FCA issues Feedback Statement on its PRIIPs Call for Input

Despite a lack of ability to do much at a local level about PRIIPs, the FCA issued a Call for Input (CfI) last year to ask for industry views on issues such as the scope of the PRIIPs Regulation and the calculation and presentation of risks, returns and costs on a KID. It deserves a muted round of applause for acknowledging the industry’s concerns and for publishing its Feedback Statement, FS19/1, responding to the huge number of responses it received to the CfI.

On the scope of the regulation, the industry told the FCA that corporate bond issuance to retail investors has slowed and issuers are taking steps to limit retail access to bonds, so issuers can avoid compliance risk. The FCA is “very concerned about the apparent impact of the PRIIPs legislation on choice and liquidity in retail corporate bond markets” and “would strongly support EU-level clarifications on the scope of the PRIIPs Regulation for corporate bonds.”

In respect of whether all Real Estate Investment Trusts (REITs) are PRIIPs, however, the FCA says “it is the responsibility of the manufacturer of REITs to determine whether the REIT is a PRIIP or not.” Fortunately, the FCA has been less ambiguous on other requests for clarity on scope, such as for derivatives, investment companies, funds from outside the EEA and so on.

On concerns expressed about the risks, performance and costs sections of a KID, the general tone is a variation on “we share the concerns of industry…We have used the information received in the CfI regarding methodological concerns to influence our discussions at a European level” and “we will continue to push for changes at EU level.”

The only exception to this, with which the FCA has little sympathy, is on transaction costs, where responses “did not provide credible evidence to support claims that the methodology is not working as intended. Our analysis…has led us to conclude that unrepresentative transaction costs in KIDs are a result of poor application of the PRIIPs methodology.” This is hardly a surprise when it is understood that the FCA has been a strong advocate of the “slippage cost” methodology.

What is a surprise, then, is that FS19/1 should take the same approach as the European regulators at a major workshop in 2016, as it says that, while the methodology aims to capture the “random” market impact between a trade being transmitted to the market and its execution, “when slippage is calculated over many transactions, this random element should average out to approximately zero.”

So I question why the FCA insists that PRIIPs manufacturers (and, by extension, everyone caught by MiFID II) go to all the effort of calculating the slippage cost when it expects the difference over time between it and half the bid-ask spread to be “approximately zero.”

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