HM Treasury Policy Statement Addresses Pressing Concerns With PRIIPs Regulation

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[co-author: Anna Lewis-Martinez]

The UK government has proposed amendments to the UK PRIIPs regime with performance information in the KID to differ from the EU “performance scenario” requirement.

On 30 July 2020, HM Treasury published a policy statement on amendments to the Packaged Retail Investment and Insurance-based Products (PRIIPs) Regulation. The policy statement provides an update on HM Treasury’s previously announced intention to bring forward amendments to the onshored PRIIPs Regulation to improve the functioning of the UK PRIIPs regime.

Industry has widely condemned the PRIIPs standardised disclosure document, known as the Key Information Document (KID), as being potentially misleading to ordinary consumers with regards to the products it is intended to describe. The European Supervisory Authorities carried out a recent review of the KID but failed to agree on proposals to amend it following the outcome of the review, which was published on 20 July 2020.

Brexit gives the UK an opportunity to amend and improve the KID. The UK government’s proposed amendments will enable the FCA, once the UK is no longer bound by the EU regime, to make supplementary provisions and amendments to the regulatory technical standards that supplement the PRIIPs Regulation (PRIIPs RTS) with the aim of avoiding consumer harm, addressing distortions of competition, and providing greater certainty to industry. The FCA also intends to explore possible solutions to rectify current issues with the PRIIPs Regulation. HM Treasury’s proposed amendments target only what it believes are the most critical concerns with the PRIIPs Regulation and aim to ensure that UK retail investors are provided with more appropriate PRIIPs disclosures. In the longer term, the government intends to conduct a more wholesale review of the disclosure regime for UK retail investors, including, for example, how to harmonise the PRIIPs regime with requirements set out in MiFID II (2014/65/EU).

HM Treasury has proposed the following amendments to the onshored PRIIPs Regulation:

FCA to clarify the scope of the PRIIPs Regulation through its rules

Whilst the definition of a PRIIP will remain unchanged, the government has proposed an amendment that delegates a power to the FCA to clarify the scope of PRIIPs through its rules. The government has said there is “currently significant uncertainty in industry as to the precise scope of PRIIIPs, such as with respect to corporate bonds”. The government has also highlighted that “there is evidence that where industry is uncertain about the applicability of PRIIPs to an investment product, retail issuance of that product has decreased”. According to the policy statement, the FCA’s new power would enable the FCA to “address existing, and potentially future, ambiguities in relation to certain types of investment product”.

“Performance scenario” to be replaced with “appropriate information on performance” in the PRIIPs Regulation

The PRIIPs Regulation requires PRIIPs manufacturers to include performance scenarios in the KID. The methodology for calculating these scenarios is set out in the PRIIPs RTS, and according to the government “has been criticised for producing misleading performance scenarios across a wide range of products”. The policy statement explains that “this is believed to be due, at least in part, to the prescribed methodology in the PRIIPs RTS relying on past performance to project future performance in a way that generates procyclicality”. The government has therefore proposed an amendment to replace the term “performance scenario” with “appropriate information on performance” in the PRIIPs Regulation. The FCA will then be able to amend the PRIIPs RTS to clarify what information on performance should be provided in the KID.

Further extension of the exemption currently in place for UCITS funds

Until 31 December 2021, undertakings for the collective investment in transferable securities (UCITS) funds are exempted from the requirements of the PRIIPs Regulation. Until that date, UCITS funds must produce a Key Investor Information Document (KIID) as set out in the UCITS Directive, instead of a KID. As the government currently considers that the existing rules for UCITS disclosure are satisfactory, the government has proposed an amendment delegating a power to HM Treasury to further extend the exemption for UCITS for a maximum of five years. This will enable HM Treasury to consider the most appropriate timing for the transition of UCITS funds into any domestic UK rules that may result from the planned review of the UK framework for investment product disclosure, and bring forward a statutory instrument to amend the exemption date in the PRIIPs Regulation, if necessary.

Timing

The legislative timeline for these proposed amendments remains uncertain. HM Treasury indicated in the policy statement that it intends to legislate for these proposed amendments to the onshored PRIIPs Regulation when parliamentary time allows.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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