company promises to provide a return to the policy holder based on the
investment performance of the assets. · The (non-investment) risks associated with the products differ. For
example, an investor in a structured security bears a counterparty risk against
the issuer of the security. An investor who entrusts his/her assets to a fund
manager accepts the risk that the manager will not act in his/her best
interests. There can also be differences in the exposure to liquidity risks
between different types of product. · The characteristics of the products may differ, for example in terms
of the types of market exposure they offer and the existence and nature of a
capital guarantee. The liquidity and accessibility of the products may also
vary significantly, with some having lock-ins or penalties if the investor needs
quick access to their capital. · Average holding periods may vary; anecdotal evidence suggests that
insurance-based products in particular are typically held for longer than the
average maturity of a structured security. · They are subject to differential tax treatment, according to the
policy preferences of national authorities. · Some products may offer additional functionality, such as biometric
risk coverage in a unit-linked life insurance policy. It is important that product disclosures are
suitable tailored or flexible to allow for all of these differences to be
clarified. However, it is clear that, from the
perspective of the retail investor, all of these products perform comparable
economic functions. Work conducted on these issues in other public fora (e.g.
Joint Forum, IOSCO, 3L3 and at national level) has variously referred to the
same set of products as 'competing' or 'substitute' products. While these
descriptions may apply to a subset of the products in question, we do not
consider these terms to be generally applicable. For the reasons given above,
we do not consider all of the products under consideration to be perfect
substitutes. Moreover, while they do compete for retail savings, it is not
always accurate to treat them as being in direct competition. For example,
unit-linked life policies often serve simply as a 'wrapper' for an investment
in an underlying fund. In this case the 'competing product' is more accurately
described as an alternative channel for the distribution of the investment fund. 4. How big is the market for packaged
retail investment products? It is not straightforward to arrive at an
accurate estimate of the size of the market for retail investment products. The
available data on unit-linked insurance investments do not distinguish between
those products offering significant biometric risk cover and those that do not.
Data on term deposits do not distinguish between those that are structured and
those that are not. There is also a problem of double-counting, to the extent
that investments in units of investment funds through unit-linked life wrappers
are included in both product categories. Nevertheless, an estimate of total
market size of €8-11 trillion is not unreasonable. As noted in section 3 of the
main text, 2009 estimates sat at around €9 trillion. (Note that this estimate does not
distinguish between retail and non-retail investments, as reliable data is not
available across the whole market in this regard. However, EFAMA estimates that
around 33% of fund investments are direct retail; the remainder however is also
contain intermediated retail investments, so this figure itself will understate
the retail market). Capital outstanding (EURO trillion)[67] Source EFAMA, CEA,
retailstructuredproducts.com and ECB 5. How are packaged retail investment
products distributed? On the supply side, it is necessary to
distinguish between the manufacturers of retail investment products and
their distributors. Manufacturers include fund managers, securities
issuers, banks and insurance companies. These entities may distribute their
products directly to retail investors – in which case the manufacturer and
distributor are the same – or through an intermediary. Funds and structured securities are
distributed predominantly by banks in many Member States, although independent
financial advisers are prevalent in the UK. Financial institutions also
distribute the majority of unit-linked life insurance policies, along with
insurance company employees, agents and, in some countries, insurance brokers.
Greater detail is given in the sections that follow. Traditionally, financial institutions
distributed products developed 'in house' by fund managers and financial
'engineers'. In recent times, however, funds and securities distributors have
moved towards more open models of distribution, with third-party products
offered alongside own-brand products ('open architecture'). It is also common
for different types of investment product to be made available from the same
distribution channel. For example, a prospective investor seeking to purchase
an investment from branch of a bancassurer or from an independent financial
advisor may be offered products from any of the product families. There are
also signs of developments whereby intermediaries offer services which blur
some of the distinctions between intermediation and product manufacturing, such
as distributor managed funds and wrap platforms. Investment funds Industry estimates suggest that, in
continental Europe, commercial banks and insurance companies remain the largest
distributors of investment funds but that their market share in fund
distribution fell from 97% to 75% between 1990 and 2005. In the UK, independent
financial advisors (IFAs) are the main distribution channel. Distribution channels by country, 2007 Source: Lipper
FERI, European Fund Market Data Digest 2007 Structured securities In 2006, banks were the primary
distributors of retail structured securities, with a market share close to 86%.
IFAs and brokers, which can either sell structured products from multiple
issuers or from a single issuer, accounted for 12% of structured product retail
sales in 2006. Distribution channels, EU, 2009 Source: www.structuredretailproducts.com Unit-linked life insurance The available data do not distinguish
between distribution channels for unit-linked life insurance policies, and life
insurance more generally. Financial institutions remain the main distribution
channels, with the exception of the UK and the Netherlands, where brokers and
agents predominate. Life insurance products are also distributed through
networks of insurance company employees. Life insurance (new individual contracts)
distribution channels, EU, 2009 Source: CEA Structured deposits No data are available on distribution
channels for structured deposits. However, it can be reasonably assumed that,
by their nature, structured deposits are distributed by deposit-taking
institutions, i.e. commercial banks. In some Member States, financial advisers
might well propose these as part of their range of products. 6. European
disclosure rules for retail investment products Requirements for different types
PRIPs Investment funds For funds covered by the UCITS Directive a Key
investor information document (KIID) must be provided to the investor before
the conclusion of the contract (s. Annex …). On request, a full prospectus, an
annual report and a half-yearly report have to be provided. Concerning nationally
regulated retail funds, many national laws follow the structure of the UCITS
Directive by requiring a full prospectus and a shorter document (simplified
prospectus/KIID) whereas others require additional disclosure documents. Details
of the KII regime are set out below. Structured securities Structured securities which are to be
offered to the public on a pan-EU basis are subject to the Prospectus Directive
2003/71/EC and hence to the publication of a prospectus. Article 5 states that
the prospectus "shall contain all information which, according to the
particular nature of the issuer and of the securities offered to the public or
admitted to trading on a regulated market, is necessary to enable investors to
make an informed assessment of the assets and liabilities, financial position,
profit and losses, and prospects of the issuer and of any guarantor, and of the
rights attaching to such securities. This information shall be presented in an
easily analysable and comprehensible form". The prospectus shall also
include a summary, which following the amendments of Directive 2010/73/EC shall
"in a concise manner and in non-technical language, provide key
information in the language in which the prospectus was originally drawn up.
The format and content of the summary shall provide in conjunction with the
prospectus appropriate information about the essential elements of the
securities in order to aid investors when considering whether to invest in such
securities." The summary shall be drawn up in a common format in order
to facilitate comparison between different summaries and its content shall contain
key information on the security. Key information here means essential and
appropriately structured information which is to be provided to the investor
and which comprises a short a description of the risks associated with the
issuer, of the risks associated with the investment into the security, the
general terms of the offer and details of the admission to trading. The
prospectus has to contain all the information required by the annexes of the
Prospectus Regulation (Commission Regulation N° 809/2004), depending on the
issuer and the securities offered. The prospectus has to be approved by the
relevant competent authority. Unit-linked life insurance Directive 2009/138/EC (Solvency II),
indicates in a list the information to be provided to the policyholder prior to
the conclusion of the contract. The information will relates to the insurance
undertaking and to the commitment itself. Article 185 of Directive 2009/138/EC
requires that before the life insurance contract is concluded, at least the
information set out in paragraphs 2 to 4 shall be communicated to the policy
holder. As regards unit-linked policies, such information includes the
definition of the units to which the benefits are linked as well as an
indication of the nature of the underlying assets. The Article further requires that · The policy-holder shall be kept informed throughout the term of the
contract of any change concerning certain elements of information mentioned in
Article 185 including information on the underlying assets in case of unit
linked life insurance . · The Member State of the commitment may require assurance
undertakings to furnish information in addition to that listed in Article 185
only if it is necessary for a proper understanding by the policy holder of the
essential elements of the commitment". The required elements of pre- and
post-contractual disclosures "must be provided in a clear and accurate
manner, in writing, in an official language of the Member State of the
commitment". Structured deposits There are no European pre-contractual
disclosure rules applicable to structured term deposits. Details on KII regime for UCITS Purpose of the KII ·
Replacement of the simplified prospectus The requirement
to produce a simplified prospectus in addition to the existing full prospectus
was introduced into the UCITS Directive in 2001 (Directive 2001/107/EC). The
simplified prospectus was to be designed as an investor-friendly tool, a source
of valuable information for average investors, giving key information about
UCITS in a clear, concise and easily understandable way and offered to them
before the conclusion of the contract. It soon appeared that the simplified
prospectus did not fulfil the role it was designed for: it has become as
ineffective and unengaging for investors as the full prospectus due to its
length, structure, and the common use of jargon. In fact, it has been difficult
to distinguish between those two documents. Learning from
this experience, the Commission embarked on a extensive testing exercise with
consumers themselves in order to develop those elements of the disclosure which
could improve the quality and effectiveness of information to be provided to
retail investors. The outcome of the testing exercise was a main point of
reference for the CESR advice on which the new regulatory framework of UCITS IV
(Directive 2009/65/EC) and its implementing measure (Commission Regulation (EU)
no 583/2010) are based. KII has
therefore become one of the documents (others being a prospectus and periodical
reports) which are obligatory for a management company or an investment
company. (this sentence seems not entirely clear to me, language wise, not
contents ) The main
purpose of the KII is to provide investors with appropriate information about
the essential characteristics of the UCITS concerned, so that investors are
reasonably able to understand the nature and the risks of the investment
product that is being offered to them, and, consequently, to take informed
investment decisions (art. 78(2) of Directive 2009/65/EC). ·
Specific contexts Apart from its
main role as a pre-contractual disclosure instrument, the KII has also an
important role with respect to the UCITS product passport (maybe we skip
merger, it is abit too technical, maybe just one sentence, important role with
respect to cross border fund mergers.) UCITS
passport - in order to ensure that investors in all
MS where a given UCITS is marketedreceive the same information, the Directive
provides that the KII, translated as required, forms part of the notification
file and is provided to investors in a Member State where the UCITS is
marketed; Fund mergers – KII of the receiving UCITS (if established in a different Member
State) should be provided, among other documents, by a merging UCITS to its
competent authorities in order to obtain authorisation of the merger. Once a
merger is authorised, KII of the receiving UCITS should be provided to
unit-holders of the merging and receiving UCITS. It should help unit-holders to
take the decision whether to stay invested in a fund or redeem the units of a
UCITS. Main requirements laid down in the level
1 directive ·
Addressees of the requirements: The fund manager
should draw up for each fund it managers; the entity selling should provide the
KII to the client or potential client. ·
Aim of KII: Pre-contractual
obligatory disclosure – it should contain information about the essential
characteristics of the UCITS concerned so that investors are reasonably able to
understand the nature and the risks of the investment and take investment
decisions on an informed basis. ·
Main characteristics of KII: It should be
fair, clear and not misleading, consistent with relevant parts of the
prospectus. ·
Main requirements with regard to the form of a
KII document and its language - short
document, - common format,
information should be presented in a specified sequence allowing for comparison
between different UCITS, - information
presented in a way that is likely to be understood by retail investors, - non-technical
language should be used, - specific,
self-standing document: its essential elements should be comprehensible to the
investors without any reference to other documents. ·
List of essential elements KII should contain in
respect of the UCITS concerned: - identification
of the UCITS, - a short
description of its investment objectives and investment policy, -
past-performance presentation, or, where relevant, performance scenarios, - costs and
associated charges, - risk/reward
profile of the investment including guidance and warnings in relation to the
risks associated with an investment in a given UCITS. ·
Civil liability Was constructed
in a way which supports the restrictive character of the KII underlying the
fact that it should not repeat the information included in the prospectus. The
civil liability was therefore limited to situations where KII is misleading,
inaccurate or inconsistent with the relevant parts of prospectus. ·
Provision of KII and its availability: To investors (in
good time before they subscribe units of UCITS; free of charge, in a durable
medium or by means of a website; in a paper copy on investor's request (also
free of charge)). To competent
authorities of UCITS home Member State. KII should also
be made available on the website of the investment or management company. ·
Revision of KII The essential
elements of KII should be kept up to date. ·
Translation of KII The requirements
relating to the translation of KII apply in a passport situation, which means
where a UCITS authorised in one Member State is marketed in another Member
State. ·
Verification of KII by competent authorities Directive
2009/65/EC does not require UCITS competent authorities to ex-ante approve the
KII. However, Member States have a general obligation (laid down in art. 99 of
Directive 2009/65/EC) to ensure the enforcement of national rules adopted
pursuant to this Directive. Furthermore, the Directive requires Member States
to lay down effective, proportionate and dissuasive measures and penalties
concerning the duty to present KII in a way that is likely to be understood by
retail investors. The obligation
requiring management companies or investment companies to send KII and all
amendments thereto to UCITS competent authorities is to facilitate the
verification of KII by these authorities either ex-ante or ex-post, depending
on their national law or administrative practice. Level 2 requirements supported by level
3 guidelines Directive 2009/65/EC foresees the adoption
of implementing measures related to the detailed and exhaustive content of the
KII as well as specific conditions to be met when providing KII in a durable
medium other than paper. In order to
achieve consistent application of the provisions on KII in all Member States
being a precondition for satisfactory level of comparability of funds, and due
to the technical character of the rules, those measures have been adopted in a
form of a regulation (Commission Regulation (EU) no 583/2010). During the
preparation of the legislative act it became clear that there was a need and expectations
from stakeholders for more precision which would not compromise the
flexibility, possibility to adjust rules to changing market conditions. CESR
responded to these needs by adopting several guidelines. This is a bit unclear.
