We knew to expect something from the FCA on changing PRIIPs Key Information Documents (KIDs) in the UK, as the Finance Act 2021 gave it the power to rule on what products are in scope and to replace the much-criticised future performance scenarios with “information on performance”.
But the Consultation Paper (CP) published in July will have surprised most people with its approach to the latter issue.
Changes to future performance scenarios
When the European Supervisory Authorities (ESAs) submitted their solution to the performance scenarios in February 2021, they used longer price histories and added further calculations to minimise the pro-cyclicality that is prevalent in existing calculations. The FCA, however, has simply removed the problem altogether by replacing the scenarios with narrative.
As the FCA (and most of the industry) believes that current performance scenarios “pose risks to consumers”, the CP requires manufacturers “to describe, in narrative form, the factors likely to affect future performance”, with an explanation of a favourable, negative or worst scenario, and to disclose “the most relevant index, benchmark, target or proxy”.
Although the FCA has said it may add further guidance on the factors that should be included in the narrative, there is a danger that consumers may find it harder to compare products against each other if the only information on performance is free form narrative.
It will be even harder to compare PRIIPs to UCITS funds, as the CP does not include any past performance, which is what most will have expected from the wording in the Finance Act. Remember that UCITS KIIDs are set to remain in existence in the UK until the end of 2026, so past performance is not going away immediately.
Nonetheless, to be on the safe side, the updated Regulatory Technical Standards (RTS) at the end of the CP include a section on what past performance could look like if it were to be included. Not surprisingly, it looks very much like a UCITS KIID, but with the ability to opt out if a past performance chart would be too misleading.
The CP follows the EU changes when it comes to allowing the PRIIP manufacturer to show a higher risk indicator (SRI) if the calculated one would be too low to indicate the true risks. Venture Capital Trusts (VCTs) would need to show a minimum SRI of 6 (out of 7), instead of the 2 or 3 that rarely valued unlisted stocks throw up at present.
On the other much-criticised question of transaction costs, the FCA is sticking to its guns on the slippage cost methodology, even though it says itself that when “slippage is calculated over many transactions, this random element should average out to approximately zero”, which does question its value somewhat.
The CP limits the impact of any anti-dilution measures so they cannot make the total transaction costs negative, which is again slightly different from the EU proposal; those RTS require the minimum total to be the explicit transaction costs (commission, taxes, etc).
All in all, the proposals in the CP are positive, if sometimes surprising. However, the timing is definitely not something many will cherish.
The consultation ends on 30 September, with final rules and updated RTS before the end of the year and an implementation date of 1 January 2022, so less than six months from the publication of the CP and no more than a few weeks from the final rules. Even if the changes are adopted as is, sorting out the narrative on future performance in that time, with or without additional guidance from the FCA, will be a big challenge.
For more information on how we are supporting Fund Managers transition to the production of PRIIPs KIDs and circumnavigate the growing divergence between the UK and Europe on PRIIPs Regulation, contact us below.