One of the objectives of the MiFID II regulation is to improve consumer protection in general and, more particularly, to strengthen the risk disclosure and information duties on the investment firm’s side. Yet, whilst calling for transparency on performance, the European Authorities ended up doing the exact opposite and severely reduced transparency on net performance and fees of long-term investment products by eliminating all requirements for disclosure of past or net performance in the PRIIPS delegated regulation of March 2017.
Not only will this leave retail investors in the dark as to whether a product has ever made or lost money in the past, it is also completely inconsistent with MiFID II information rules and is already leading to absurd situations that are damaging to retail investors.
Over the past years, BETTER FINANCE repeatedly warned EU policymakers against requiring disclosure of “direct and indirect costs to be borne by the retail investor” necessitating an ex-ante and theoretical approach to transaction costs disclosure. Such disclosure necessarily needs to be based on theoretical assumptions and will produce confusing, unreliable and in some cases even negative transaction cost figures, which does not reflect reality. The same goes for performance fees, since future returns of any given fund are not known in advance and can only be suggested based on theoretical assumptions.
The new PRIIPs rules contradict and violate MiFID II provisions at the detriment of investors on multiple fronts:
- Even though it does away with past-performance, future performance scenarios to be used in the PRIIPs KID are based on historical data anyway;
- Eliminating prominent warnings that information based on past performance and information on future performance do not constitute reliable indicators of future performance, violates MiFID II rules;
- Absolute performance without reference to a benchmark has little to no meaning and is misleading over the mid- to long-term as it is nominal (not real, i.e. after inflation);
- As it is based on four future scenarios, the information on performance provided will not be clear and understandable to the majority of EU savers.
These misalignments of the PRIIPs Regulation with MiFID II puts the European Commission’s CMU Action Plan at risk and significantly undermines investor protection. BETTER FINANCE flagged these flaws very early on (in 2016 before the finalisation of the PRIIPs Delegated Regulation) and has been joined by the European Securities and Markets Authority (ESMA) and the European Commission’s FSUG (Financial Services User Group) in warning of the disastrous mistake of eliminating the disclosure of past performance in the KID.
- BETTER FINANCE Press Release: Equity financing of the EU economy: how to get EU citizens as investors back into capital markets?
- EC: Key information documents for packaged retail and insurance-based investment products (PRIIPs) - Regulation (EU) No 1286/2014
- EC: Investment services and regulated markets - Markets in financial instruments directive (MiFID)