Some of them contain detailed elements for the underlying methodologies so that
information in KII document can be truly comparable across the whole fund
universe. The table
below reflects main elements covered by the regulation and supporting
guidelines Level 1 principles || Level 2 rules || CESR guidelines Requirements relating to the form and language of KII document || - content exhaustive; - specification of the the title of the document, the order of contents and sections' headings; - requirements in relation to: · language that should be used (e.g. avoidance of jargon or technical terms), · use of colours and branding, · document size: no more than two pages of A-4 sized paper. - details on the use of cross-references to other sources of information . || CESR's guide to clear language and layout for the KII document. CESR's template for the KII document. Essential elements of KII || Specification of all elements of KII listed in level 1 directive. In particular: risk and reward profile of the fund should contain a synthetic indicator supplemented by narrative descriptions of the indicators and those categories of risks which are material for a given UCITS but not adequately captured by an indicator. charges should be presented in a certain form (a table annexed to the Regulation) and what sort of information it should contain. || CESR guidelines on the methodology for the calculation of the synthetic risk and reward indicator in the KII document. CESR guidelines on the methodology for calculation of the ongoing charges figure in the KII document. Revision of KII || clarification on the review of the KII and the situations which trigger the publication of the revised version of KII Document. || Exceptions to main rules – specific situations || specific requirements (complimentary to or different than those laid down for UCITS in general) for specific UCITS structures: - an investment compartment of UCITS; - one class of units or shares; - a fund of funds - a feeder UCITS - structured UCITS || CESR guidelines on selection and presentation of performance scenarios in the KII document for structured UCITS. Provision of KII || conditions which should apply when KII Document is provided in a durable medium other than paper or by means of a website. || To aid visualisation of this regime in
practice, CESR prepared a 'template KIID'. This can be found at http://www.cesr.eu/index.php?docid=7336. 7. Member State approaches to the
regulation of retail investment products Many Member States have supplemented the
provisions of European directives with additional provisions within their own
jurisdictions. This section provides examples from four Member States, which
are included for illustrative purposes only. United Kingdom: At the time of the implementation of MiFID, the UK introduced a
new Conduct of Business sourcebook[68]under
which many MiFID provisions, particularly on conduct of business and conflicts
of interest were applied to non-scope business, e.g. certain life insurance
products. In this context also the need to prepare a Key Features Document
(KFD) and a Key Features Illustration (KFI) for "packaged products"
was introduced. A Key features document has to include
information which enables retail clients to make an informed decision about their
investment. Firms which sell such products to
retail clients have to provide these documents to their clients in good time
before conclusion of the contract. In Italy, the amended Consolidated
Law on Financial Intermediation[69]
adopted a homogeneous approach for both product disclosure and rules on conduct
of business. Any public offering of securities, investment funds (both UCITS
and non-UCITS) or "financial products issued by banks or insurance
undertakings" is subject to the same rules concerning the prospectus
as well as to the supervision of the CONSOB. Moreover, Italy introduced
transparency requirements for supplementary pension schemes, providing
investors with pre-contractual and contractual information similar to that
required for retail investment funds. In Portugal, the Decree-Law No. 357-A/2007 of 31 October 2007 (as subsequently amended) which transposes MiFID
into national law transferred the powers of supervision and rulemaking on
assurances linked to investment funds and the individual subscription contract
to open-end pension funds, from the Portuguese Insurance Institute (ISP) to the
Portuguese Securities Commission (CMVM) with regard to the conduct of business
rules for distribution. In this context, the CMVM supplemented the existing
requirements for unit-linked insurance contracts and open-ended pension funds
with some relevant MiFID provisions. In addition, the CMVM Regulation nº 8/2007[70]
supplemented the existing requirements for these two types of products with
disclosure requirements following the UCITS model. More recently and alongside
these requirements, CMVM Regulation No. 1/2009[71] introduced an information
document on complex financial products. Such document needs to be presented in
a language which is clear, concise and easily understandable language for the
investor. In Germany, it is foreseen to
introduce a product information sheet for all financial products under MiFID
which is to be provided to the investor by the distributor in case of advised
sales. Such changes shall enter into force by summer 2011. [72] The document shall be short and understandable for retail
investors. Its model has been inspired by the information sheet which
accompanies medicines distributed by pharmacies ("Beipackzettel"). 8. Evidence
on issues for retail clients from 2008 Call for Evidence Unit-linked
life insurance policies Many responses to the Call for Evidence on
unit-linked life insurance policies highlighted deficiencies with regard to the
disclosure of likely performance and of the costs associated with this type of
investment. The response from the insurance supervisors
in CEIOPS highlighted the disclosure of 'chain costs' as a particular problem
(the use of insurance 'wrappers' entails the addition of costs both at the
level of the insurance company and the originator of the underlying
investment). More broadly, the Dutch AFM and other
regulators have reported that differences in regulation between life insurance
products and mutual funds have caused significant problems. They argue that
transparency of costs and inducements is not achieved in the insurance sector
solely on the basis of EU requirements, so to the extent that the EU
requirements set the standard of disclosures, prospective investors are unable
to weigh these factors up against other features that might be highlighted,
such as the tax advantages of the product. This is considered to have resulted
in the sale of insurance products even where mutual fund investments offering
similar asset exposures with lower charges might have offered better
risk-adjusted performance. A recent example of such a potential
distortion in sales is the alleged misselling of equity-linked insurance
products in the Netherlands, which resulted in a class action lawsuit. The
complaint was that there was insufficient disclosure of the costs associated
with those policies, leading to investment returns that were significantly
lower than investors had been led to expect and penalties on early withdrawal
that were not expected. Following intervention by the Dutch Insurance Ombudsman
and its replacement, the Financial Services Ombudsman, out of court settlements
were reached with certain distributors of such products.[73] There are other examples. For instance, a
Belgian consumer association has warned that rules for advertising on
unit-linked life insurance in Belgium do not specify how information on past
returns should be presented so as to avoid misleading prospective investors.[74] The association encountered an insurance
company advertising a unit-linked life contract by referring to the return
achieved in 2006, without mentioning the return earned in 2007, which was
considerably weaker. The same association is currently suing an insurance
company for misleading advertising. In particular, the company is considered to
have given undue prominence in its marketing material to the return on only one
of the funds underlying the insurance policy (the best performing fund), rather
than the basket of funds in which client's assets were invested. Investment funds Consultation on possible amendments to the
UCITS Directive revealed that most respondents felt that the Simplified
Prospectus (a shorter summary document required for all UCITS since 2005) had
failed to provide key information in a form that was easily understood by the
average retail investor.[75] (This finding triggered the work on developing Key Investor
Information.) Respondents to the Call for Evidence reported similar problems
for non-harmonised funds and closed-ended funds. In France, the Final Court of Appeal
recently sanctioned a commercial bank over failure of compliance with the
combination of rules on product disclosure and marketing communications. The
Court found that the firm did not mention in its advertisement the downside
risk that a formula (structured) fund presented.[76] Problems with formula funds were also
noted elsewhere in the French market. In Belgium, a consumer association recently
criticised an advertising campaign for a structured fund distributed by a
Belgian commercial bank.[77] It is claimed that adverts placed undue emphasis on a
guaranteed rate of return, without a clear indication that this return would
only be achieved on half of the capital invested. The Dutch AFM have reported that the
mandatory information provided in the prospectus for closed-ended real estate
funds is not well-tailored to this type of investment, which is growing in
popularity in the Netherlands. The result is that investors cannot understand
the expected return, the costs and most importantly the level and nature of the
risks involved in these investments. In Germany, a number of legal proceedings
have highlighted problems of mis-selling, unfair marketing, and misleading or
inaccurate product information with respect to closed-ended funds. In the United Kingdom, the FSA have
recently published an assessment of the standards of disclosure documents
across the whole range of retail investment products, which found many to be
inadequate and unlikely to be understandable for their target audience.[78] Retail
structured securities Many stakeholders have argued that
structured product disclosures do not adequately describe the costs associated
with the product or the likely range of performance outcomes. Prospectuses
produced in accordance with the Prospectus Directive – including the summary
prospectus - were not considered to be effective disclosures for structured
securities, since they focus on the issuer rather than the product and are both
lengthy and technical. (Separate work is now underway to further develop
requirements on the summary prospectus). The European Securities Markets Expert
Group, in their review of the functioning of the Prospectus Directive, found
that '"[...] from the point of view of the investors, the Prospectus
Directive has failed to produce an effective means of communication. For
example, the average length of prospectuses has increased dramatically due to
the requirement for additional information. The length and complexity of
prospectuses make them more a sort of 'liability shield' for the
persons involved in the preparation (issuers, intermediaries, auditors,
law firms and competent authorities), effective ex post in minimizing the risk
of potential litigation, rather than a document to be used ex ante by an
investor when making investment decisions." They added that "many
investors have difficulties in understanding the technical language and the
complex structure of information as well as analyzing the importance of various
types of information. As a consequence, most retail investors rely only on the
marketing material prepared in connection with a public offering. The summary
is often a simple “cut and paste” exercise of various parts of the prospectus
without any attempt to simplify the language of such parts (often very
technical) as required by the Prospectus Directive."[79] Obligations in
the Prospectus Directive are supplemented by additional disclosure requirements
on intermediaries in MiFID, which relate primarily to the services provided by
the intermediary but also to the financial instruments they may be selling.
However, many stakeholders argued that these provisions are subject to
inconsistent implementation in Member States and do not go far enough in
ensuring that the relevant items are clearly disclosed. In a cross-country survey, Deloitte found
that 'material differences exist between investment funds and structured
notes in the nature and level of detail of information disclosed to the
investors … this is clearly the case for characteristics, risks and costs.
These differences make it difficult or even impossible for investors to compare
in detail all characteristics of the products. The differences also result in a
different quality of information given to investors.' The Dutch AFM published an analysis of
developments on the market for structured products in May 2007, arguing that many
are difficult for retail investors to understand. These developments
constituted grounds for an 'exploratory analysis of structured products',[80] which concluded that …' the information
provided to investors is not as it should be. Prospectuses do not focus
sufficiently on the information that consumers need to make well-considered
investment decisions. In addition, the legal entity chosen for the products
means that financial information leaflets are not obligatory … The AFM feels
investors may select an unsuitable product, which will jeopardise the proper
operation of the market and, if investors are disappointed in their choices,
the confidence in the market'. In another example of the issues being
raised, the Czech National Bank has expressed concerns in relation to an index-linked
bond, the yield of which is based on a specific underlying asset (for example
the performance of an index or an exchange rate). The product was sold as a
'guaranteed bond', while it in fact presented a significantly higher risk than
standard guaranteed bonds. In the United Kingdom, the FSA has fined or
some cases banned a number of product manufacturers and intermediaries in
relation to sales and marketing of certain kinds of complex 'high income
products', typically known as precipice bonds.[81] The FSA had previously issued a series of
warnings in relation to the products, such as an alert in December 1999 which
urged consumers to consider carefully the level of risk they were willing to
accept before investing in so-called high income products; the FSA reiterated
in later communications that consumers should be cautious when investing in
bonds that promise income but carry a high risk that investors may not receive
back all, or any, of their original investment, and required regulated firms to
improve the information they provided to consumers..[82] Structured
deposits Many responses to
the Call for Evidence noted that there were no European rules that applied to
structured term deposits as a class of product. (In this area, no specific
targeted examples of investor detriment were provided.) The Joint Forum
reiterated the point, and noted that there are retail investment products (such
as structured term deposits) that are not subject to disclosure
regulation at EU level. Noting that similar lacunae existed in other
jurisdictions, they suggested that 'this is [an issue] that governments
should consider'.[83] There is evidence that some of same issues
as are raised for other classes of PRIP apply. For instance, in Poland in the
first half of 2008, the Polish Financial Supervision Authority (PFSA) ordered
some banks to withdraw advertisements of structured term deposits due to the
violation of professional standards and ethical codes in operation. The PFSA
was concerned that these placed excessive emphasis on a product’s benefits for
the customer and deliberately omitted other important product characteristics,
e.g. penalties for early withdrawal of funds. 9. Nature
of product disclosures and their relationship with the sales process This impact assessment is focused on
assessing regulatory failings related to the effectiveness of product
disclosures in aiding retail investment decision-making. It may be useful
however to better clarify what product disclosures cover and how product
disclosures might relate to other regulatory disclosures aimed at retail customers. Perhaps the best way of tackling this is to
examine the broad process by which an investor makes a purchase of an
investment product, so that the different kinds of information (and sources of
that information) involved can be clearly identified. Many sales of investment products are
accompanied by advice. A retail customer enters a branch of a high street bank,
for example, and makes an appointment to see and advisor. At that appointment
or prior to it, the advisor will typically provide the customer with
information about the service of advice that is being proposed: about who the
advisor is, and such matters as what the scope of the advice will be, who the
advisor works for, and possibly how the advisor is remunerated for the advice
or whether there are any fees that the customer will have to pay to get the
advice. These might be described as 'sales disclosures'. They will include,
where necessary, information about inducements. Once the customer agrees to engage in this
advised sales process, the advisor will typically gather information from the
customer about the customer – for instance about their financial situation and
knowledge and experience of financial matters, about their investment needs,
and about their attitude to risk and capacity to take on risk. As part of this
process the advisor may well provide the customer with general information
about investments, types of product, different kinds of assets and the risks
associated with them. (It may very often be the case that the
retail customer enters a branch of his bank, with he already has a contract for
the provision of services. In this case, the advisor will build on existing
information concerning the client that has resulted from the client's earlier
dealings with the bank, and/or advisor.) Under these two different scenarios, the
advisor would typically make a recommendation or (more normally
recommendations) to the customer as to possible suitable investment products.
