2018 has gotten off to a shaky start…
With the start of the New Year, the updated Markets in Financial Instruments Directive (MiFID II) rules came into force, requiring investment managers to reveal transaction costs that were previously not included in the ongoing charges information for Ucits funds.
Despite continuing opposition from the investment industry, the disclosure rules of the much-maligned MiFID II are already bearing fruit as investors are discovering that, once transaction costs are taken into account, they had been paying twice the amount in fees and charges previously disclosed.
But MiFID II is not the only new kid on the block… 2018 also witnessed the start of the implementation of the regulation regarding packaged retail and insurance-based investment products (PRIIPs) imposing a new standardised information document to parties providing investment products such as investment funds or life insurance offered to non-professional investors.
This PRIIPs regulation already ran into trouble… Financial media have reported on problems caused by the new PRIIP requirements concerning future performance and transaction costs disclosure in the overhauled Key Information Document (KID). This Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products (KID for PRIIPs) requests PRIIPs manufacturers to publish a set of four scenarios indicating the future performance of the investment products:
- the stress scenario;
- the unfavourable scenario;
- the moderate scenario; and
- the favourable scenario
The new KID requirements have led to confusion it seems. More specifically, when asset management companies trading in highly-leveraged and risky securities did the calculations for the annualised performance of the favourable scenario, results indicated a 523bln% profit for the investor. In some cases funds even had to report negative transaction costs! Several representatives of asset management firms requested a review since the new disclosures may provide ‘potentially misleading information at points of sale’. Others indicate that the new KID is far from being ‘clear, fair or not misleading’ and that reliance on past performance to indicate future performance is problematic.
BETTER FINANCE already flagged that future performance is impossible to predict and very dangerous to disclose to non-professional investors. This is the very reason why MiFID II (article 44.5 and 44.6 of the MiFID Delegated Regulation) forbids information on future performance that is based on past performance, and that does not contain "a prominent warning that such forecasts are not a reliable indicator of future performance". The PRIIPs KID violates both requirements...
BETTER FINANCE reiterates that future performance scenarios are even more misleading than past performance. The elimination of information on past performance and especially past performance compared to that of the benchmark(s) chosen by the investment product provider constitutes a huge step backwards. All of this is completely inconsistent with one of the key goals of the Capital Markets Union initiative which calls for more transparency on performance.
Further reading:
- FT article: Regulators meet over ‘absurd’ performance forecasts
- Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products
- FT article: Large hidden fund charges revealed by Mifid II rules
- Funds Europe: MiFID forces disclosure of UK funds' hidden costs
- Joint EFAMA - BETTER FINANCE letter on the implementing rules for the PRIIPs KID