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Categorized | Financial

MEPs snub Brussels consumer legislation

Posted on September 25, 2016

Members of the European Parliament take part in a voting session at the European Parliament in Strasbourg, eastern France, on September 13, 2016. / AFP PHOTO / FREDERICK FLORINFREDERICK FLORIN/AFP/Getty Images©AFP

European politicians have overwhelmingly rejected a core part of a consumer focused regulation known as Priips

One Wednesday morning earlier this month, a flood of emails arrived in an EU lobbyist’s inbox. Many of these messages did not contain any words, but most featured an emoticon: the smiley face.

Just minutes before those emails were sent, European politicians had overwhelmingly rejected a core part of a consumer-focused regulation known as Priips, or the packaged retail and insurance-based investment products rules.

    It was the first time such a snub had taken place in the history of financial services regulation, and the asset management industry, which had lobbied for changes to the legislation, was jubilant.

    Now fund houses are crossing their fingers that Priips, which is due to come into force at the start of 2017, will be delayed, giving them more time to prepare for its implementation and to lobby for further changes to the regulation.

    “If news comes out [that Priips is delayed], I expect I will receive a lot more smiley faces,” says the lobbyist, who spoke on the condition of anonymity and works on behalf of fund managers.

    This desire for Priips to be postponed is at odds with how warmly the fund industry initially welcomed the regulation. Thomas Richter, who heads up the BVI, the German trade body for fund managers, says: “[Priips] is one of the favourite projects of the asset management industry. We were so happy when Priips came out.

    “The problems started when it came to [the technical rules underpinning the regulation]. From that moment on things went in the wrong direction.”

    The idea for Priips was first mooted almost a decade ago, with work on the rules gathering pace in 2014. Heralded as financial regulation that would help consumers, its intention was to make it easier for ordinary people to compare the risks, costs and performance of different investment products, from mutual funds known as Ucits to insurance products.

    At the heart of Priips is the so-called key information document or Kid, three pages that provide investors with a simple overview of the most important details they need to know about an investment product.

    Asset managers already produce a similar document, called the key investor information document, for Ucits funds. But the proposed Priips version featured some big changes, including an overhaul of how costs and investment performance are calculated and displayed.

    Chart: Priips timeline

    In a rare sign of agreement between often opposing groups, politicians, asset managers, insurers and consumer groups argued there were shortcomings in the Priips proposals that would put consumers at risk.

    Despite the protestations, the European Commission, the EU’s executive arm, signed off on the rules, known as regulatory technical standards, without any amendments in June.


    Number of MEPs who voted to reject Priips

    Two months later, MEPs pitted themselves against the commission as they voted overwhelmingly — 602 in favour, four against and 12 abstentions — to reject the regulatory technical standards. It was a rare sign of defiance by the EU’s political arm.

    MEPs highlighted four main concerns around Priips, including performance disclosure. Under the rules signed off by the commission, companies would need to provide investors with forecasted future investment returns based on three scenarios that ranged from adverse to good. But Sven Giegold, the Green MEP, had warned that the formulas put forward to calculate future returns contained a “huge flaw” that would make performance look better than it was likely to be.

    The European Council will make a decision on the technical standards later this month. However, the MEPs’ vote means that the rules will have to be redrafted in any event.


    Number of MEPs who voted in favour of Priips

    Syed Kamall, a British Conservative MEP, says: “The onus is now on the commission to redraft these technical standards, so that the resulting key information document is a viable resource for consumers.”

    With the regulatory standards now under review, the big question for all parties is whether the introduction of Priips will be delayed. A majority of council members this week asked the commission to delay introducing Priips for 12 months. This would please asset managers who have said they do not have enough time or information to prepare for a January implementation deadline.

    The commission has repeatedly said Priips should come into force at the start of 2017, even if the underlying rules have yet to be drafted. People familiar with the commission’s view say there is a feeling that companies could comply with the spirit of Priips, even without the underlying technical rules.


    Number of abstentions

    Florian van Megen, retail markets specialist at the Investment Association, the UK trade body for fund companies, believes this is unworkable. “The technical standards give you all the cornerstones on how to produce this three-page document. Without having the granular information, no one will know how to implement [Priips].”

    Mario Mantrisi, senior adviser to the chief executive of Kneip, a research company that works with asset managers to produce investor documents, says fund houses are in a state of flux about how to respond to the current situation. “The reality is at the moment it is still January 1 2017 [for implementation] and we are working towards that deadline,” he says. “There is an urgency, but this could change.”

    Helena Walsh, who heads up the Brussels team for Cicero, the financial lobbying company, continues to advise her clients to prepare for a January deadline, although she believes it will be difficult for the commission to avoid pushing back the implementation of the rules by a year.

    MEPs plan revolt against retail investment rules

    Syed Kamall, Pervenche Beres, Sven Geigold

    Rare show of defiance against ‘unclear’ consumer protection plan

    A spokesperson for the commission says: “We will take the council and the European Parliament’s positions on board to ensure the best possible course of action for consumers. We have not been supportive of a delay because our first obligation has always been to consumers throughout this process.

    “Our main goal is to have this important legislation in place as quickly as possible so as to benefit European consumers. We will work closely with co-legislators and European supervisory authorities to make sure that happens.”

    But Mr Richter says a delay is the only solution that makes sense. “Anything else would be counterproductive and to the detriment to consumers and the financial industry.”

    If a delay is likely, the fund industry plans to lobby for changes to the investor document, especially around the calculation of transaction costs and the disclosure of returns.

    Mr Richter adds: “Everyone is unhappy with Priips [in its current form] — the consumer protectors are unhappy, the asset managers are unhappy and the insurers are unhappy.

    “We continue to ask for a delay. We will continue to convince people that a delay is necessary for the sake of real consumer protection and for the sake of Priips itself.”

    Concerns about removal of historic performance data


    The investment fund industry was a vocal supporter of the Priips rules when they were first announced, but in recent months asset managers have raised concerns about the consumer-focused regulation.

    Chief among their complaints is the removal of historic performance data from the new Priips investor documents.

    Instead of showcasing the returns generated by an investment product over pervious years, the new Priips investor document requires asset managers to forecast how the funds are likely to do in the future, based on three scenarios: unfavourable, moderate and favourable.

    In June, BlackRock, Schroders and six other global asset managers wrote to the European Commission, the EU’s executive arm, calling for it to allow past performance to be included alongside the future scenarios, arguing this would “provide historic proof of an active manager’s ability (or not) to regularly outperform the fund’s benchmark”.

    They warned the rules in their current format were “not evidenced based, will not help consumers, and will not command respect”.

    The commission signed off on the rules without any amendments in June, but MEPs rebelled against them in September, meaning the rules will have to be redrafted.

    Asset managers now hope they will have another chance to get past performance back on to investor documents.