At this point the customer will (perhaps after a period of reflection) be
required to make or agree on a choice as to where to put their money. Following their choice, further information
will typically be provided to the customer, such as a contract note or
contractual document relating to investment, information about the actual price
paid for the investment. Specific information may also be provided at this
point confirming the scale of payments the advisor may receive from the product
manufacturer in relation to the transaction. In broad terms these stages of a purchase
can be outlined as in the following diagram. The policy options to be addressed in this
impact assessment do not relate to all of the kinds of disclosure covered in
this diagram: the focus is information about specific products, and the
role this can have in improving investors' decision-making (i.e. information
provided before a decision has been taken). Given sales persons are obliged to know and
understand the products they sell to clients, and to explain the key features
of these to clients, such information may serve two purposes. Firstly, since
products are often produced by different entities to the distributor who is
selling them, the distributor may find it most effective to rely on the
information prepared by product manufacturers to explain the features of the
products. (Typically, the person producing the product will be best suited to
explaining the product – so it makes sense to require that person (the product
manufacturer) to prepare information for others about the product). Secondly,
the information serves the purpose of providing the retail investor themselves
with key facts about products in a form they can use, e.g. to compare between
products. 10. The
Lamfalussy process The regulatory structure of the so-called
Lamfalussy process was initiated by the Stockholm European Council Resolution
of 23 March 2001 on “more effective securities market regulation”. The
Lamfalussy process is based around the four‑level regulatory approach
recommended by the Committee of Wise Men on the Regulation of European
Securities Markets, chaired by Baron Alexandre Lamfalussy.[84] The Lamfalussy process was designed to make
Community legislation on securities markets more flexible, so that it can be
agreed and adapted more quickly in response to innovation and technological
change in financial markets; to allow the Institutions to benefit from the
technical and regulatory expertise of European securities regulators and from
better involvement of external stakeholders; and to focus more on even
implementation and enforcement of Community law in the Member States. One of the key innovations of the
Lamfalussy process was the creation of two Committees to advise the Commission
on Level 2 implementing measures – the European Securities Committee (ESC)
representing the Member States and functioning as a so‑called ‘regulatory
committee’ under the Comitology arrangements[85] –
and the Committee of European Securities Regulators (CESR). The two
Committees were set up by Decisions of the Commission on 6 June 2001.[86] Till 1 March 2011 the ESC acted in its capacity as a regulatory
committee, assisting the Commission in the exercise of its delegated executive
powers, within the terms defined in the Directives adopted at Level 1. After
this date, on the basis of the new 'comitology' rules the ESC will act as an
Advisory procedure committee or Examination procedure committee if an examined
draft act will be of general scope.[87] Transparency
is another important feature of the process. The Lamfalussy process has
established a rigorous mechanism whereby the Commission seeks, ex‑ante,
the views of market participants and end‑users (companies, investors and
consumers) by way of early, broad and systematic consultation, with particular
regard to Level 1 proposals, but also at Level 2. The Lamfalussy regulatory approach has been
impacted recently by the new European supervisory architecture in financial
services; this has notably replaced the Committee of European Securities
Regulators (CESR) with a new authority (the European Securities and Markets
Authority, ESMA). The other two sectoral authorities are also for relevance for
PRIPs, given the cross-sectoral nature of the initiative -- the European
Banking Authority (EBA) and the European Insurance and Occupational Pensions
Authority (EIOPA). ANNEX II 1. Detailed
analysis of options 1.1. ISSUE
1: What should the scope of any new regime be? Scope relates directly to all operational
objectives. Targeting a reduced regulatory patchwork and improved comparability
and comprehensibility depends on drawing into scope all the products that
compete with one another as investments and might readily have the same
standardised approach applied to them. Scope directly interacts with the identified
problems of an unlevel playing field, and to a degree single market barriers.
These issues also relate to the possibility of 'regulatory arbitrage'. If the
scope of the new regime is set too narrow, then products on the ‘inside’ might
be put at a disadvantage to products on the ‘outside’ (in so far as they are
substitutable). Products in the 'outside' might be able to present themselves
as more attractive or competitive than those on the 'inside', since information
on the products on the 'outside' could be less comparable or comprehensible.
This could lead to market distortions, and regulatory arbitrage on the part of
product originators and distributors. This issue was highlighted already in the
Communication on PRIPs, and the impact assessment that accompanied it. Failing
to adequately address this issue could undermine the whole initiative. The key question to face in addressing scope
is whether to seek to demarcate the scope of the work to focus on so-called
'packaged' products (options 2 and 3), or whether to wide the work to cover all
kinds of possible investments (option 1). (The definition of 'packaged
products' was developed initially in the Communication, and refined
subsequently following consultation; see Annex I.3 for detail on this
definition, which would be used as a basis for options 2 and 3.) Options for scope of regime 1 || Set the widest possible scope 2 || Focus on 'packaged' products 3 || Focus on 'packaged' products; set firm date for reviewing scope Analysis of options Setting the scope of the regime as wide as
under option 1 could have practical consequences related to steps on improving
comparability and comprehensibility and improving consistency of regulation,
since it would mean including in the scope of the regime potential types of
investments that would be difficult to incorporate into a single approach on
disclosure (such as 'plain vanilla' equities, bonds, and deposits). In terms of
consistency of regulation, a very wide regime would interact with a wider range
of other existing legislation, and would duplicate requirements; MiFID already,
for instance, places general disclosure requirements in regards financial
instruments as such on all entities caught by MiFID. This is in a context where, as the problem
definition outlines, key issues for investors appear to have emerged mostly in
relation to more complex 'packaged' retail investment products rather than
investments in general, and where existing regulatory interventions (which have
generated the problem of a regulatory patchwork) have concentrated more on
these 'packaged' products than investments in general. Packaging can be
understood generally as the introduction of an indirectness or mediation in the
investment, whereby a product is manufactured or engineered in some manner;
financial services professionals 'mediate' between the investor and the
ultimate assets the investment is exposed to. The PRIPs
Communication and subsequent 3L3 report on PRIPs both came to broadly the same
conclusion that a focus on 'packaged' products rather than investments in
general was sensible. Indeed, from the retail investor's
standpoint the financial engineering that characterises packaged products
raises specific challenges for comprehension and comparison which justify the
development of targeted product disclosure measures. For instance, packaging
typically introduces complexity in terms of how investments function, and may
entail more complex risk and cost profiles which are harder to understand and
compare between products. Consultation responses In general terms respondents to the PRIPs
consultation supported a focus on 'packaged' investments, as offered under
option 2, though there were a number of divergences over technical questions
relating to how best to define in technical terms the boundary between packaged
and non-packaged investments. A number of respondents, including consumer
representatives, considered that a wider scope might be advisable, e.g. to
include deposits, bonds and shares in individual companies, but nonetheless
recognised that the complexity of structure of packaged products warranted
specific regulatory attention. Regardless of this general support for
focusing in on 'packaged' investments, a number of respondents expressed
concerns over how best to define the concept of 'packaged' investments. Assessment of costs and benefits of
options It is not clear that option 1 could
effectively avoid issues related to regulatory arbitrage, since standardised
and detailed requirements on product information (e.g. relating to costs, risks
and product features) are likely only to be relevant for packaged products, so
that the application of requirements to these packaged products would still
entail drawing distinctions between types of investment product, with a
potential for arbitrage around these distinctions. If an approach was adopted that did not
develop standardised and detailed requirements on disclosure, but was higher
level in form to account for the wide range of possible investments in scope,
this would reduce the extent to which the new regime could address
comparability and comprehensibility objectives or level playing field
objectives in regards different products, undermining the ability to deliver
benefits. On this basis it is not clear that option 1 would better address
regulatory arbitrage challenges, while it could either lead to a dilution of
the effectiveness of changes or additional uncertainty or duplication in
requirements, and associated costs for industry. It needs to be recognised that however the
boundary is determined between 'packaged' and 'non-packaged' investments, there
is always the risk that it will be diluted in practice. It will always be
possible to develop an investment proposition which is economically similar or
the same as the one captured by the defined scope but which falls nevertheless
outside the defined boundaries or sits at least at the edges of that scope.
This is also due to financial innovation: market developments could well lead
to new types of product not foreseen by the original definition. Such
developments could distort competition, undermining firms that operate 'within'
the packaged definition compared to those 'outside. In view of these difficulties but taking into account that there is
broad support for a specific focus on 'packaged investments', and also given
the concern that regulatory arbitrage may in the future lead to market
distortions where the scope is not determined appropriately, a two phase
approach seems advisable (option 3). Under this approach, the scope of products
falling within the disclosure regime would initially be focused on 'packaged'
investments which will be clearly defined in the legal act on disclosure.[88] However, a commitment would be
made to gather baseline and market evolution data so that the impact of the new
regime might be assessed, and in particular so that possible evolutions in the
market towards non-PRIPs could be identified. This data would be used at a set
future review date (say, after the regime had been in place sufficiently long
for market reactions to become clear, at most 5 years) to consider whether the
scope of the regime might be widened. The data gathered in this way might also
be used to identify further the extent to which certain savings and investment
products. Given the potential for developments in the
retail investment markets, commitments to monitor and review the boundaries of
the regime would be prudent. This monitoring should clearly address, in the
light of market evolution data, whether widening the scope of the regime would
be appropriate. All options would need to be supported by
strong supervisory coordination, to ensure consistency in application across
Member States. On the grounds that it combines a
practical focus on the key products where comparability of disclosures makes
most sense, with a commitment to consider widening this scope in the future,
option 3 is retained. Option || Effectiveness || Efficiency Comprehension || Comparison || Regulatory Patchwork 0 – Take no action || 0 || 0 || 0 || 0 1 -- Set the widest possible scope || + Effective approach would still require boundary to be drawn between 'packaged' and 'non-packaged' products; wider scope could allow for overall better coherence. || + Effective approach would still require boundary to be drawn between 'packaged' and 'non-packaged' products; wider scope could allow for overall better coherence. || + Existing unlevel playing field is practically focused on 'packaged' products, but wider focus || Depending on approach, costs for industry may be comparable to focus on packaged regime, but marginally greater due to wider impact. Benefits for consumers depend on extent to which regime still segments between packaged and non-packaged products; effectively challenge of demarcation of products cannot be avoided. 2 -- Focus on 'packaged' products || + Key benefits relate to packaged products, so only likely to be marginally less effective than 1. (May be more effective in practice due to more focused approach.) || + Key benefits relate to packaged products, so only likely to be marginally less effective than 1. (May be more effective in practice due to more focused approach.) || + Existing unlevel playing field is practically focused on 'packaged' products || Costs likely to be lower than for 1, as impact targeted on those products that are most relevant, and option 1 would likely still need to demarcate in measures between packaged and non-packaged investments. Core benefits achieved in relation to packaged products, so likely to be equivalent to option 1 3 – Focus on packaged products, but set firm review date (e.g. within 5 years of coming into force) || ++ Key benefits relate to packaged products, so only likely to be marginally less effective than 1. (May be more effective in practice due to more focused approach.) Review of scope allows possible future arbitrage and consumer detriment to be addressed || ++ Key benefits relate to packaged products, so only likely to be marginally less effective than 1. (May be more effective in practice due to more focused approach.) Review of scope allows possible future arbitrage and consumer detriment to be addressed || ++ Existing unlevel playing field is practically focused on 'packaged' products Review of scope allows possible future arbitrage and unlevel playing field issues to be addressed || Costs likely to be lower than for 1, as impact targeted on those products that are most relevant, and option 1 would likely still need to demarcate in measures between packaged and non-packaged investments. Core benefits achieved in relation to packaged products, so likely to be equivalent to option 1. Review mechanisms allows for possible regulatory arbitrage, countering possible weakness with option 2 1.2. ISSUE
2: How far and in what ways should disclosures be standardised at EU level? The PRIPs Communication IA made the case for
steps at the EU level to address regulatory inconsistencies and raise levels of
consumer protection. It did not however address detailed options for the
content and form of legislative changes, though it identified the UCITS KIID as
a clear benchmark for future work. In considering the content and form of
legislative changes, the overarching question that needs to be addressed is the
extent to which the UCITS KIID model might be applied to other PRIPs. At heart this is a question of
standardisation: the UCITS KIID is strongly standardised, through highly
prescriptive rules. Every document should look (relatively) similar for all
UCITS, and across all Member States, with variations only due to translations
and some residual flexibility over form and content. UCITS cannot add
information to the document not allowed for in the UCITS KII regulation.
