Within the current tsunami of regulations that asset managers are undergoing, PRIIPS stands out among the most challenging. Project managers heading the efforts to successfully comply with these in the next few months, are well aware that interpretation of the regulatory text over the last two years has been arduous, to say the least. Despite the latest clarifications by the Esma questions and answers (Q&A) in June and August of this year, which provided guidance on the interdependencies that the MiFID II directive has on PRIIPS, the regulatory framework still remains extremely complex and not crystal clear when it comes to the real life application of the text.
The good news is that based on the above mentioned Q&A, MiFID II requirements in terms of cost and risk disclosure to investors are now aligned with PRIIPS on methodology and in the regulatory schedule. Asset managers will be able to streamline their processes of document production across their range of investment funds targeting retail and institutional investors in the European Economic Area.
The good news is that based on the above mentioned Q&A, MiFID II requirements in terms of cost and risk disclosure to investors are now aligned with PRIIPS
Pilar de Terry, Head of global fund administration product (BNP Paribas Securities Services)
A sea of challenging objectives is still to be confronted by the funds industry, conditioning the navigation to a happy implementation end. While not unsurmountable, it will be resource draining and cost bearing for the product manufacturer.
Exemption rules not always a relief
The two-year grand fathering period for UCITS funds and alternative investment funds (AIFs) with a UCITS KIID (key investor information document) may not provide with the expected relief if these structures are the underlying investments of packaged products such as multi-option insurance products. Some insurance companies have heavily invested in the target full PRIIPS platform and despite the fact that they could leverage on existing UCITS KIID data, they are requesting their service providers to provide fully compliant PRIIPS KID data.
In addition, even if UCITS KIID data complies with regulations until end 2019, costs and charges need to be calculated using the simplified method of PRIIPS.
From macro to micro interpretation of the regulation
At the end of June this year, the market finally had a good macro understanding of the scope of the regulations and could proceed with refining project charters. This said, as we started to work on the nitty gritty, we realised that applying the detailed regulatory requirements is somewhat of an intellectual quiz.
Making sense of the regulation for each specific underlying instrument in the investment fund is not always black and white. Obtaining a clear picture of the individual costs calculation methodology to apply to complex holdings must be foreseen in a timely manner.
Readiness, the stress test
In June, the market started working on a readiness effort for a go-live of their PRIIPS project in January 2018 – with just six months to implement and to ensure everything is up and running. This preparation period, in reality, is reduced to three months, in cases where investment funds are the underlying of multi-options PRIIPs.
Insurers under the obligation to produce their own PRIIPS KID are requesting data from their service providers in order to test their platforms starting in October 2017. Already next month!
Data monitoring, the unavoidable resource and cost burden
Asset managers now have a larger scope of funds impacted by transparency regulations and need to ensure reporting updates when there is a significant variation in the costs of the product. They have to efficiently produce and check data on a regular basis, thereby managing larger data volumes will now be, without question, part of the process.
Data monitoring will also mean ensuring that the quantitative indicators to communicate to the final investor represent a true and fair image of the investment profile of the fund. In particular asset managers must publish a new KID when:
- the PRIIP moves to a different class of the summary risk indicator from that attributed in the KID
- the mean return for the PRIIP’s moderate performance scenario, expressed as an annualised percentage return, has changed by more than five percentage points
Managing the impact of regulatory differences, despite the synergies
Differences in UCITS KIID and PRIIPS KID regulations are evident in the higher complexity of the latter, particularly in the area of costs and charges with the additional requirements on transaction costs and in the area of performance and risk indicators as the methodology moves from a reflection of the past to a forward-looking view with different scenarios.
We could also say that risk and performance calculations appear closer to reality in PRIIPS. Still, the risk model could be at stake in cases of a market crisis. Projections will be impacted when a short period of bad market returns impacts the calculation of the risk/performance scenarios. Also worth mentioning is the disparity of risk indicators, from a 1 to 7 level in PRIIPS versus UCITS KIID scale for a given volatility. Asset managers may end with different risk measures for similar fund types depending on the regulation referenced for the KIID/KID production and with the challenge of having to reclassify the full range of funds under the PRIIPS regulation.
What will the 2018-2019 period will look like? By 31 December of next year the European Commission will review the regulation. It could be expected that upon intense lobbying on the risk of investor misinformation that the wind direction changes. All stakeholders of this regulation hope that any revisions will result in the simplification of the current requirements. Until then, fund managers in their role of product manufacturers need to comply with foreseen regulations as well as with the commercial engagements they undertake with their institutional clients in the insurance industry.
For more information, please refer to our guide:
BNP Paribas Securities Services corporate website:
http://securities.bnpparibas.com/
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