The UK’s Regulatory Reform Taskforce recently published a report which proposed some changes to transparency and disclosure rules for the asset management industry.
Among these proposals are the removal of the MiFID II requirement to provide costs and charges reports to professional investors and permanently limiting PRIIPs to "genuinely complex" products.
Our Regulations Manager, Mikkel Bates takes a look at the implications of these proposals and what it might mean for the industry.
The FCA is a strong advocate of transparency as a tool for investor protection, but its focus for this has always been firmly on the retail investor, so that fits in with the recommendation on MiFID II costs and charges disclosure. It is not clear what the FCA’s stand on this was in discussions with the European Supervisory Authority, ESMA, pre-Brexit, but there are options for a slight relaxation of disclosures to professional investors under MiFID II, so it is not a huge step to get to this recommendation.
However, with PRIIPs, it is a little more surprising as we would expect the FCA to favour the ability for retail investors to compare all products based on, among other things, costs and volatility. However, they have been more relaxed than the EU regulators on what constitutes a non-complex product, including most investment companies when the strict European interpretation would not include them.
The PRIIPs Regulation got itself tied up in knots over ‘complex’ and ‘complicated’ products, as evidenced by the ‘comprehension alert’ (additional text on PRIIPs KIDs, where relevant, of: “You are about to purchase a product that is not simple and may be difficult to understand"), which the legislators wanted to be on all ‘complicated’ products. These however were not intended to be the same as ‘complex’ products. The understanding was that they hoped its appearance on a small number of KIDs would result in the disappearance of ‘complicated’ products from the shelf for retail investors. However, in the end, the regulatory technical standards (RTS) included the alert on all ‘complex’ products, thereby watering down its impact. So there needs to be more clarity on exactly what is deemed to be a “genuinely complex” product.
Impact on investors and the industry
Based on the little information there is in the report, there would be no difference to retail investors from the MiFID II change, while most professional investors would most likely be fine with it.
The PRIIPs recommendation would affect retail investors (professional investors don’t get a PRIIPs KID anyway) and we would have expected a proposal to make the KID more meaningful and useful, rather than remove it entirely (for the majority of products/funds). What, one may ask, is then the argument for retaining the UCITS KIID, as UCITS are, by definition, non-complex products? Those who would benefit from the proposal are the PRIIPs manufacturers who would no longer need to produce the documents, and, to an extent, the platforms and advisers who wouldn’t need to give them to clients.
Scale of the changes in the UK
It is likely there would need to be a balancing act for UK regulators between asserting independence from “EU red tape” and not throwing away any chance of equivalence in the future. The UK has talked about wanting equivalence to be based on outcomes and strength of investor protection, while the EU requires regulations to be aligned for there to be equivalence. These changes don’t go so far as to change the nature of investor protection rules, but they do assert the UK’s right to self-determination