Battle Royal or Just a Misunderstanding over PRIIPs Past Performance?

The European Supervisory Authorities (ESAs) issued a consultation paper on possible changes to PRIIPs KIDs last October, following extensive criticism of several aspects. In the UK, this criticism culminated in the Association of Investment Companies (AIC) publishing its response to KIDs in a report titled “Burn Before Reading”, whose title tells you all you need to know.

The most heavily criticised section of the KID has been the performance scenarios, as they are intended to show the range of possible returns available under favourable, moderate and unfavourable conditions, using a formula overlaid onto past performance, which, as we all know, is not a guide to future performance.

When it was pointed out that even the unfavourable scenarios for many equity-based funds could show positive returns after a long bull run, the regulators added a fourth – stress – scenario. So now, the range of possible returns shown is generally extremely wide and tells retail customers little that is really useful.

The consultation paper proposed a number of changes to the calculation and presentation of performance. These include different ways to illustrate future performance without being subject to the cyclicality of past performance and the possibility of adding a chart of past performance.

Don’t forget that, at the end of next year, UCITS KIIDs are due to disappear and be replaced by PRIIPs KIDs. UCITS KIIDs show only past performance, so there is inevitably going to be a huge adjustment for UCITS, when they need to start showing future performance scenarios, instead of, or alongside, past performance.

Now a spat has broken out, with the regulators and Better Finance (a European body representing savers and investors) on one side and the European Commission and MEPs, who don’t like the idea of showing past performance, on the other. Even before any sign of the regulators’ final solution, the protagonists are airing their arguments for or against putting past performance on a KID.

According to the FT, the Commission wrote a letter to ESMA, the European securities industry regulator, saying future performance should not be replaced by past performance, “even if such scenarios could allegedly better apply to the reality in the market and avoid procyclical effects”.

Better Finance, which has advocated including past performance since the beginning, countered by saying that excluding past performance would have a “catastrophic impact” and that future scenarios are “almost certain to be wrong, highly misleading, not intelligible [and] not comparable”.

Clearly, past performance would not have been included in the consultation if there was no possibility of including it and we have to assume that MEPs and the Commission have been sounded out about it since the consultation closed in January, so this may not be an easy one to resolve. The good news is that the MEPs’ real concern may be around past performance replacing the future scenarios, but, as the use of scenarios is enshrined in the PRIIPs Regulation, that is very unlikely to happen any time soon, if ever.

We could be optimistic and hope that this battle is all about a misunderstanding that can be sorted out easily, or we could be pessimistic and expect to see a major battle played out in the trade press and in Brussels for quite a while. For the sake of a more sensible KID – and a workable solution before UCITS KIIDs are due to disappear, I’m sure the whole industry is hoping the former, but I wouldn’t bet on it, given some MEPs’ resistance to showing past performance at all.

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