On 11 September, the Association of Investment Companies (AIC) published a report detailing the extent of misleading output, particularly in the risk and reward sections, of PRIIPs KIDs.
Unambiguously titled “Burn before reading”, the report forms part of the AIC’s response to the FCA’s Call for Input on the industry’s experience to date with KIDs, and has also been sent to the Treasury. The AIC’s announcement can be found here.
Using data provided by FE, the report shows, amongst other things, the discrepancy between what the moderate return scenarios would have shown on an investment company KID if they had been around since 2003, compared to the actual returns five years later, based on the recommended holding period of almost all investment companies.
You won’t be surprised to learn that the concept of over-optimistic return scenarios is not confined to KIDs produced this year, which has been well documented. As the report states, “In June 2007, the KID indicated that, in moderate markets, the investor could have sold their stake and walked away with over £47,000. In reality, they would have lost just over £2,000.”
But over-pessimistic scenarios would have been equally off-putting: “In January 2003, the KID moderate scenario indicated a loss of just over £1,600. Had they invested, consumers would have received nearly £40,000, including their original investment.” How many retail investors would have felt encouraged to invest when shown that moderate scenario?
The report also points out that one third of investment companies, including 70% of Venture Capital Trusts (VCT), have a Summary Risk Indicator of 3, defined in the regulation as “medium-low” risk. The AIC itself says VCTs are “among the highest-risk investments available”.
The AIC calls on European regulators to act quickly to suspend the requirements for a KID until the faults can be corrected, which will “prevent significant consumer harm”.
The European Commission is obliged, under the terms of the original PRIIPs regulation, to undertake a review of the regulation by the end of 2018, including the question of whether UCITS funds should still be required to move from producing their own KIIDs to issuing PRIIPs KIDs at the end of 2019.
Whatever the outcome of the review, the whole industry needs certainty to allow it to plan effectively for whatever lies ahead, whether that is KIDS v2, the addition of UCITS funds to this “highly misleading” regime, or something else entirely.
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