Retail investors need to read pre-contractual disclosures if new PRIIPs regulations are to be successful

Any replacement to the Packaged Retail and Insurance-Based Investment Products (PRIIPs) regulations can only be effective when retail investors actually read them, FE fundinfo – the global leader in investment fund data and technology – has stated in its response to HM Treasury’s consultation.

Currently, under 3% of retail investors read pre-contractual disclosures – according to the Financial Conduct Authority’s (FCA) Asset Management Market Study – meaning the vast majority are not taking advantage of the disclosures being made by investment product providers.

In its response, FE fundinfo also stated that the implementation of new PRIIPs regulations has been adversely affected by a number of problems, including trying to “shoe-horn” disparate products into a single set of rules.

FE fundinfo has said that it believes that since the introduction of the PRIIPs regulation at the start of 2018, there have been many issues experienced by those trying to implement them, and that few problems have actually been resolved by the recent changes either in the UK or in the EU.

In addition, FE fundinfo believes that the original argument in favour of a single disclosure document – that the different products classed as PRIIPs all deliver investment returns to retail investors – was a spurious one and no investor, retail or otherwise, compares derivatives to structured products to investment trusts to life assurance bonds at the point of making an investment decision.

It also disagrees with the idea that price volatility is the most important risk to disclose to a retail investor. The most important risks are of losing money, in nominal and/or real terms, or of not being able to access the proceeds of an investment when desired, unless that risk has been clearly disclosed in advance.

In January this year, FE fundinfo, announced that it had successfully completed its transition to, and the production and dissemination of, the revised Key Information Documents (KIDs) for PRIIPs, in time for the European deadline of 1 January 2023. Around half a million documents were produced in 32 languages for distribution in 37 different countries.

Mikkel Bates, Regulation Manager, FE fundinfo, said:  

“Along with most other industry participants, we agree that the provision of key information to consumers before a sale is concluded is extremely important, but the implementation of the regulation has been adversely affected by a number of problems. The most obvious problems have been the attempt to shoe-horn disparate products into a single set of rules with a prescribed template, and the use of historical data to project future risks, returns and costs."

“However, the overriding problem with existing pre-contractual disclosures was highlighted in the FCA’s Asset Management Market Study that even predated the introduction of PRIIPs KIDs, which is that fewer than 3% of retail investors read them. It doesn’t matter how useful or important the disclosures are if over 97% of those they are targeting never read them.”