The Financial Conduct Authority (FCA) is calling for European authorities to address significant concerns with regard to the PRIIPs regulation, which came into force in January 2019.

Scope, transaction costs calculations, “performance scenarios” and “summary risk indicators” (SRI) are part of a plethora of issues the FCA believes the European regulators and politicians must address in a review, which is expected to be completed by the end of 2019.

However, in response to its consultations on the controversial regulation, published on Thursday (28 February), the FCA warned that the asset management industry itself must work harder to address concerns about transaction cost methodology. The regulator warned that further evidence of “poor application” of the methodology could result in it undertaking “more detailed investigations” of firms.

PRIIPs requires asset managers to provide a Key Information Document (KID), which has received much criticism due to its controversial requirement to provide predictions of future performance as well as estimations of transaction costs.

The performance predictions have been described as misleading and the transaction costs estimations have already resulted in documents printed with negative costs estimations.

The Investment Association has been a big critic of the document, as has EFAMA and the Association of Investment Companies (AIC), which announced it would not be hosting the documents on its website.

More than 100 responses to the FCA’s July 2018 call for input on PRIIPs revealed problems with clarifying the scope of the regulation, the calculation of transaction costs, the presentation and calculation of performance scenarios, and the presentation of SRIs.

Specifically, the FCA noted that widespread “uncertainty about scope and unintended effects of compliance with PRIIPs requirements are particularly serious and may risk causing consumer harm if not addressed”.

This was found to be particularly problematic for managers of corporate bond funds.

The FCA explained: “There was concern that corporate issuers have been reducing new issuances of bonds in retail denomination sizes and taking steps to limit retail investors’ access to their bonds in the secondary market.

“This is principally due to concerns about those bonds being caught by the scope of the PRIIPs regulation and the cost and potential legal risks of not producing a KID where one may be required.”

As a result, the FCA is “seeking and encouraging swift and effective action from EU institutions”.

In addition, the FCA said it “shares” respondents’ concerns about misleading performance scenario and will be “working closely” with European authorities to address the issue.

It added: “We will continue to push for changes at EU level for a solution to the PRIIPs requirements that produce misleading performance scenarios. We will consider the extent to which domestic interpretative guidance could mitigate this issue.”

The FCA concluded that is will work closely with the European Commission and other regulators “to influence the full review of PRIIPs” and will “focus on the performance scenarios, SRIs and market impacts arising from uncertainty about whether certain corporate bonds fall within the scope of the PRIIPs regulation”.

It added: “We will also continue to monitor the impact of the PRIIPs regime and investigate the scale of potential consumer harm in this area of the market.

“We will work constructively with trade bodies, consumer groups and firms in the industry to ensure that PRIIPs delivers the intended outcomes for consumers.”

Ian Sayers, chief executive of the AIC, welcome the FCA’s intention to work in Europe to address problems associated with PRIIPs but warned that “this will take time, and meanwhile consumers are still being misled”.

He added: “[The FCA’s] feedback statement agrees that both the summary risk indicators and performance scenarios in KIDs can be misleading, and that the regulation could cause consumer harm if problems are not addressed.

“The regulator should take a creative and urgent approach to protect UK consumers from harm, for example by ensuring that information in KIDs does not spread to other parts of the market.”

Transaction costs

However, the FCA stopped short of demanding EU-level change with regard to PRIIPs, despite concerns that KIDs were displaying “negative, zero or very high transaction costs that are unlikely to fairly represent the true transaction costs of the product”.

The FCA said responses “did not provide credible evidence to support claims that the methodology is not working as intended”, and that “unrepresentative transaction costs in KIDs are a result of poor application of the PRIIPs methodology”.

Chief executive of the FCA Andrew Bailey (pictured) said: “While awareness of the rules appears good, we found that firms take inconsistent approaches, risking confusion for customers, who may be misled about how much they are being charged.

“Certain aspects surrounding compliance with PRIIPs may risk not leading to good consumer outcomes and we are working with EU institutions to address these.

“We are aware that many firms are finding aspects of the calculations difficult or are making inaccurate calculations. We will work with firms to help them ensure their reporting is accurate.

“We are aware of public claims of an intent deliberately not to comply with the new rules.

“While we have found some areas of non-compliance with the new rules, the claims which have been made regarding this are not supported by the evidence in important respects.”

Commenting on the FCA’s approach, chief executive of the Investment Association Chris Cummings said asset managers are “fully committed to implementing” regulatory requirements.

He added: “Where problems exist, especially in relation to the methodologies, we are committed to working with the regulator to ensure that we can move to a solution that ensures we are able to provide customers with reliable, clear and meaningful information.

“It is especially important to note that the FCA have found no evidence to support the claims that firms are deliberately not complying with the regulations.”

This is reproduced from Investment Week; all views are from the publication. This originally appeared online on 28 February 2019.