Neither can Member States require additional information to be included. However, the UCITS are 'harmonised' products
– a European framework exists that defines how UCITS operate, the risks they
can expose investors to and how to manage these risks, how they be valued and
how often, and so forth. Other PRIPs are not harmonised in this way: PRIPs can
vary significantly in their legal form and particular features, though they
share a common focus on serving investment. A standardised approach that
follows the level of standardisation developed for UCITS is therefore
impossible for other PRIPs. (Note that a distinction might be drawn
between prescriptiveness (the use of requirements which set out in great
detail the content and form of disclosures, e.g. including specific phrases,
warnings or titles, the order of information, the visual presentation) and consistency
(the extent to which requirements are the same across different product
types, sales channels or Member States).[89] These
are two linked dimensions of 'standardisation': to achieve certain kinds of
consistency in approach prescription is likely necessary.) The broad issue of standardisation will be
addressed by exploring detailed options for tackling the operational objectives
of improving the comprehensibility of information and the comparability of
information, as derived from the problem analysis for problem driver 3, to see
to what extent standardisation or prescription is appropriate across these
different areas. We will then draw together the analysis, to
consider consultation responses and costs and benefits overall, and the
effectiveness of the proposed approach in addressing our other operational
objectives. Options on degree of standardisation Plain language, engaging quality of document [Options 1 and 2 are mutually exclusive] 1 || Apply high-level principles only 2 || Prescriptive rules to standardise elements of language, ‘look and feel’ of document 3 || Use of non-legislative tools 4 || Clarify liability attached to document Length of document [Option 3 is not mutually excusive with 1 and 2] 1 || Set a ‘hard’ limit on the length of all documents (e.g. 2 pages A4) 2 || Set a ‘soft’ limit on length; prescribe contents and length where viable at level 2 3 || Use layering of information / signposting to other documents Accuracy, balance of information [Options are mutually exclusive] 1 || Set high-level principles only 2 || Use prescriptive requirements on form and contents to ensure balanced presentation Comparisons of product features, risks, costs [Options are not mutually exclusive] 1 || Seek consistent structure, layout to aid comparisons 2 || Standardised risk, cost, and performance disclosures for all PRIPs Improving comprehension In our problem definition we identified a
number of specific problem areas relating in general to the 'comprehensibility'
of product disclosures: financial services concepts and jargon
used in documents are opaque, difficult for average
investors to understand and unfamiliar; documents are very
often too long, or suffer from 'information overload'; presentation
of the documents can often be dull, confusing or unengaging; and,
finally, information provided may be partial or misleading. To address these areas, policy options can be
broken down under three headings: · improving use of plain language and making information more engaging;
· addressing information overload; and, · ensuring accuracy and balance of information. Improving use of plain language and encouraging more engaging
documents Financial services legislation typically requires communications
with clients to be undertaken in a clear, understandable and comprehensible
manner. However, prepared communication documents, including those related to
product information, often fail to be clear, understandable or comprehensible. Four options emerge: apply high-level principles only; to use more
prescription to set out common standards in more detail; to use non-legislative
tools (improved supervision, self-regulation by industry to improve consistency
in use of 'plain language'); and finally, to clarify liability attached to
documents (so as to reduce firms' focus on including fine print so as to reduce
exposure to liability). Option || Effectiveness || Efficiency 0 – Take no action || 0 || 0 1 – Apply high-level principles only || - Experience with UCITS simplified prospectus showed that high-level requirements were not sufficiently effective in ensuring comprehensible information in documents. Ensuring firms, supervisors approach standards in consistent way would be difficult to achieve, leading to inconsistencies in outcomes. || Effective engagement by supervisors with firms could be costly / inconsistent, given lack of guidance in a high-level approach. Some lack of legal clarity for firms as to necessary standards; inconsistencies cross-border would erect barriers to single market. Flexibility may be valuable for allowing innovation in terms of communication practices. 2 – Increased prescription || + + Experience with developing UCITS KII requirements is that higher standardisation allows for setting better 'minimum standard' for all, so that best practices can be more immediately reflected into generalised industry practice. Greater consistency in approach across all markets / sectors. || Consistency and better clarity could lead to reduced costs for firms and supervisors. Benefits for investors through wider adoption of better practices enshrined in binding EU level requirements. May be seen as a 'tick-box' approach by firms, or a regulatory 'safe harbour' if they follow the letter but not the spirit of the rules. 3 – Use of non-legislative tools || ++ Can support 2, e.g. national regulators, firm trade bodies, consumer associations may be best placed to develop practical guidelines on better language, common glossaries, will better address continued scope for poor language. || Costs expected for developing and improve industry practices, but benefits for consumers from better addressing possible weaknesses Allows flexibility for allowing innovation in terms of communication practices Can overcome tick-box approach possible under 2 on its own 4 – Clarify liability attached to document || + UCITS experience was that success (shortness, clarity of language) of document requires some comfort for firms that they may focus only on 'key' information and not include all possibly relevant information. || Lack of clarity could undermine document, as firms' concerns over liability lead to inclusion of all possibly relevant information, rather than sole focus on key information. The experience under UCITS with regards the
failure of the simplified prospectus was that a combination of prescription and
standardisation (to set out in more detail expectations as to a minimum
standard of language, common labels and warnings to use), with the use of
non-legislative tools (self-regulation by industry, work with supervisors), is
most likely to effectively address the challenge of raising the quality of
'plain language' in product disclosures. Certainly, full prescription is not
possible (particularly for non-harmonised products), so option 3 is an
important element of the preferred approach. In relation to liability, please see the
discussion under issue 5 below. For UCITS it was clear that a focus on only
'key' information was vital if the failure of the simplified prospectus was to
be avoided. This issue is also linked to options below related to information
overload. Addressing information overload One of the issues most often raised by consumer representative
stakeholders is the problem of 'too much information' in financial services
documentation. To address this issue, the UCITS KII is limited in most
instances to only two sides of A4 paper. The document was also developed to
focus only on key information. (The requirements on the content of the KII are
also extremely prescriptive, so that firms do not have the flexibility to
include any other information they might wish to include). Option || Effectiveness || Efficiency 0 – Take no action || 0 || 0 1 – Set a hard limit on the length (and content) of all documents (e.g. 2 pages A4) || +/- For UCITS a hard limit on the document could be readily considered because UCITS are harmonised across the EU. With other PRIPs which are not harmonised, the product features or benefits may not be always covered in 2 pages (even for UCITS this is not always possible; structured UCITS are provided with a derogation from the 2 page limit). Given this, enforcing a 2 page limit could lead to documents that do not cover all information clearly or comprehensibly. Setting a hard limit may be an effective tool for ensuring firms write in a concise manner: evidence suggests longer documents may not be read. || Simple requirement straightforward for competent authorities to supervise: consistency in approach. 2 – Set a soft limit on length: prescribe contents and length where viable at level 2 || + In practice may be similar (due to impact of prescription on content) to option 1, but flexibility may allow for better tailoring of requirements to specificities of non-harmonised products. || Varied requirements lead to inconsistencies in approach between supervisors and firms. 3 – Use layering of information / signposting to other documents || + Layering may be useful for targeting key information and more detailed information appropriately. Layering might undermine extent to which KIID must is capable of being used 'stand alone' (i.e. on its own) to make an investment decision – ensuring this does not happen raises risks for supervisors || Use of 'layering' or 'signposting' may require more careful supervision and assessments of compliance raising some costs,, however may allow same documents to better target range of different investors needs. Under this analysis, prescriptive
requirements on content and strong requirements on length, appear most
effective in addressing 'too much information,' in that these approaches
clearly control the amount and nature of information that can be included.
However, an overall hard prescription on length would appear impractical for
non-harmonised products (too little flexibility could lead to documents that
are paradoxically too dense and difficult to use). This approach can be
supported by permitting the use of signposting (cross-references to other
documents) or layering of information, so long as the KIID itself remains
functional as a 'stand alone' document. Ensuring accuracy and balance of
information The UCITS KIID requirements strongly determine how certain
information – e.g. on costs or on performance – is presented, in order to
minimise possible ways in which information can be subtly presented in an
unbalanced way. For instance, the relative positioning of information in a
document can influence perceptions of its salience by retail investors.
(Putting charges information at the end of a document implies, for instance,
that this information is of lower importance.) Option || Effectiveness || Efficiency 0 – Take no action || 0 || 0 1 – set high-level principles only || - While in general the principle of being 'not misleading' covers such issues as a lack of balance in information or inaccuracy in information, without more detailed requirements inconsistencies between firms and between Member States would emerge, reducing comprehensibility of information for customers It is likely, given difficulties in enforcing principles, that presentation of information could be 'gamed' (enabling subtle investor biases to be exploited) || Could raise supervisory costs, given potential subjectivity of standards Inconsistencies in approach between supervisors or lack of legal certainty might raise compliance costs for some firms, and negatively impact consumer benefits 2 – use prescriptive requirements on form and contents to ensure balanced presentation || + Reduced misunderstandings by investors: YouGov and IFF testing of KII proposals for UCITS suggested that precise positioning of information (e.g. putting cost information on front page, performance on back page) can be material in impacting consumer comprehension of relative importance of messages; specifying these in prescriptive rules could lead to higher minimum standards across all PRIPs || Consistency in approach could reduce some supervisory costs Legal certainty for firms Under this broad analysis, steps on
responsibilities and liabilities might be supported also by the use of detailed
prescription to ensure a strong minimum standard of balance in documents. In
addition, details on keeping documents up to date. Comparability Comparability of information has two elements:
· the general layout of information in a document facilitates
effective comparisons: documents laid out in similar ways are easier to compare; · comparisons of particular features of products require consistent
approaches both to the layout and presentation of information about those
features, but also to the calculation of information, such as quantitative
data. The notable examples of areas where such comparisons are or may be
possible are the risks of the product, the costs of the product, its
performance (whether in the past, or possible performance as projected into the
future), and on guarantees or capital protection. The UCITS KII was designed specifically to
improve comparability between funds on risk information, cost information and
performance information; the YouGov and IFF study goes into detail as to the
various options and approaches that were tested; in general terms that research
concluded in favour of a structured approach to the presentation of information
in these areas. (The focus of the research was on the presentation of
information; CESR members worked separately to develop detailed methodologies
to ensure consistency in underlying data so that comparisons between UCITS on
the basis of risk and cost data in the KII could be made without being
misleading). At this stage (i.e. in relation to level 1
measures) the key question to address in this area is not so much the detailed
application of methodologies for comparisons, but the principle of the
techniques to be followed for pursuing comparability. (Note that we do not analyse other options
than standardisation in relation to comparability, as from the wider context it
is not clear what viable options might emerge: it might be possible to address
comparability using different tools, such as websites designed to allow
comparisons of costs or risks, but such options are not within the scope of
this impact assessment). Option || Effectiveness || Efficiency 0 – Take no action || 0 || 0 1 – Prescribe consistent document structure to aid comparisons || + Consistency in structure will benefit investors in comparing between products, potentially improving comprehension and confidence in using information. Consistency in structure may run the risk of taking a ‘one-size-fits-all’ approach that reduces effective communication of specific features of some products – care must be taken to test approach to ensure effectiveness for consumers. || Consistency may reduce some aspects of compliance costs (through simplicity) and supervision costs, though likely to be marginal in impact on costs Benefits for investors, better decision making 2 – Standardise risk, cost and performance disclosures || + + Comparable disclosures crucial to informed decision making: improving capacity of investors to compare risks, performance and costs is fundamental to this initiative. Choice and technical development of information capable of guiding comparisons (including calculation of numbers where quantitative information is provided) must be very careful undertaken. Presentation also needs to be tested with investors. Improving comparability of disclosures may impact competition between providers, sectors NOTE: improving comparability of information may entail public policy choices: identification of the elements of investment products that are most salient for retail investors and which elements should be highlighted likely to have impact on consumer behaviour (e.g. question of relative balance between risks, costs, benefits). || Comparators should lead to better decision making, broader market efficiency benefits Costs may be material for providers if new methodologies for calculation are unfamiliar or require new resources to be developed/obtained Comparators may aid distributors and advisors in making personal recommendations or assessing the suitability of different products for retail investors The key issues relating to options on how to
enhance comparability in product disclosures relate not so much to the use of
standardisation (which is intrinsic to this objective), but to technical
details on the application of standardisation to particular types of PRIPs.
