Proposed change to Key Information Documents

The Financial Conduct Authority (FCA) has issued consultation paper CP21/23: PRIIPs – Proposed scope rules and amendments to Regulatory Technical Standards.

CP21/23 outlines the FCA’s proposals to adjust the PRIIP regulations, in particular adjusting the regulatory technical standards (RTS) to address concerns on the methods used for the performance scenarios and summary risk indicator (SRI) within the key information documents (KIDs).  These changes are intended to come into effect on 1 January 2022.

The CP also clarifies the scope of the regulations in relation to corporate bonds, clarifies what it means to make the PRIIP available to retail investors and addresses the concerns on the slippage methodology when calculating transaction costs.

Performance Scenarios

The current regulations require KIDs to project the PRIIP value under four different performance scenarios.  Some firms and the FCA have concerns that the current performance scenario methodology may provide misleading information.

The CP proposes an immediate remedy to remove the need to display performance scenarios and instead disclose:

• the factors that could affect future performance,
• the most relevant index/benchmark and how the PRIIP is likely to compare in terms of performance and volatility, and
• an explanation of a favourable, negative and worst scenario.

We do not agree with removing performance scenarios entirely as it will impact on a retail investor’s ability to compare PRIIPs, as performance figures are easier to compare than narratives.  It also reduces the relevance of the KID and results in the retail investor needing to place more reliance on the SRI, which is also the subject of industry concerns. The KID may also be the only document provided to the retail investor which provides some form of illustration of possible future returns.

We would prefer instead to see the RTS adjusted to reduce the risk of the performance scenarios resulting in misleading information.  For example, allowing for the use of historical investment data going back further than the current five years, such as for the recommended holding period.   This would lead to less volatile results from the performance scenarios between the annual KID reviews.

We do consider however, that including a narrative description of the risk factors of future performance is a positive addition to the KID.  For comparative purposes, it would be easier if the FCA specified a minimum set of factors to consider, with firms being required to justify if any of these factors are excluded.

The FCA is not currently proposing to add past performance to the KID, however the CP asks for industry views on the inclusion of this in addition to the narrative above.  It has provided an indication of the past performance information requirements, with the main requirement being a graphical representation of performance over the preceding ten years.  We feel that whilst the inclusion of such past performance data may be suitable for some PRIIPs, for with-profits products, it would be difficult to capture the impact of smoothing in such a graphical representation which may mislead a retail investor when comparing PRIIPs.

Summary Risk Indicator

There is also a concern that the SRI may be underestimated, due to the calculation methodology relying on volatility measures and possibly not allowing for all significant risks associated with the PRIIP.  The CP proposes the RTS are adjusted to allow a firm to upgrade the SRI if it considers the risk rating to be too low, with any manual upgrades having to be notified to the FCA.

We believe the proposal of manual additions to the SRI will be subject to individual judgement by firms and will impact on the ability of a retail investor to compare PRIIPs.  We feel a more prescribed method may be more appropriate, based on a list of excluded risks outlined by the FCA.  A prescribed method would remove the need for the FCA to individually assess additions to SRIs across PRIIPs and would allow for an element of consistency within the industry.