Those drafting the packaged retail and insurance-based investment products (PRIIPs) directive had good intentions. They wanted a key information document (KID) to be created for each retail product to help the average investor compare different options.

Whilst a reasonable principle, the problems came with the detail. Part of this is a requirement to calculate predictions of future performance scenarios using a set of standardised formulae. As well, there is a formula for calculating the total cost of the products, including how the market has moved since the order was placed and executed.

“The predictions for future returns are based on the most recent five years of data, thus ignoring events such as the 2007/2008 financial crash,” noted François-Kim Hugé, partner at Deloitte Luxembourg. There are problems too with the transaction costs estimations, with some suggesting negative costs.

Insurance providers have already been supplying the PRIIPs KID to clients since the start of 2018, and it was planned that investment fund providers would follow from
1 January 2020.

Industry lobbying bore fruit on 3 November when the European Parliament voted to delay implementation to 1 January 2022, with the authorities promising to review the rules in the meantime. Until then, funds will continue to issue the less complex key investor information document (KIID) required by the Ucits directive. This move followed a suggestion by the EU’s three European supervisory authorities (ESAs).

Outstanding questions

“Everyone in the fund industry has welcomed this move,” noted Hugé, but the question remains whether real reform is likely. Some analysts are quietly hopeful that the two-year delay points to serious disquiet behind the scenes at the EU.

“For now, all we have seen are proposals from the ESAs to add further information on past performance, but this will not address the issue of the lack of clarity of performance scenarios,” he said. “On the contrary, this adds more complexity and does nothing to address the question of the future performance projections.”

Indeed, the consultation paper released in November by the ESAs suggested some small adjustments to the way future returns are predicted. Many in the industry worry that them being asked to make predictions at all could be potentially damaging for them and the industry in general. Then, on other points raised by critics (such as the calculation and presentation of fees and costs), the paper said very little.

The industry still has a lot of work to do to convince EU decision makers of the need for change.