Regulatory divergence between the European Union and the United Kingdom seems to be on the cards with HM Treasury intending to make some changes to the UK's onshored PRIIPs Regulation.
On 23 June HM Government announced its intention to frame legislation to improve the functioning of the Packaged Retail Investment and Insurance-based Products (PRIIPs) regime in the UK. It has now issued some more detailed proposals. 'Onshoring' describes the efforts that the Government has made to convert the existing body of EU legislation into British law with as few glitches as possible.
The European Union's PRIIPs Regulation calls for standardised disclosure documents, known as Key Information Documents or KIDs, that firms must send to HNW and other retail investors when they purchase particular PRIIPs. Each KID must contain information about the product and its objectives, the potential risks and returns associated with it, performance scenarios, information regarding compensation that the investor may be entitled to if the PRIIPs manufacturer fails to pay out, the costs associated with investing in the product and an indication of the recommended holding period for the product and information about the consequences for investors who want to sell them off early.
The Treasury plans to make the following changes to the UK's 'onshored' version of the PRIIPs Regulation.
1. An amendment enabling the FCA to "clarify the scope of" (i.e. decide when not to apply) the PRIIPs Regulation by making rules. Nobody knows exactly how far PRIIPs reach, especially with respect to corporate bonds. Wherever firms are uncertain about the applicability of PRIIPs to an investment product, HM Treasury believes that the retail issuance of that product is bound to suffer. It is therefore worried that retail investors who hold such products find it harder to get rid of them.
The Treasury's amendment will undoubtedly allow the FCA to pick and choose between investment products. The definition of a 'PRIIP' will remain unchanged.
2. An amendment to replace "performance scenario" with "appropriate information on performance" in the PRIIPs Regulation. The FCA will then be able to amend the RTS to decide (or, in the Treasury's terminology, 'clarify') the information about performance that the KID should provide. The PRIIPs Regulation obliges PRIIPs manufacturers to include performance scenarios in key information documents or KIDs. The method for calculating these scenarios is set out in the PRIIPs regulatory technical standards or RTSs issued by the European Supervisory Authorities, the "national regulators' regulators," and people have criticised it for producing misleading performance scenarios for a wide range of products. The Treasury believes this to be due, at least in part, to the methods that the PRIIPs RTSs prescribe that rely on past performance to project future performance in a way that generates "procyclicality."
3. An amendment enabling HM Treasury to extend the exemption that is already in place for Undertakings for the Collective Investment in Transferable Securities (UCITS) funds. UCITS funds are exempted from the requirements of the PRIIPs Regulation until 31 December 2021. Until that date, instead of KIDs, UCITS funds must produce Key Investor Information Documents (KIIDs) as per the requirements of the EU's UCITS Directive.