These technical issues will be assessed as part of follow up work on detailed
implementing measures to support the overall PRIPs framework. General assessment In general the foregoing analysis has
identified a detailed range of options that range from the adoption of
high-level approaches, to seeking standardisation, but combining this with some
flexibility for addressing different product forms, to approaches which seek
the maximum degree of standardisation. Benefits of standardisation of disclosures A key conclusion of the Decision Technology
study was that greater levels of standardisation (and simplification, via
standardisation) are likely to be effective regulatory tools for achieving
benefits for consumers. Standardisation can aid comprehension, and offer a way
of ensuring common minimum standards in regards information – it provides a
recipe for disclosure documents that can be careful developed on the basis of
consumer testing, and so its design can build on best practices.
Standardisation also crucially underpins possible ways of improving
comparability in information (there are other ways such as standardising
products themselves) – showing information in a structured and consistent way
is a key precondition for aiding investors in comparing between different
products. Consumer representative respondents to the PRIPs consultation broadly
underlined the value of standardisation techniques in ensuring better comparability
of information. However, there is a relationship between the
degree of standardisation possible and levels of product heterogeneity or
homogeneity. The greater the variety in products and their
features, the greater the extent to which a single ‘one-size-fits-all’ approach
can lead to results that are potentially misleading. For instance, specific
products might possess features that standardised prescriptive requirements do
not take into account. This could either lead to misunderstandings on the part
of those relying on the information, or a reliance on other information tools,
reducing the impact and relevance of the standardised disclosure. This implies
that rules should reflect to some degree the heterogeneity of products (and
thereby places an absolute limit on the degree of prescription that is
advisable). Standardisation is not the only way to raise
the general quality of disclosures; non-regulatory tools (supervisory
cooperation, industry-led action) could in principle contribute to raised
standards of clarity for disclosures. Under such a scenario, the burden of
raising the standard of disclosures would be borne partly through increased
supervisory work, increasing costs for supervisors. However, the fundamental weakness (other than
efficiency problems) of such an approach is that it could not lead to greater
comparability at the level of the disclosures. Different supervisors would
likely take different views on the application of the principles, even where
supporting coordinator work is undertaken at the level of the European
Supervisory Authorities. In addition, so as to address the objective of
regulatory consistency, any such approach would need to give little additional
flexibility to Member States to augment the principles, so that comparability
could not be readily tackled even at the level of the Member State. This could also undermine the extent to which
improved consistency in regulatory requirements could be achieved cross-border
or between sectors where these are supervised on a sectoral basis (as is the
case in many Member States). Impact of standardisation for industry and
supervisors In respect of the product manufacturers and
distributors, some stakeholders have noted certain possible benefits of further
standardisation: greater legal certainty in regards disclosure responsibilities
on behalf of product manufacturers, reduced search costs for advisors and
provided a potential basis for improved quality of advice when considering
different products, and, for those operating cross-border, reduced barriers to
entry to new markets. It is difficult to assess the extent of such benefits
(similar arguments were made in respect of UCITS KII compared to its
predecessor, the Simplified Prospectus, yet the CSES study showed many providers
anticipated an increase in costs for the standardised document; such increases
may however be factoring in uncertainty and a period of adaptation). For supervisors, greater standardisation
could reduce costs, as there would be less discretion for firms and the
assessment of the adequacy and compliance of disclosures would in some regards
be more straightforward. However, the industry – and indirectly
investors, in so far as immediate costs are passed on to them – would carry the
incremental and ongoing costs of changing to a new regime, and greater
standardisation implies change for providers. Summary Comparability of disclosures depends on
standardisation of information provided for different products, but the
benefits in terms of comprehensibility of disclosures can become attenuated if
this standardisation is taken too far. Comprehensibility does not depend on
standardisation, but standardisation contributes to it, and standardisation is
likely to be more efficient at improving comprehensibility across all EU
markets. Costs for firms are largely driven by the
extent to which changes practically have to be made and the precise nature or
extent of the procedures that have to be followed in making such changes.
Standardisation drives costs to the extent that it requires a changeover to a
new regime (less flexibility is available to adapt existing approaches).
However non-standardised approaches which require improvements could also be
costly, as these too can lead to changeovers to disclosures: where changes are
to be made, standardisation potentially reduces costs against a more
‘principles-based’ approach since it provides a more detailed 'recipe' to
follow when preparing the product disclosure. The preferred approach is therefore to
pursue standardisation, by building on the KIID model, but in a targeted way
which allows for adaptations and tailoring of the details of this model for
other kinds of PRIP. 1.3. ISSUE
3: Responsibility for producing document For the UCITS KII, responsibility for
producing the KII is clearly allocated to the fund manager. Is it possible to
apply this general approach to all other PRIPs? Options range from leaving this
open for the market to determine (i.e., specifying the outcome being sought,
but not harmonising who would be deemed responsible for doing it), to making a
hard rule that product originators are the only entities who can be
responsible. A separate (not exclusive) option raised by stakeholders would be
to always require disclosure in the KIID of who was responsible for
manufacturing the product, and who for preparing the document (normally the
same). Options for responsibility for producing documents [Options 1-3 mutually exclusive] 1 || Flexibility over who prepares the document 2 || Flexibility over who prepares the document, but requiring agreement on responsibility 3 || Product manufacturer normally responsible for preparing the document 4 || Require disclosures of responsible parties in document Consultation responses Responsibilities for preparing and producing
or disseminating (printing and making available to clients or distributors,
including electronically e.g. as a 'PDF' or in some other electronic format)
the KIID have been an important area in debate amongst stakeholders, but the
materiality and impact of different options have proved difficult to assess.
Consultation respondents note that determining responsibilities in a manner
that does not match capacities to deliver on responsibilities could drive
significant costs for the industry or lead to structural changes in
distribution models with impacts that might be difficult to assess beforehand. In response to our consultation with
stakeholders, and also in our engagement with supervisors and their independent
work on PRIPs, a majority of respondents argued that product manufacturers
should be responsible for the document (and that disclosure of responsibility
was a vital element of the regime). In general, it has been argued that the
product manufacturer are the best placed entities in distribution chains to
prepare the KIID so that it is accurate, given their knowledge and
responsibility for the product. The 3L3 report on PRIPs came to the same
conclusion.[90] Some respondents also argued that placing
responsibility on providers ensures that they can better control when their
products might be sold to retail investors. In addition, a number of
respondents noted that it is important for investors to both know who produced
the product, and who prepared the information about the product and is
responsible for its accuracy. Respondents generally felt that this latter
entity would in practice for much of the market be the product producer. In developing the UCITS KII requirements
greater legal clarity (and transparency through the KII) was introduced
precisely on this point of responsibilities, following feedback that a lack of
legal certainty in the prior framework had led to additional uncertainty for
investors. On the other hand, some industry
respondents, notably those producing PRIPs in the form of securities that may
be sold on secondary markets outside the control of the product manufacturer,
argued that making the PRIP provider solely responsible for preparing
disclosures could lead to a misalignment between the allocation of
responsibilities and the capacities of different entities to practically
discharge those responsibilities, for instance if third parties might have some
responsibility for providing information to be included in disclosures. Analysis of costs and benefits In practice, for banking, insurance and
fund sectors a clear allocation of responsibilities for preparing the document
– and linked to this a clear ‘ownership’ of the PRIP by a clear PRIP
manufacturer – appears relatively non-controversial. However, despite much debate on this point with
stakeholders, it remains difficult to assess the practical consequences of
applying such a model in the securities sector. An additional complexity would be where
there is a product that would be a PRIP in the EU that has originated in a
third country not subject to EU rules; in these cases, in principle it would
seem reasonable that a distributor might take responsibility for preparing a
KIID where the product originator – not directly subject to EU rules – has
failed to do so. In addition, distributors might be permitted to prepare a KIID
(to bring a product to the retail market) where the product producer has not
done so (not intending the product for retail distribution themselves), so long
at they take full business responsibility for this.[91] Note, for clarity, that the preparation of the document would only
be necessary where a product was to be sold or distributed to retail clients. Option || Effectiveness || Efficiency Comprehension || Comparison || Regulatory Patchwork 0 – Take no action || 0 || 0 || 0 || 0 1 -- Flexibility over who prepares the document || - For the much of the PRIPs market, this may reduce clarity || - May lead to differences in approach to information about the same product || - Lack of consistency in allocation of responsibilities likely to lead to different supervisory practices between Member States and sectoral supervisors || Allows for tailoring of requirements for market realities / responsiveness to changing distribution arrangements May exacerbate legal uncertainty over responsibilities, undermining 'ownership' of the KIID and undermining its practical development in some market segments 2 -- Flexibility over who prepares the document, but agreement on responsibility || - As above || - As above || - As above in regards consistency || As above, though there would be clarity as to individual responsibilities in regards specific arrangements. Impact could be significant for providers and distributors where agreements have never been established in the past 3 -- Product manufacturer normally responsible for preparing the document || +/- Reflects existing approach in much of PRIPs market Determination of allowed exceptions would need to be subject to detailed implementing work and impact analysis in this regard to avoid impractical solutions that lead to misalignment between responsibilities and capabilities || +/- Reflects existing approach in much of PRIPs market. || + Greater consistency depends on care taken in regards targeting of exceptions || Allows for some adjustments for practical scenarios where responsibilities and capabilities might not otherwise be appropriately aligned (split responsibilities, handling of delegations); this could mitigate possible unintended consequences, whilst still allowing for broad legal certainty for much of the remainder of the market. 4 -- Require disclosures of responsible parties in document || + Important for investors in relation to possible complaints, also ensuring clarity as to who is actually producing product || n/a || n/a || Identification of product manufacturer may require supporting clarification work in some instances (complex chains of intermediation and 'remanufacturing' possible in some areas in PRIPs market) 1.4. ISSUE
4: Ensuring effective provision of product disclosure information to retail
investors Evidence (such as the recent Synovate
study) shows that mandatory disclosures may often be either not provided or
downplayed at the point of sale, or they may be delivered only at the point of
conclusion of the contract (not at a point sufficiently early in the decision
making process so as to effectively contribute to the investors’ deliberations
on what investment to make). In respect of requirements for mandatory
provision, this is primarily an enforcement matter. Under the UCITS framework there is a ‘hard’
requirement on provision, such that an investor seeking to buy a unit in a
UCITS must be provided with KII before they buy the units, though this
provision may be undertaken by means of a durable medium or website (under
certain conditions). This requirements was adopted following uncertainty in the
prior UCITS framework as to relative responsibilities for handing over or
giving the KII to the investor. Delivery of the document, particularly in
advised sales, was identified as necessary for better ensuring its effective use
by investors. Currently, for non-UCITS PRIPs caught by
MiFID intermediaries are not required to use any particular document to satisfy
information requirements. Some stakeholders have noted that hard
requirements on provision might create costs around certain distribution
models, or require clarification in relation to, for instance, online sales
channels. Three policy options emerge: (1) provision
is not addressed directly, leaving arrangements to market participants to
decide; (2) a ‘hard’ requirement analogous to that within the UCITS directive
is applied to all sales of PRIPs, stressing that the KIID must be provided
sufficiently early in the sales process as to be of value in the investors
decision making; (3) specific timing and media exceptions permitted, the
precise scope of which to be strongly controlled through detailed implementing
measures. Options for responsibility for provision of documents [Options are mutually exclusive] 1 || Soft requirement on provision and its timing 2 || Hard requirement on provision and its timing 3 || Follow 2, but allow for some targeted exceptions Consultation responses Some consultation respondents have noted
that hard provision may not always be appropriate, for instance in cases of
‘execution only’ sales where the retail investor has already made a decision to
invest, and is requesting a broker to execute a deal, possibly in a time
critical manner. The question of what technical might be appropriate in terms
of ‘providing’ the KIID arises in this circumstance. Analysis of costs and benefits For the UCITS KIID a 'hard' provision
requirement has been considered key to ensuring regulatory documents actually
get used. National supervisors, when working on the detailed implementing
measures to those proposals, noted that a more permissive regime in this regard
could create great cost for the industry (satisfy regulators that they have
produced documents that are compliant with the requirements) but no benefits to
investors if the documents are not provided to the investors by distributors or
intermediaries. It is difficult to assess the extent to which
detailed level 2 provisions might be necessary to tailor the provision model to
different distribution channels; however, the heterogeneity of the PRIPs market
suggests scope for such provisions would be sensible. For this reason,
option 3 appears preferable over option 2. Option || Effectiveness || Efficiency 0 – Take no action || 0 || 0 1 – 'soft' requirement on provision -- information made available, but not required to be actively provided, e.g. by intermediaries || -- This could potentially weaken requirements, e.g. compared with the standard now in UCITS; this is incompatible with ensuring disclosures are made to improve investment decision making Possibilities of mis-selling likely would lead to ad hoc arrangements for provision between distributors and firms, and variations between member states would emerge || Would appear low cost for firms and distributors, but mis-buying could raise costs more widely 2 – ‘Hard’ requirement on provision and its timing – following UCITS model || +/- In the context of advised sales, actual provision of KII relating to proposed investment is key to effectiveness of these documents – a strong requirement on this would make clear responsibilities on this, able to act as a better basis for effective supervision, compliance and redress in this area || Hard provision may clarify legal responsibilities between providers and distributors over what information can be used to discharge responsibilities of the distributor. Hard provision may reduce flexibility over how to provide information for some distributors. Hard provision could however improve the control of providers over the information given to investors about their products. 3 – Broadly follow 2, but allow for some targeted exceptions || + Allowing additional flexibility over and against option 1 would allow certain execution only and other specific distribution scenarios to be better addressed (e.g. where timing is critical). || Additional element of flexibility could mitigate potential consequences of applying hard requirement across all distribution channels. 1.5. ISSUE 5: Civil liabilities
and sanctions As is clear from the above discussion of
responsibilities for preparation (and separately under issue 4 for delivery),
important questions arise as to what additional steps might be taken to ensure
effective and practical compliance with the new framework by firms. The
practical effectiveness of a disclosure regime involves a much wider range of
factors than simply the establishment of a sound regulatory framework that sets
out requirements and outcomes in a clear and unambiguous manner. The
supervision and enforcement of the requirements are clear and key elements. In
addition, preparing effective documents that communicate well with retail
customers is not a trivial 'tick-box' exercise for firms. It can involve
developing new skills, and even the use of consumer testing and focus groups by
the firm itself to ensure its communications are hitting their target and
working as intended. It is clear that 'buy in' from all stakeholders is a
necessary precondition for maximising benefits. Respondents to the PRIPs
consultation noted a number of different tools that could be used to ensure the
practical effectiveness of any new disclosure regime. These included
clarifications on the liabilities that should attach to the document. The
sanctions regime applied by competent authorities was also underlined; , some
industry stakeholders have expressed the view that inconsistencies in
supervisory approach between Member States in the consumer protection area were
a significant barrier to the further development of the single market. In addition, respondents mentioned a number
of other possible steps. These included the possibility of pre-approval of
documents by supervisors (to check ex-ante their accuracy and compliance),
though a number of respondents questioned the practicality or coherence of this.[92] A number of respondents
underlined that developing prescriptive requirements on the content and form of
documents would be a practical way of driving overall improvements by ensuring
a common minimum standard. Others noted the vital importance of improving the
overall consistency and clarity of the language used by the financial services
for describing investments, investment strategies, asset types, and so forth.
