Background to the PRIIPs and UK Retail Disclosure reforms

HM Treasury (HMT) December 2022 consultation: PRIIPs and UK Retail Disclosure

As set out in HMT’s December 2022 consultation, the government intends to repeal the UK PRIIPs Regulation (which was first introduced in the UK in January 2018) and create a new framework for retail disclosure in the UK. The consultation set out that the intended aims of the PRIIPs Regulation to assist retail investors with making sense of a complex investment landscape have not been achieved as further set out below.

The intention of the new UK retail disclosure regime is to empower UK regulators to take a flexible and agile approach to setting appropriate retail disclosure requirements that work for the UK’s dynamic capital markets. The December 2022 consultation was the first step in that process, setting out an alternative vision for a UK retail disclosure regime to encourage retail investor participation rather than stifling it.  The consultation closed on 3 March 2023 and further detail about the responses are set out below.

FCA Discussion Paper: Future Disclosure Framework

In parallel, the FCA also published a discussion paper (DP22/6) in December 2022 which explored how to draft proportionate rules to ensure the delivery, presentation and content of retail disclosure is fit for purpose and enhances consumer understanding whilst also allowing firms to tailor information.  DP22/6 concluded for comments on 7 March 2023 and the FCA is currently considering responses as it considers the development of a new framework for retail disclosure.

HMT July 2023 consultation response

On 11 July 2023, HMT published a consultation response to its December 2022 consultation summarising the responses received. The response also sets out the government’s vision for the new retail disclosure framework and provides further detail about the next steps to deliver this reform.

The consultation response highlights the following issues with the existing PRIIPs regime that were highlighted in responses to the consultation:

• Prescriptive format requirements have not led to improved consumer understanding, and are overly burdensome for firms to produce. 
• The objective of comparability across such a wide variety of products has led to misleading information being presented to retail investors for example on risks and costs.
• Some feedback suggested that the compliance costs associated with the UK PRIIPs Regulation has dissuaded some firms from making their products available to UK retail investors, thereby reducing consumer choice.

Summary of the PRIIPs consultation responses

There was strong agreement from all respondents on the description of the problems with the current PRIIPs Regulation and stakeholders welcomed the government’s consultation. In particular, respondents highlighted their concerns with the misleading nature of some information – specifically relating to cost and risk disclosure – contained within the PRIIPs Key Information Document (KID).

More broadly, many respondents called for the government to reform the cost and charges disclosure requirements established under the Markets in Financial Instruments Directive (MiFID II), to improve how costs are presented to retail investors under the new regime.

Some respondents also suggested that as well as reducing consumer choice, the PRIIPs Regulation may have contributed to distortion within the market for some products, notably in relation to cost disclosure methodologies artificially increasing the costs of certain products. Therefore, several respondents suggested the government should review the scope of the regime, with a view to removing certain categories of products from disclosure requirements.

Framework for the New Retail Disclosure Regime

Chapter 3 of the HMT consultation response sets out the government principles and vision for the new UK Retail Disclosure Regime as follows:

• To ensure that retail investors have access to clear and useful information to make evidence-based decisions for their prospective investments.
• To ensure that the disclosure that retail investors receive is proportionate to the risk that they are taking in purchasing an investment product and the complexity of the decision that they are making.
• To provide additional choice for retail investors, and to reduce burdens for firms.

The new regime will look to ensure that the FCA has all the tools it needs to design a new regime and in particular one which carefully considers the concerns raised in relation to:

• Products in scope of the new UK disclosure regime.
• Accuracy of disclosure information.
• Balances flexibility with comparability to ensure consumers are provided with the appropriate information to make effective investment choices.

As indicated in the consultation, UCITS vehicles will be brought into scope of the new retail disclosure regime. The government and FCA will provide clarity on the transition period from current disclosure requirements (for both packaged products and UCITS) as further detail of the new regime is set out.  

