Nobody denies the value of a short document with key information for investors before they commit to a fund or product. But criticism of the calculations used in PRIIPs KIDs has been pretty constant since even before they hit the streets in January and has hopefully reached a level that can’t be ignored by the European Commission or the European Supervisory Authorities (ESAs).
At the end of last year, the Chief Executive of the Association of Investment Companies (AIC) said that disclosure on KIDs overstates performance and understates the risks, as they are based on a bull market that has been running for more than five years. No sooner had KIDs become a reality than the manager of one of the largest investment trusts, Scottish Mortgage, said they were “seriously flawed”. These criticisms led to the FCA saying providers and advisers could provide additional explanation if they felt the prescribed information on a KID was misleading.
Still in January, the Investment Association, representing fund groups, and the advisers’ and wealth managers’ trade body Pimfa called for an urgent review of KIDs.
In April, no less than the FCA Chief Executive, Andrew Bailey, told a conference at the London Business School, “I am concerned about PRIIPs, and I know I am not alone.”
Now the AIC has continued its assault by saying KIDs are so misleading that it will not be posting them on its website. Among its research were findings that 42 of its members’ KIDs show more than 20% annual returns in the “moderate” scenario and 138 investment companies have a medium-low or low risk indicator level.
It’s not just in the UK that faults with PRIIPs KIDs have been highlighted, as even the Chairman of the European regulator ESMA told a conference in March that, “on the methodology for calculation, we are aware of the vocal reactions of stakeholders and the extensive coverage in the media of supposed flaws … we are ready and willing to look at this issue”.
The European Commission is required by the PRIIPs regulation itself to conduct a review of the regulation by the end of 2018. This should consider, among other things, whether UCITS funds are to migrate from their current KIIDs to PRIIPs KIDs at the end of 2019, as planned. As part of the review, the Commission needs to carry out consumer testing that, surely, will support changes to the numbers shown in the existing document. Even if the Commission and regulators refuse to make changes to KIDs any sooner, wholesale changes will be needed when UCITS funds make the move, so the single document produced across the board will really be fit for purpose.
As the outcome of the review is unlikely until very near the end of the year, the time to make major changes may be short. The lead-up to KIDs wasn’t blessed with a lot of consensus, so consultation on further changes may be fraught. If 2019 is as busy for PRIIPs as 2017 was, groups may struggle even more than before, as many project teams have now been disbanded.
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