(A number mentioned the possibility of developing a common 'glossary' of
terms). When considering the supporting measures that
might be taken to ensure practical success of the new regime, these can be
split between those measures that relate to the legal framework itself (civil
liability and sanctions), and properly need to be considered when developing
that framework, and those measures that relate more to the effective
implementation of that framework. (This impact assessment will consider the
first area as an immediate concern, but further work will be needed as this
initiative matures to clarify the necessary additional steps that might be
taken, and to clarify in particular who might be best placed and responsible
for taking these additional steps. In terms of legislative
design, two issues remain, both of which have been addressed in the UCITS KIID
regime that need to be considered in relation to other PRIPs: the clarification
of the civil liability attached to PRIPs product disclosures, and the sanctions
regime applying through the relevant competent authorities. Civil liability On this issue, three main options emerge,
(0) taking no action (that is, remaining silent on liabilities); (1) supporting
non-legislative measures to build capacity for consumers to seek and obtain
redress; and (2) clarifying the civil liabilities. (1 and 2 are not mutually
exclusive). The UCITS KIID experience In regards civil liability, the UCITS KIID
approach on this was developed in response to failings in regards the
simplified prospectus, where uncertainty as to the liabilities for the
'simplification' of information (that is, whether the simplified prospectus
must contain all elements in the prospectus that might be taken as material for
an investment decision) had led to firms including too much information in the
notionally simplified prospectus so as to avoid liabilities. There were cases
of simplified prospectuses that were longer than the full prospectus that they
were supposed to simplify. For this reason, a delimitation of
liability, modelled on that in the PD in relation to the summary prospectus,
was included in UCITS IV – civil liability attached to the KIID only in relation
to consistency with the prospectus. The aim was to ensure that the KIID was
approached as a communication document by firms, not as a legal or contractual
document. Take no action: It would be possible to take no comparable steps on civil liability
for other PRIPs, remaining silent in this regard, leaving liabilities to
existing sectoral and national requirements. However, while prescription of the
form and content of PRIPs product disclosures reduces the risk that the
document be used by firms primarily as a contractual rather than communication
document, respondents to the PRIPs consultation raised concerns that if
liabilities were not clarified in some form, the PRIPs regime could be
undermined in just the same way as the simplified prospectus. Clarifying civil liabilities: But how might civil liability be addressed? Two possible options
can be identified, which are not mutually exclusive. The first option would be
to support the the development of (non-legislative) measures to build the
capacity of retail investors to seek and obtain redress in relation to failures
linked to the PRIPs product disclosures. Option 2 would draw on the UCITS
approach, to buld explicit (legislative) requirements on civil liabilities
(since there may not always by a prospectus or other full disclosure document
to refer to, a simple copy of the UCITS approach is not possible). On this
basis, the focus would be on establishing clearly that the PRIPs product
disclosure is a communication document designed to address pre-contractual
rather than contractual issues, but not presupposing the form of other
documents. Option || Effectiveness || Efficiency 0 -- Take no action || 0 || 0 1 – Supporting non-legislative measures (to build capacity for consumers to seek and obtain redress, collective redress work, etc.) || + builds practical capacity directed at retail investors themselves and their behaviour || Targeted and proportionate 2 – Clarify civil liabilities (but adjusted as necessary; to establish clearly that the PRIPs product disclosures on its own is a communication document and is designed to address pre-contractual rather than contractual issues) || + could reduce uncertainty, encourage clear commitments in relation to production of product disclosure || Likely to lead to greater confidence in industry, and ensure benefits of changes more likely to be realised. Could reduce costs related to cross border activity. Given the need for legal clarity but also
for flexibility, option 1 and 2 are both preferred options. Clarifying civil liabilities would also
contribute to better achievement of an effective remedy for consumers, as
enshrined in the Charter of Fundamental Rights, article 47. As such this would
help achieve the aims under article 38, which seek a high level of consumer
protection. Sanctions UCITS IV currently contains a high-level
requirement on sanctions, which provides for only limited convergence in this
area amongst competent authorities. Other Community
legislation (such as the Distance Marketing in Financial Services Directive and
the E-Commerce Directive) contain sanctions regimes, however, this legislation
has been drafted to address specific issues that are separate from those
addressed in this initiative. In addition, the regimes within these other areas
of legislation can co-exist with those that might apply in regards this
initiative; this is already the case in relation to the UCITS KII regime, which
is in parallel to those in these two other areas. Other work is underway that has identified
efficient and sufficiently convergent sanctioning regimes as a necessary
corollary to the new supervisory system.[93]
More convergence as regards the contents and the form of disclosures
requirements alone do not create by themselves a more convergent regime in this
area. Such requirements should be flanked by common supervisory tools for
national authorities. Certainly, also other non legislative measures would be
important to flank such regime. A more harmonised approach to sanctions alone
will not be sufficient. However, divergences between the powers of Member
States to take action with respect to non-compliance with the new requirements
could be one important factor which incurs the risk diminishing the
effectiveness of the new requirements. Therefore, national authorities need to
act in a coordinated and integrated way. The new European Supervisory
Authorities (ESAs) will bring about improvements in the coordination of
national authorities' enforcement activities. Nevertheless, in order to achieve
such convergence it would be necessary to equip supervisors across Europe with
the same supervisory tools on the legislative level at the first instance. Take no action: If no action was taken for non-UCITS PRIPs on sanctioning regimes,
leaving these to sectoral and national legislation, then this could lead to
material inconsistencies across sectors and Member States in approaches between
UCITS and non-UCITS PRIPs. In particular, the PRIPs product disclosure
requirements may not be clearly covered by other legislation, which would
undermine the goals of this initiative. More convergence as regards the
contents and the form of disclosures requirements alone do not create by
themselves a more convergent regime in this area without effective and
deterrent enforcement. Divergences between the powers of Member States to
sanction non-compliance with the new requirements could diminish their
effectiveness. In addition, with regard to consistency, other work is underway
at the Commission on sanctions (as set out in Annex I.2), that has identified
efficient and sufficiently convergent sanctioning regimes as a necessary
corollary to the new supervisory system, calling for steps to this end to be
taken across all sectoral financial services legislation.[94] Clarifying sanctions: Taking steps on sanctions for PRIPs raises two possible options –
following the high-level approach in UCITS, or specifying the form and content
of possible sanctions in more detail so as to allow for greater consistency in
these across the EU. In practice it would appear that product disclosures are
seldom a direct target for sanctions in themselves, and mechanistic or overly
prescriptive alignments of supervisory activities here would seem
disproportionate. Under this option, sanctions can be perceived in three broad
areas:
the power for competent authorities to require
sales of PRIPs to cease where preparation of the PRIPs disclosure document
has not occurred or it has breached requirements on its contents;
the power for competent authorities to
publically name a PRIPs producer where that producer has breached
requirements on the product disclosure's contents; and
the power for competent authorities to fine a
PRIPs producer where that producer has breached requirements on the
product disclosure's contents.
0 – Take no action || 0 || 0 3 – Take high level approach on sanctions || +/- A high-level approach to sanctions might leave material differences in use of sanctions across Member States that reduce consumer protection standards overall and could contribute to continued barriers to the single market || Largely neutral for industry compared to current requirements, but may reduce effectiveness of new regime, thereby limiting scale of possible benefits (e.g. in regards those involved in cross-border business or active in more than one national market). 4 – Clarify sanctions (as regards the areas and breaches against which sanctions might need to be used and the broad kinds of sanctions that might thereby apply in these areas) || + allows consistency with commitments in Sanctions communication Allows tailoring of liability regime to specifics of different PRIPs Level playing field between different areas of financial services business || Likely to lead to greater confidence in industry, and ensure benefits of changes more likely to be realised. Could reduce costs related to cross border activity. Level playing field between different areas of financial services business Given the importance of proportionate
sanctions to underlining the importance of the PRIPs product disclosure regime,
and given the PRIPs regime would create consistent duties on firms across all
Member States, option 4 appears most effective and efficient. 2. Estimation
of administrative burden The
administrative costs that this initiative would lead to cannot be assessed
solely on the basis of the measures being examined in this impact analysis, as
it is proposed that the initiative follow a Lamfalussy structure, and the whole
package (level 1, level 2 and supporting guidance) would only come into force
once the detailed level 2 measures had themselves been developed and their
administrative costs assessed. We will however provide here an estimate of
magnitude of administrative costs and burden that such a package may lead to in
the future. The Commission
Impact Assessment Guidelines define administrative costs as "the costs
incurred by enterprises, the voluntary sector, public authorities and
citizens in meeting legal obligations to provide information on their action
or production, either to public authorities or to private parties." The preferred
options emerging from this impact assessment include stronger standardisation
and prescription at the EU level of retail product disclosures for PRIPs. Under
the Guidelines legal requirements on information disclosure to investors, as in
the form of a financial prospectus, qualify as administrative costs.[95] In fact, broadly all costs
relating to a future PRIPs regime will fall within the category of
administrative costs, as the new regime will of necessity require all firms to
replace existing product disclosures with new ones. As noted, the
envisaged PRIPs product disclosure instrument would take the form of a level 1
framework regulation, supported by detailed implementing measures at level 2.
While level 1 requirements would determine that new product disclosures should
be introduced for all PRIPs, the precise form and content of these disclosures,
which is important for assessing administrative costs, would be determined
through technical implementing measures at level 2. In other words, the alternative
options analysed in this impact assessment – apart from the scope[96] – are not as strong drivers of
the compliance and administrative costs as the future Level 2 measures that are
likely to determine the magnitude of costs, which, depending on the precise
details of those measures, could be very substantive or moderate. One example
is the number of product disclosure documents that need to be prepared for
certain types of product. An impact assessment at level 2 will address various
implementation options and make the case for any such choices on the basis of a
more detailed analysis following the standard cost model to assess
administrative burden. However in this impact assessment we provide already a
forecast estimate of the magnitude of administrative burden that could result
from these Level 1 and future Level 2 measures. The case of
costing UCITS KII To do this for
PRIPs, a reasonable proxy exists. For the introduction of the KII for UCITS,
the form and content of the proposed changes was already in large part
available during the latter phase of policy development for UCITS IV
implementing measures. On this basis CSES were commissioned to survey a
representative sample of the UCITS industry, including both smaller and larger
firms across different national markets and distribution models.[97] This survey was designed to
address both the one-off costs of introducing the KII and any incremental
impact on ongoing costs. These figures can be used for indicating the broad
possible order of magnitude of costs, but again, level 2 work will be necessary
to clarify more detailed options and thereby final overall costs. CSES focused on
administrative burden.[98]
This means that they identify the incremental costs of introducing KIID, over
and above existing costs borne under business as usual[99] (be it
industry practice or national legal requirements that lead to disclosures on a
"business as usual" basis). Following the prescription of the
Guidelines, the figures cover the production costs of a disclosure document,[100] including translation costs,
use of external advisors or graphic designers, and so forth, which fall under
various types of required action[101]
along the different phases of introducing a KII, such as drafting of the
document or arranging its printing or dissemination. Having identified the
target groups and relevant cost parameters, the study sought estimates from
firms[102]
of the hours of professional and other staff, and other fixed costs that might
be incurred. The costs were split between one-off costs and ongoing costs. CSES estimated
one-off administrative burden of around EUR 10100 per KIID (EUR 10100 for
preparation and dissemination, and EUR 5900 for regulatory costs). Ongoing
costs (for updating documents) were EUR 5700 (EUR 5700 for preparation and
dissemination, EUR 1500 for regulatory costs). The regulatory costs under both
of these estimates relate to approval and notification requirements that are
specific to the UCITS market. Such measures are outside the scope of PRIPs
proposals covered in this impact assessment, so these costs are disregarded
here. Grossing these
costs up for the UCITS market (on the basis of the number of funds that need to
have a KIID prepared), CSES calculated a best estimate of overall one-off
administrative burden for introducing KIID of around EUR 389 million; roughly
adjusted for regulatory costs, this stands at EUR 246 million.[103] Incremental increase in ongoing
costs was calculated to be around EUR 25 million; again, adjusted for
regulatory costs, this is around EUR 20 million. This represents a 7.5%
increase in the costs of previously existing disclosures. Estimating
the PRIPs compliance costs, administrative costs and administrative burdens A rough
estimate of administrative costs for all PRIPs can be achieved by grossing
these figures up on the basis of proportions of business relative to UCITS.
