For immediate release - Brussels, 28th June 2018 

EFAMA “Evidence Paper" on PRIIPs rules confirms shortcomings of the regulation for investors

Six months into the implementation of the new PRIIPS rules, EFAMA has published an “Evidence Paper" which explains the shortcomings of the new PRIIPs Key Information Document (KID) rules based on “real life" data from its corporate members.  

EFAMA's compelling evidence showcases how the disclosures made in the PRIIP Key Information Documents (KID), originally designed to enhance investors' understanding of retail investment products, are causing serious detriment to these same investors by mandating figures, particularly in relation to performance and costs, that at best confuse them and at worst mislead them. 

The paper supports EFAMA's assessment of the negative consequences of the PRIIPS rules by leveraging “live" data and direct insights from its corporate members on how the regulation is currently impacting the industry. 

The full paper can be read here (link). 

The European fund industry calls on the policymakers and the regulators for regulation that will enable shareholders to follow the fundamental principle that investor communications must be 'clear, fair and not misleading'.  EFAMA believes this needs to be achieved through providing investors with truly reliable product disclosures on which to base their investment decisions. 

The evidence supports the following findings and conclusions: 

  • The new methodology for calculating transaction costs produces confusing and unreliable figures: on a constant basis, transaction costs are either over or underestimated, sometimes even leading to overall negative transaction cost figures being presented to investors.
     
  • As a result, PRIIP KID's new methodology forces manufacturers to make claims for products that hinders investors' understanding of them.
     
  • Investors will be deprived of an important element of information as a result of past performance of products and of their benchmark if any not being disclosed in the PRIIP KID.
     
  • Looking at future performance scenarios without further context will not help investors make investment decisions: the future performance scenario is based on the last five years returns and assumes that a market will operate in a single direction effectively indefinitely, meaning that investors will be provided with excessively optimistic and linear performance scenarios. 
     

Meaningful comparisons between similar investment products will become impossible: because costs are now averaged over a product's recommended holding period, cost comparisons will not be possible for products with different holding periods. 

EFAMA's Director General Peter De Proft alerts:We urgently call on the ESAs and the European Commission to plan an immediate targeted revision of the PRIIPs Delegated Regulation, well ahead of any planned formal review[1] of the rules. The clock is painfully ticking, and time is of the essence as investors are currently presented with misleading information. 

We believe that a level of urgency is justified and we ask the ESAs and the European Commission to take swift action in order to stop systematic misinformation of investors and avoid further consumer detriment. 

We are also extremely concerned that the current legal framework is such that it will require funds to produce both a PRIIP KID and UCITS KIID simultaneously by December 2019. Given the compelling evidence of the negative impact of the PRIIPs KID rules on investors, we strongly recommend that the exemption for funds producing a UCITS KIID be extended until these issues are satisfactorily resolved in the upcoming PRIIPs review." 

Peter De Proft will be speaking at the European Commission's public hearing on “Making the Capital Markets Union work for retail investors", taking place tomorrow in Brussels. 

More details on EFAMA's paper and the above findings can be found in the annex to this announcement. 

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Annex: EFAMA Evidence Paper proves negative effects of PRIIPS rules on investors  

EFAMA's Evidence Paper showcases how our concerns, shared by the investors' representatives, with regards to the new PRIIPs disclosure rules and their negative effects on investors are materialising.  

Specifically, the methodology for calculating transaction costs and the new rules around future performance scenarios are fundamentally flawed. This in turn drastically challenges the ability of the PRIIP KID to assist investors in making good investment decisions - given both the value proposition (the fund's projected performance) and the cost proposition are seriously skewed.  

Cost calculations are based on partly inappropriate methodologies resulting in misleading information for the investors: The new methodology for calculating transaction costs is producing unreliable figures. This new methodology systematically leads to the inclusion of market movements (i.e. slippage) when calculating transactions costs, which is fundamentally wrong. The inclusion of market movements is, for example, distorting the figures and transaction costs disclosed to investors will, in many cases, be either overestimated or underestimated. Investors are therefore being presented with a confusing and misleading picture of the real costs of the product.  

Past performance will no longer be disclosed in the PRIIP KID. This is a regrettable step back from the UCITS KIID, given that investors will be deprived of an important element of information. Past performance (although not a guarantee for the future) allows investors to see whether an investment product has previously met its objectives and delivered value for its investors. Long term (10 years minimum in the UCITS KIID) past performance presentation can also illustrate well the volatility of returns, something now missing in the context of scenarios.  

Looking at future performance scenarios without further context will not help investors make investment decisions. The future performance scenario framework is fundamentally flawed as it assumes that a market will operate in a single direction effectively indefinitely. Available data shows that performance scenarios will be based on the very positive market returns of recent years. This means that investors will be provided with excessively optimistic performance scenarios that assume sometimes yearly double-digit growth rates over the product's whole recommended holding period, making no distinction whether it is one, five or forty years.  

Such overly optimistic scenarios may not only lead to wrong investment decisions, but also contradict the PRIIPs Regulation's overarching principle to provide fair, clear and non-misleading information. The methodology in the rules, if not reverted and corrected, will lead to misleading results even in relatively short recommended holding periods of five years and ever more so for longer recommended holding periods. Finally, the methodology risks pro-cyclical investor behaviour as investors respond to signals based on the stage of the market cycle during which the disclosure material is produced.  

Meaningful comparisons between similar investment products will become impossible: because costs are now averaged over a product's recommended holding period, cost comparisons will not be possible for products with different holding periods.  

Background on PRIIPS 

The PRIIPs (Packaged Retail Investment and Insurance Products) Regulation is in place since 3 January 2018. The new rules were designed to enhance investors' understanding of retail investment products whether bank, insurance or fund-based. They do so by adapting existing UCITS disclosure rules (the UCITS Key Investor Information Document, or KIID) into a PRIIP Key Information Document or KID.  Like the UCITS KIID, the PRIIP KID is intended to provide meaningful, comprehensible and comparable information in order to make investors feel confident in their investment decisions.  

EFAMA continues to fully support the initiative to provide to investors with transparent, comparable and understandable information through a PRIIP KID. Unfortunately, it is clear that they will not achieve the desired objective. EFAMA's Evidence Paper demonstrates this.  

Over the past years, the European asset management industry systematically alerted EU policymakers throughout the rule-making process of these risks. We communicated repeatedly on the likelihood that the proposed rules would prove to be badly calibrated and on the negative consequences that they would have on PRIIPs investors. We did this jointly with investor representative associations. The industry also remodelled calculation methodologies and provided practical solutions to get the rules right for investors. Regrettably, our concerns and proposals were ignored in the final rules.  

EFAMA's Evidence Paper published today demonstrates how the new disclosure rules in the PRIIPs KID is misleading investors. 

---Ends ---

For media enquiries, please contact:

Peter De Proft, Director General 

Telephone: +32 (0) 2 513 39 69

E-mail: info@efama.org  

Notes to editors: 

About the European Fund and Asset Management Association (EFAMA): EFAMA is the representative association for the European investment management industry. EFAMA represents through its 28 member associations and 62 corporate members close to EUR 23 trillion in assets under management at end 2016. At end June 2017, total net assets of European investment funds reached EUR 14.8 trillion, with over 31,200 of these funds were UCITS (Undertakings for Collective Investments in Transferable Securities) and over 28,300 funds composed of AIFs (Alternative Investment Funds).