Is the end really in sight for UCITS KIIDs?

So the European Insurance and Occupational Pensions Authority (EIOPA) rolled over when pressure was applied by the European Commission for the European Supervisory Authorities (ESAs) to resolve the impasse on the regulatory technical standards (RTS) to deal with some of the more contentious aspects of PRIIPs KIDs.

The other two ESAs – the European Banking Authority (EBA) and European Securities and Markets Authority (ESMA) – already voted through the RTS last summer, but EIOPA held out, taking the line that PRIIPs could only become fit for purpose if the Level 1 regulation were reviewed first, instead of tinkering around with the presentation and methodology.

The EU Financial Commissioner wrote to the ESAs in December with the ultimatum that they had until the end of January to agree the RTS or the Commission could take away their responsibility for them. EIOPA’s last act of defiance on this was to take until 3 February to vote them through, and not before receiving a promise of a review of the regulation as “a priority for the Commission … [taking] place as soon as possible”, but not until the results of a study into disclosure, inducements and suitability rules, due at the end of 2021, are known.

There are still a number of outstanding matters to be resolved, even with the RTS moving ahead.

The exemption for UCITS KIIDs is due to end on 31 December 2021

We now have less than 11 months before UCITS funds are due to convert to publishing PRIIPs KIDs instead. As the European investment managers’ trade body EFAMA said in its pre-emptive paper on 1 February, calling for a further year’s extension for UCITS KIDs, “time has already run out to allow for proper implementation” of the new PRIIPs rules before UCITS are due to transition across.

With the focus this year on sustainable investment disclosure, will any UCITS management group really have the resources to throw at preparing for PRIIPs KIDs in the time available?

UCITS KIIDs for institutional share classes

UCITS KIIDs are produced for all share classes, while PRIIPs KIDs are only required for investment products available to retail customers. It is not yet clear whether non-retail share classes will need to produce a PRIIPs KID (not under the regulation as it stands), continue to produce UCITS KIIDs or stop publishing such pre-sale disclosure documents altogether.

Technically, any changes to the production of UCITS KIIDs will require a revision to the UCITS directive, but that is unlikely to prove much of an obstacle.

A different risk indicator for PRIIPs and UCITS

While the Synthetic Risk and Reward Indicator (SRRI) on UCITS KIIDs and the Summary Risk Indicator (SRI) on PRIIPs KIDs look the same, with a scale from 1 to 7, they are based on different calculations and represent very different levels of risk.

As it is not possible to lose more than the amount invested in a UCITS fund, the highest SRRI represents annualised volatility over 25%. However, as PRIIPs include derivatives, it may be possible to lose more than 100% of the initial investment, so an SRI of 7 applies to products with a Value-at-Risk-equivalent volatility of 80% or more, also taking account of any credit risk, if applicable. Will a sudden shift in the apparent risk level of a fund be confusing to investors?

To include or not to include past performance

We all know that past performance is not a reliable indicator of future performance, as was clearly shown when the coronavirus brought a decade of rising markets to an abrupt halt. But even Better Finance, the European lobby group for financial services customers, says PRIIPs KIDs should show past performance, as investors understand it and expect to see it.

It doesn’t help that the current method for calculating the future performance scenarios on PRIIPs KIDs is based on historical returns and emphasises the cyclicality of markets. The new RTS go a long way to countering this, but customers are used to seeing the past performance of a fund and they know very well that it’s not a guarantee it will continue in the same way.

But the PRIIPs regulation only allows for future scenarios, so the revised RTS suggest signposting from a PRIIPs KID to a separate document showing past performance. The word last year was that a few MEPs were intent on keeping past performance out of PRIIPs KIDs completely, so it will be interesting to see if they push back on that.

Now that the ESAs have approved the RTS, the European Commission has up to three months to endorse them and then they need to go to the European Parliament (via the Committee on Economic and Monetary Affairs (ECON)) and the Council. This should be a formality, but it still takes time that fund groups don’t have to prepare for the changeover. And we must not forget that, formality or not, ECON rejected the first set of PRIIPs RTS in 2016 after the Commission had endorsed them. Given the chequered short history of PRIIPs KIDs, I wouldn’t bet against any outcome.