Under such an approach we arrive at one-off figures of around EUR 171
million for non-UCITS PRIPs, and on going costs of around EUR 14 million.[104] In broad terms, if cost
structures for the rest of the industry are similar for UCITS by volume of
business, the impact of requiring a KIID for all the other PRIPs will be of the
same broad scale as for UCITS given the size of the UCITS market. The CSES study
suggests the 'cost per product' might be used to estimate a more accurate
figure, by multiplying the cost per product by the numbers of products on offer
/ turnover in product offerings across all PRIPs sectors. This is because the
cost per product was not dramatically different for different sized firms (of
course some economies of scale apply for larger firms). However it is
not possible to use an estimate of this kind at this stage, as it will only be
at level 2 that the precise application of the requirements to different PRIP product
forms will be determined. For instance, within the retail structured product
market (covering structured deposits and structured securities) there were a
total of 274000 products brought
to market in 2009 (for reference there were 36000 UCITS registered at end
December 2009).[105]
What might
impact the costs/burden at Level 2 measures? Level 1
measures assessed here do not determine whether a KIID would need to be
produced for each individual product, or whether a single KIID might be used
for multiple tranches (releases) for a product (updated as may be necessary).
In the retail structured product market, this could have a very strong impact
on costs: if the 10100 EUR one-off costs were accurate per product, a market
with 274000 products could face potential costs of almost 2.8 billion EUR.
Likewise, for the unit-linked insurance market the application of requirements
at the fund or product level, and the extent to which insurers may rely on KIID
produced for underlying funds where the insurance contract is to link to these,
will be important determinants of costs, and the details of these arrangements
will be established at level 2 rather than level 1. On this basis a more
sophisticated assessment of burdens seeking to tailor the precise impact of proposals
on different market sectors could at this stage be premature and potentially
misleading. Such assessment will be carried out within the impact assessment
leading up to the Level 2 implementing measures. However, it
would be useful to explore some of other factors – other than the volume of
issues for which a KIID might be required – that are likely to impact on the
scale administrative burdens. As noted above,
the CSES study focused on the broad administrative burden of replacing, in
effect, a more high-level disclosure regime with one which is more
prescriptive. For this reason, the study assessments have some wide relevance.
Cost drivers for the one-off costs of change over – systems changes, staff
training, consultancy fees and data gathering – are broadly likely to be
similar for all financial services firms. In terms of ongoing costs, changes to
the number of disclosures required (related to the stand-alone nature of KII
proposals, such that the new document needed to be produced for most sub-funds
and share classes, where as before a combined document could be produced)
appeared the largest cost driver, whilst otherwise it was anticipated that the
new requirements would be similar in impact to old requirements. The CSES
research saw no major differences between smaller and larger firms in terms of
the costs, though larger firms in general were better placed to absorb ongoing
costs, and smaller firms found it harder to reliably assess possible costs (it
was in fact difficult to ensure a representative sample from smaller firms).
This to a degree is reflected in a number of respondents' comments in regards
the PRIPs consultation, which indicated a view on the part of the larger firms
that the ongoing costs of the new regime might be readily absorbed, so long as
reasonable transitional arrangements were put in place. To be clear,
for most of the PRIPs market regulatory disclosure requirements, at national or
EU level, already apply. The only area where a gap has been identified is in
regards structured term deposits. According to Arete data, this is likely to be
a relatively small part of the overall market – 14% of the retail structured
product amount outstanding in 2009, or 0.6% (roughly) of the EU PRIPs market.
For 99.4% of the PRIPs market (by volume of existing business), therefore, the
proposals in this impact assessment are largely a matter of one-off costs of
change from one approach to product disclosures under regulatory requirements
to another, and possibly a maximum of 7.5% increase in ongoing costs for the
new requirements. The one-off compliance costs of the
PRIPs regime would clearly fall under the category of administrative burden
– these are the costs for the whole industry of introducing new
disclosures; these costs are incurred irrespective of whether such a disclosure
might be produced under business as usual. However, for ongoing costs
the situation is more complex. The CSES study specifically asked respondents to
identify incremental costs over and against what they would do as 'business as
usual'; on this basis these estimates (a maximum increase of costs of 7.5% over
existing disclosures) are a proxy for the ongoing administrative burden. Comparing estimated costs to estimated
benefits It is important to note, however, that
these costs are dwarfed by the scale of potential mis-selling or buying in the
retail investment market. As set out above, even if disclosure failings were
seen as only contributing 1% to such problems, our analysis still suggests
potentially 8 billion EUR of mis-placed investments attributable to such
failings. 3. Possible
impacts of horizontal PRIP act on existing sectoral legislation Sectoral legislation || Possible impacts of horizontal PRIP act on existing sectoral legislation PD || Impact on Article 5(2) Art. 5(2) of PD requires drawing up of a summary of a prospectus which should provide appropriate information about essential elements of the securities concerned in order to aid investors when considering whether to invest in such securities. These essential elements are defined in Art. 2(s)(i) – (iv): (i) a short description of the risk associated with and essential characteristic of the issuer and any guarantor, including the assets, liabilities and financial position: (ii) a short description of the risk associated with and essential characteristic of the investment in the relevant security, including any rights attaching to the securities; (iii) general terms of the offer, including estimated expenses charged to the investor by the issuer or the offeror; (iv) details of the admission to trading So as to avoid duplication, the proposed PRIPs disclosure rules could be designed so as to ensure that information in the KIID can be regarded as appropriate for certain pieces of key information to be provided in the summary such as e.g. information on risks and costs. Solvency II || Impact on Article 185 Art. 185 specifies types of information the insurance undertaking is to provide to the policy holder before a life insurance contract is concluded. So as to avoid duplication of requirements, the proposed PRIPs disclosure rules could be designed so that the information contained in the KIID in accordance with the overall PRIPs act (regime) (level 1 and 2) would be regarded as equivalent to the information required by Art 185(3) and (4), such that information under Art 185(3) and (4) would not need to be supplied again if a KIID has been provided. The precise degree of equivalence depends, however, on an assessment of detailed level 2 PRIPs measures as these may develop. UCITS || UCITS will be excluded from the scope for a transitional period. AIFMD || AIFMD only regulates marketing of AIF to professional investors. The marketing of AIF to retail investors is left to national law. Therefore, the PRIPs act requiring that retail clients are to be provided with a KII will apply independently from AIFMD Transparency Directive || As the Transparency Directive establishes requirements in relation to the disclosure of periodic and ongoing information about issuers whose securities are already admitted to trading, its scope is different than that of PRIPs disclosure, which will play its role before a contract is concluded (pre-contractual disclosure). e-Commerce || Impact on Article 5 Art. 5 contains a list of information which the service provider should render accessible to the recipients of the service and competent authorities. The list is not exhaustive and it has a complementary character with regard to other information requirements established by Community law. Art. 5(2) requires, 'in addition to other information requirements established by Community law' that Member States should 'at least ensure that, when information society services refer to prices, these are to be indicated clearly and unambiguously and, in particular, must indicate whether they are inclusive of tax and delivery costs'. Since these requirements are in addition to other information requirements in community law, both regimes can generally exist in parallel; detailed requirements at level 2 to the PRIPs act would be designed so as to avoid unnecessary duplications. Distance marketing || Impact on Article 3(1) Art. 3 requires that certain information concerning the financial service will be provided to the consumer before the consumer is bound by any distance contract or offer., like, for instance: - a description of the main characteristics of the financial service, - the total price to be paid by the consumer to the supplier for the financial service, including all related fees, charges and expenses and all taxes paid via the supplier, - information on special risks related to specific features of the instrument to which the financial service is related. Since these information requirements are mainly service related, both regimes can generally exist in parallel; where relevant with respect to product information, detailed requirements at level 2 to the PRIPs act would be designed so as to avoid unnecessary duplications [1] http://ec.europa.eu/internal_market/finservices-retail/docs/investment_products/29042009_communication_en.pdf. [2] The area of sales has ben
addressed in proposals on changes to the Markets in Financial Instruments
Directive (MiFID) and the Insurance Mediation Directive (IMD). For MiFID, see http://ec.europa.eu/internal_market/securities/isd/mifid_en.htm;
for the IMD, [forthcoming]. [3] In
the fourth Consumer Markets Scoreboard the retail financial services market
ranks worst out of fifty consumer markets for overall market performance,
including worst for ease of comparing products and services sold by different
suppliers: (SEC2010)1257: The Consumer Markets Scoreboard, 4th
Edition, October 2010. [4] http://www.iosco.org/library/pubdocs/pdf/IOSCOPD343.pdf
(IOSCO). [5] Commission
Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC. [6] See:
http://ec.europa.eu/internal_market/finservices-retail/docs/investment_products/29042009_impact_assessment_en.pdf. [7] See: http://ec.europa.eu/internal_market/finservices-retail/investment_products_en.htm. [8] See:
http://www.cesr.eu/index.php?docid=7278
[9] See:
[to be published – reference to be added when
available.] [10] http://ec.europa.eu/internal_market/investment/docs/other_docs/research_report_en.pdf [11] http://ec.europa.eu/consumers/strategy/consumer_behaviour_en.htm [12] http://ec.europa.eu/internal_market/consultations/docs/2010/prips/costs_benefits_study_en.pdf [13] http://ec.europa.eu/consumers/rights/docs/investment_advice_study_en.pdf. [14] For the purposes of this impact assessment, by product
disclosure we mean information about the product provided to the investor at a
pre-contractual phase, i.e. before concluding the contract. This is information
about the features, risks and costs of the product itself, that can be used to
compare it with other products. This is distinguished from "other
disclosures" that are provided to the investor at a pre- post- or
contracting phase, e.g. on the firm that sells the product, the regular info on
the product's performance, etc. Other disclosure requirements may be laid down
under legal rules on distribution and advice. For the description of a typical
sales process, please see box 1 under section 3.1; for more detail see Annex
1.9. As set out, the area of sales processes – distribution and advice,
including disclosures about these – is addressed in separate initiatives and
impact analysis work by the Commission, under the
reviews of MiFID and the IMD. [15] Source:
EFAMA Investment Fund Industry Fact Sheet, May 2010. This figure is equivalent
to over 50% of EU GDP and around 33% of global fund assets. [16] See
Annex I.4 for some alternative figures, prepared for the PRIPs Communication IA. [17] CEA
Statistics N°43: The European Life Insurance Market: Data 2000-2009. [18] https://eiopa.europa.eu/fileadmin/tx_dam/files/publications/reports/CEIOPS-Report-National-Measures-Unit-Linked-Life-insurance-products.pdf,
p. 24. [19] Decision
Technology, p.8. [20] See
Annex I.3, 4 for further data on the evolution of the market, showing in
particular the relative growth – though this has recently slowed – of the retail
structured product market. [21] Source:
EFAMA, Arete Consulting. [22] Directive
2003/71/EC of the European Parliament and of the Council of 4 November 2003 on
the prospectus to be published when securities are offered to the public or
admitted to trading and amending Directive 2001/34/EC. [23] Directive
2004/39/EC of the European Parliament and of the Council of 21 April 2004 on
markets in financial instruments amending Council Directives 85/611/EEC and
93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council
and repealing Council Directive 93/22/EEC. [24] Directive
2002/92/EC of the European Parliament and of the Council of 9 December 2002 on
insurance mediation. [25] https://eiopa.europa.eu/fileadmin/tx_dam/files/publications/reports/CEIOPS-Report-National-Measures-Unit-Linked-Life-insurance-products.pdf. [26] Broadly
in this direction BVI (Bundesverband Investment) contribution to call for
evidence "need for a coherent approach to product transparency and
distribution requirements for substitute retail investment products?", p.