Revoking PRIIPs-related retail disclosure elements

The government intends to proceed with its plan to entirely remove all PRIIPs firm facing retail disclosure requirements from legislation. The FCA will be empowered to deliver a new retail disclosure regime which is tailored and proportionate to the UK market. The intention behind this is to support UK businesses, whilst maintaining the appropriate disclosure for retail investors to make informed decisions.  To do this, the FCA will require some additional tailored powers.  These powers will ensure the new regime applies obligations to:

• Certain unauthorised firms – which make up a substantial part of the PRIIPs market and are currently subject to directly applicable obligations under the existing PRIIPs regime. These obligations will fall away when the UK PRIIPs Regulation is repealed. The government is considering how best to preserve appropriate obligations over certain unauthorised firms under a new retail disclosure regime.
• Overseas Funds – Some respondents noted that the FCA should be able to apply disclosure standards to overseas funds to ensure there is a level playing field for UK funds and appropriate information for UK retail consumers. The government recognises the importance of overseas funds providing disclosure to UK retail investors and will ensure the new regime facilitates this.

The government intends to set out further detail on the FCA’s powers over certain unauthorised firms and overseas funds for the new regime in due course.

Consideration of wider issues

The consultation addressed the clear issues in the current PRIIPs Regulation but in order to ensure the new regime is fully effective the government is also considering wider issues facing retail investment and disclosure. 

Obstacles preventing or discouraging firms from different jurisdictions from offering investment product to UK retail investors

HMT reports that many responses focused on the ways that PRIIPs retail disclosure requirements can act as a barrier to UK retail investors accessing certain overseas funds, for example US Exchange Traded Funds.

Some responses suggested that the government should ensure the new UK regime aligns with international standards for disclosure to ensure that the cost burden for producing disclosure is minimal for overseas firms. A small minority of respondents went further, proposing that the government accepts disclosure documents from other jurisdictions, in place of UK disclosure, to increase availability of international investment products.

Other issues raised included taxation and the need for more detailed guidance for overseas firms on how to comply with UK disclosure requirements.

Digital disclosure

The consultation also sought views on digital disclosure, noting that a more flexible approach to disclosure could facilitate innovative disclosure formats.

Respondents were widely supportive of a move to digital disclosure, recognising its opportunities for innovation, including:

• Enabling disclosure via novel formats, e.g. video, which would permit firms to layer data to enhance consumer understanding.
• Providing opportunities to share disclosure at different points along the consumer journey to improve engagement with disclosure by retail investors.
• Facilitating the personalisation of disclosure documents to suit individual consumers’ circumstances.

Some respondents thought that digital disclosure should be the default in the new regime whilst others cautioned that there is a need to ensure disclosure remains accessible to all. Several responses suggested the ‘durable medium’ requirement should be reviewed.

General feedback included the need to strike the right balance between the level of detail for retail investors and burden on firms to produce disclosure.  Responses also highlighted the need to carefully align the regime with other reforms to disclosure, including the FCA’s Consumer Duty and new sustainability disclosure requirements.

Next steps

The government has welcomed the feedback to its consultation and the strong support from respondents for the proposed direction of the new UK retail disclosure regime. The government intends to publish a draft statutory instrument by 2024 to enable the FCA to deliver the new retail disclosure regime, following the repeal of the PRIIPs Regulation (and related secondary legislation).

The FCA will also publish a consultation paper seeking industry feedback on their draft rules for the new retail disclosure regime, building on the principles discussed in the HMT consultation and the December 2022 Discussion Paper.

There will be a period of transition prior to the new FCA retail disclosure rules coming into force. The government and FCA will ensure that there is no gap between the old regime being removed and the new regime being put in place, to ensure certainty and minimal costs for firms. Further detail about the transitional period, and the intended change in disclosure requirements for UCITS vehicles, will be communicated in due course.

We will be following developments in relation to the new retail disclosure regime closely.  Please get in touch with Michael Thomas or Anahita Patwardhan if you have any questions or would like to discuss.