International banks that sell investment products to EU clients are grappling with the extraterritorial reach of new EU legislation governing retail structured products. Panellists at IFLR’s European Capital Markets Forum in London last week said it was unclear whether non-EU distributors are aware of the incoming changes.The rules for packaged retail and insurance-based investment products (Priips) were due to come in on December 31 2016 but after the European Parliament rejected its draft regulatory technical standards in an unprecedented move last year, implementation was pushed back by 12 months.
Central to the new framework is a requirement that manufacturers of such products produce a key information document (KID), which allows the end user to easily compare it to other types of retail products. The rules stipulate that the KID must be provided ‘in good time’ before the sale of a Priip.
The scope of products caught by the legislation is wide and there are no exemptions for small distributions – even if the Priip is marketed and sold to a single retail investor, the manufacturer must still produce a KID.
“There are plenty of non-European Economic Area (EEA) distributors who distribute non-EEA manufactured products to retail clients in Europe on the basis of exemption – meaning they too would have to provide KIDs to these investors, even though they may be exempted from licensing requirements,” said Lucia Pivetta, executive director, legal and compliance at Morgan Stanley. “It would be helpful if they could rely on the infrastructure in place in Europe already.”
- Panellists at IFLR’s European Capital Markets Forum in London last week expressed concerns that foreign manufacturers selling to EU retail investors may not be aware of incoming new legislation;
- The new rules for packaged retail and insurance-based investment products will be effective from January 2018 and require manufacturers to produce key information documents for all their in-scope products;
- It’s also unclear how manufacturers will know when the time is right to produce the KID, as for some products execution is quick and the holding period is often short;
- The lack of grandfathering provisions is also troubling many due to the sheer volume of products in the market.
For many products including derivatives, which have recently been confirmed as in scope, execution is not a drawn-out, contemplative affair. That poses significant challenges for the manufacturer who must know when the time is right to present the investor with a KID.
According to Ben Pugh, senior legal counsel at BNP Paribas, this would be even more difficult for a non-EEA distributor to determine.
“We in Europe are often impacted by US legislation, but this is a clear example of far-reaching European legislation that Priips manufacturers need to be aware of – and that appears not to be the case for some non-EEA manufacturers,” he added.
Various sticking points
An overriding theme of the market’s discontent with the rules is their one-size-fits-all approach to a wide variety of asset classes including most structured retail products, many insurance-based investment products, structured deposits and derivatives.
Unlike the KID that must be produced under the Undertakings for collective investments in transferable securities (Ucits) rules, a Priips KID does not show past performance. Instead it requires manufacturers to produce performance scenarios based on three sets of circumstances: unfavourable, moderate and favourable.
"Performance over the year will be completely skewed and provide clients with very little guidance"
“Some products are held for a day, or intraday even – yet performance values are based on a year holding period,” said Pivetta. “So performance over the year will be completely skewed and provide clients with very little guidance.”
Another issue market participants have is that there are no grandfathering provisions. Given the sheer quantity of products already out there, producing KIDs for every one presents huge procedural challenges. Plus many firms hold secondary market obligations that they can’t just switch off as it would be harmful to their clients, explained Pivetta.
“It’s not as simple as going back and amending documents, because of the nature of where they have been sold and how widely they’ve been distributed,” said Veena Patel, director and senior counsel at Rabobank. “To make changes to those legal documents is virtually impossible.”
All the highlights from IFLR’s European Capital Markets Forum are here.
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