2-3. [27] Source: EFAMA, “Trends in the European Investment Fund
Industry in the Fourth Quarter of 2010 and Results for the Full Year 2010”. [28] These
figures are derived from the White Paper on insurance guarantee schemes
(COM(2010)370), p.4. [29] Complexity
does not correlate (necessarily) with 'riskiness'. [30] http://www.fsa.gov.uk/pubs/consumer-research/crpr47.pdf;
see also http://www.fsa.gov.uk/pubs/consumer-research/crpr76.pdf. [31] See
the World Bank report noted above [ibid.] outlines academic research (p. 1-9):
markets in financial services and products are not in all respects
'self-correcting'. [32] See
Annex I.8 for a summary of the evidence collected during the development phase
of the PRIPs initiative; see also http://ec.europa.eu/internal_market/investment/investor_information_en.htm
(section relating to workshops on simplified prospectus) for further data. See www.fsa.gov.uk/pubs/consumer-research/crpr18.pdf. [33] Decision
Technology p.8. [34] See
Decision Technology p. 8; See http://www.abi.org.uk/Publications/ABI_Publications_Helping_Consumers_Understand_Investment_Risk_708.aspx
(ABI Risk Research). [35] Decision
Technology study. [36] For
a good summary, see National Consumer Council, Too Much Information Can
Harm. [37] IFF
p.147. [38] See
http://www.fsa.gov.uk/pubs/consumer-research/crpr55.pdf [39] IFF
p.147. [40] See
ABI Risk Research. [41] See
http://ec.europa.eu/internal_market/investment/docs/other_docs/research_report_en.pdf.
[42] Summarised
at Decision Technology p. 7. For samples of other research see Appendix 2 to
the IOSCO report. [43] See,
again, Appendix 2 to IOSCO report. [44] Decision
Technology p. 9. [45] As
we will see, the Decision Technology study reached a major conclusion that
regulatory interventions designed to improve standardisation and comparability
of information are effective interventions for improving investor decision
making (see Decision Technology p. 9). [46] See
YouGov and IFF p.10-13 for summary. [47] ABI
risk paper, ibid. [48] See,
for instance, Decision Technology pp 186-7. [49] http://www.fsa.gov.uk/pubs/occpapers/op32.pdf;
http://www.fsa.gov.uk/pubs/occpapers/op39.pdf. [50] http://www.fsa.gov.uk/pubs/other/cra_report_benefits.pdf.
See in addition a conceptual model for considering the interaction between price
transparency and consumer welfare: http://www.fsa.gov.uk/pubs/occpapers/op26.pdf. [51] While
this is at heart an enforcement issue relating to rules applying on
distributors, it underlines the importance of exploring regulatory mechanisms
for ensuring delivery of information. [52] The
UCITS KIID regime tackled these problems through explicit requirements on the
provision of KIID to investors, on the timing of this provision, and on the
overall quality of the KIID compared to other information or marketing
materials. [53] Complaints
data can be illustrative: for instance, the Financial Ombudsman Service in the
UK has roughly received between 3000 and 11000 complaints on investments
(though excluding certain insurance and pensions related investments) each year
since 2003. Note complaints that following the potential mis-selling of
endowments linked to mortgages in the UK, the latter generated almost 70,000
complaints in 2005 and 2006; as another example, in the Netherlands the
Ombudsman dealt with significant volumes of cases related to mis-selling of
equity-linked insurance and pricing transparency. See also
http://www.kifid.nl/uploads/2008-03-04-Recommendation_of_the_Financial_Services_Ombudsman.pdf [54] 'Mystery
shopping' is a technique where researchers adopt the pretence of being an
ordinary shopper, in order to assess the service offered in practice. This is a
powerful tool for assessing compliance with regulation. [55] Carefully
conducted longitudinal studies might be able to resolve this issue, but these would
need to be set up in advance. [56] Lipper
FMI White Paper: Profiting from Proliferation? June 2009 [57] Common
elements and principles recur across existing legislation and in the
recommendations of international bodies seeking to coordinate disclosure approaches;
see earlier footnotes. [58] See
the impact assessment prepared to accompany the November 2010 Communication on
sanctions, a summary can be found at: http://ec.europa.eu/internal_market/consultations/docs/2010/sanctions/resume_impact_assesment_en.pdf [59] Article 34 of Directive 2006/73/EC on MiFID provides an
example for such link between two different acts: In case of UCITS, the
distributor is allowed to fulfil the MiFID obligations on product disclosure by
providing the Simplified Prospectus (now UCITS KIID) to the client [60] See
section 2.4 above. The level 2 impact assessment for UCITS IV foresaw a formal
study to assess the effectiveness of the KII risk indicator (in particular).
Any steps to consider alignment of KII with other PRIPs should be taken in line
with this work. [61] Examples
include Regulation 1060/2009 of the European Parliament and of the Council on
credit rating agencies, Regulation 1095/2010 of the European Parliament and of
the Council establishing a European Supervisory Authority or Commission
Proposal for a Regulation of the European Parliament and of the Council on
Short Selling and certain aspects of Credit Default Swaps. [62] http://ec.europa.eu/internal_market/consultations/docs/2010/sanctions/COM_2010_0716_en.pdf. [63] Directive
2010/73 the European Parliament and of the Council of 24 November 2010 amending
Directives 2003/71/EC on the prospectus to be published when securities are
offered to the public or admitted to trading and 2004/109/EC on the
harmonisation of transparency requirements in relation to information about
issuers whose securities are admitted to trading on a regulated market. [64] Directive
2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the
coordination of laws, regulations and administrative provisions relating to
undertakings for collective investment in transferable securities (UCITS)
(recast). [65] http://ec.europa.eu/social/main.jsp?langId=en&catId=89&newsId=839&furtherNews=yes [66] Directive
2009/138/EC of the European Parliament and of the Council of 25 November 2009
on the taking-up and pursuit of the business of Insurance and Reinsurance
(Solvency II). [67] Investment
funds: includes UCITS and non-UCITS but not hedge funds or private equity. Unit-linked
life investments: includes life insurance policies with biometric risk
component. Term deposits held by households: with Monetary and Financial
Institutions: includes deposits without embedded optionality [68] New
Conduct of Business Sourcebook (COBS) applying to
firms with effect from 1 November 2007 [69] Legislative
Decree n° 58
of 24 February 1998 - Consolidated Law on Financial Intermediation - (as subsequently
amended) [70] CMVM
Regulation n.º 8/2007
"Selling open-ended pension funds with individual adhesion and insurance
contracts related to investment funds" [71] CMVM
Regulation n.º 1/2009 "Information and advertising on complex financial
products under supervision of the CMVM" [72] Gesetzentwurf zur Stärkung des Anlegerschutzes und
Verbesserung der Funktionsfähigkeit des Kapitalmarkts, BT-Drucks.17/7410, p.
14 [73] See
http://www.kifid.nl/uploads/2008-03-04-Recommendation_of_the_Financial_Services_Ombudsman.pdf [74] See
http://www.test-achats.be/map/src/522123.htm. [75] See
http://ec.europa.eu/internal_market/investment/investor_information_en.htm,
section on workshops on Simplified Prospectus. [76] See Arrêt
n° 740 du 24 juin 2008 06-21.798 Cour de cassation - Chambre commerciale. [77] See
http://www.test-achats.be/map/src/522123.htm. [78] See
http://www.fsa.gov.uk/pubs/other/key_features.pdf. [79] See
http://ec.europa.eu/internal_market/securities/docs/esme/05092007_report_en.pdf. [80] http://www.afm.nl/corporate/default.ashx?DocumentId=9246. [81] These
so-called "precipice bonds" were linked to derivatives such as the
performance of an index or indices or baskets of stocks. They were often
structured as offshore investment companies or offshore insurance companies and
so are not regulated by the FSA. They were structured to deliver a high income
without protection against loss of the initial capital invested; return of the
original capital was linked to the performance of an index/indices or a basket
of stocks. The risk of capital loss (particularly high given the income being
taken) was often not clearly explained. [82] See
for example FSA/PN/122/2002
of 15/12/2002 'Precipice bond' investors may not get their money back, FSA
warns". See also http://www.fsa.gov.uk/pubs/guidance/guidance7.pdf.
[83] Joint
Forum, Customer Suitability in the retail sale of financial products and
services, April 2008. [84] The
Lamfalussy report, published on 15 February 2001, can be found on the
Commission’s website: http://europa.eu.int/comm/internal_market/securities/lamfalussy/index_en.htm [85] See
Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the
exercise of implementing powers conferred on the Commission, OJ L 184,
17.7.1999, p. 23. [86] See
Commission Decision of 6 June 2001 establishing the Committee of European
Securities Regulators (2001/527/EC), amended by Commission Decision of
5 November 2003 (2004/7/EC), and Commission Decision of 6 June 2001
establishing the European Securities Committee (2001/528/EC), amended by Commission Decision of 5 November 2003 (2004/8/EC). [87] Regulation
of the European Parliament and of the Council laying down the rules and general
principles concerning mechanisms for control by Member States of the
Commission’s exercise of implementing powers, adopted by the
Education, Youth, Culture and Sport Council on 14 February 2011. [88] Annex I 3 contains a definition on which we consulted
and which might be used as a basis for such definition in order to achieve
necessary certainty. [89] Note,
that while consistency is sometimes considered solely from the perspective of
the content of rules, our focus in this impact assessment is on likely
consistency in outcomes. [90] [Reference:
joint 3L3 report on PRIPs, November 2010]. [91] This
reflects the extent to which the allocation of responsibilities can be a tool
which controls what PRIPs can in fact be sold to retail customers. [92] The
FSA in its recently published paper on product interventions noted that
pre-approval of products (and/or disclosures about them, which may be taken to
amounting to the same thing) had some strong disadvantages in their eyes, for
instance it could lead to a transfer of risk onto the regulator from the
industry, that would thereby take less responsibility for the design of
products being marketed at the retail client. [93] See
the impact assessment prepared to accompany the November 2010 Communication on
sanctions, a summary can be found at: http://ec.europa.eu/internal_market/consultations/docs/2010/sanctions/resume_impact_assesment_en.pdf [94] See
the impact assessment prepared to accompany the November 2010 Communication on
sanctions, a summary can be found at: http://ec.europa.eu/internal_market/consultations/docs/2010/sanctions/resume_impact_assesment_en.pdf [95] See
IA Guidelines Annex p. 49. available at: http://ec.europa.eu/governance/impact/commission_guidelines/docs/iag_2009_annex_en.pdf
[96] Different
options on the scope of the regime could materially impact costs, to the extent
that the chosen option on the scope of the regime would determine the degree of
standardisation adopted. A wide scope that applies only high-level principles
to non-packaged retail investments, but standardises disclosures for packaged
investments, would functionally be very similar to the proposal being assessed
here. The impact of a wider scope that standardises disclosures across the
board would require much further work to assess its likely impact. [97] "Study
on the Costs and Benefits of the proposed UCITS Key Investor Information"
Final Report 2009 December; prepared by CSES for the European Commission,
(hereafter referred to as the CSES study). [98] Administrative
burdens are administrative activities that an entity only conducts because of
legal obligations. (See p.47 of the Annexes to the Impact Assessment
Guidelines). "Given the design of the KID as shown above, as part of the
study we needed to design an approach to costing the KID. What we were trying
to cost is the additional cost of the KID over and above existing requirements.
So it is the marginal costs that were sought – not the cost of providing
underlying information which are incurred anyway." CSES study, p.6. [99] Business
as usual costs are created by administrative activities that an entity would
continue if legal obligations (at EU level) were removed. (See p.47 of the
Annexes to the Impact Assessment Guidelines) [100] For the types of obligations that qualify as
"administrative", see p.49, box 1 of the Annexes to the Impact
Assessment Guidelines. [101] For the typology of required actions see p. 51, box 3 of
the Annexes to the Impact Assessment Guidelines. The types of information
obligation assessed in the CSES study fall under the categories 1 to 11 and
categories 13 and 14. [102] Concerning the methodology of surveying firms, it should
be added here that assessing compliance and administrative costs and burdens of
proposed changes is in practice very difficult for firms on an ex ante basis,
where precise details of all the measures are not yet in place; any assessment
requires many assumptions to be made. This problem applies for the PRIPs
changes being assessed here, as much of the detail necessary for firms to
understand the likely changes will be prescribed at level 2 rather than level
1. Nonetheless, we use these figures for a rough estimate of possible
administrative burdens flowing from this initiative once the Level 2 measures
are determined. [103] See CSES Table 7.6, page 24. Some assumptions were made
in grossing up: a possible range of overall. [104] 2009 basis, on a conservative assessment: unit-linked as
proportion of life insurance business held as securities or units; Arete
Consulting data for outstanding retail structure products (with securities or
deposit forms), EFAMA market data on size of UCITS and non-UCITS fund markets
in EU. [105] Source: Arete Consulting, EFAMA.