EC publication of Prips regulation stirs debate
As Europe’s structured products professionals await the publication of the final version of the European Commission’s Packaged Retail Investment Products regulation, the debate about what it should and should not include still rages
Market observers fear that several concerns expressed about rules contained in the previous draft will not be adequately addressed in the final version of rules on Packaged Retail Investment Products published by the European Commission.
The rules will define the region-wide practices for structured products, and will be delivered in the form of a regulation, which means they will have direct effect in member states. These will be level one rules, and will be followed by level two implementation procedures over a period of two years after the new rules are published in the European Commission’s (EC) official journal.
The EC published its first consultation document on the legislative steps for Prips in November 2010. The document contained few surprises and was available for final comments until January 31, 2011.
The latest draft of the new rules, a copy of which has been obtained by Structured Products, includes a reverse burden of proof, which makes the product producer solely liable for the content of the key information document (Kid), which encapsulates all of the main risk-and-reward features of each newly created product.
Other elements of the new rules that have been a cause for concern include the level of damages for breaches of the new rules pertaining to the Kid and how these would be applied.
There is also a difference between the Prips Kid and the one already created for Ucits, as well as anoverlap between the Prips Kid and the newly amended Prospectus Directive, created by the European Commission and implemented today (July 2).
“The interaction with Ucits and the Prospectus Directive is a bit disappointing. Ucits will still have a separate key investor document requirement, so you will have two regimes,” says one London-based structured product professional. “There is still an unfair playing field for issuers that come under the Prospectus Directive because they need to do their issuer summary under it, which is effective for any prospectus from today onwards, but at the same time they still have to do a Prips Kid.”
It has also been indicated that the new Prips rules will include a risk indicator, which has not been well-received by practitioners. “The proposal for a risk indicator is frankly unworkable and has the very real risk that it will be over-relied upon by investors,” says Peter Green, capital markets partner at Morrison & Foerster in London, who notes that the risk indicator may not be included in the final proposals.
As far as the legal status of the Kid is concerned, the EC states that the essential information contained in it should be comprehensible to retail investors on a standalone document. “The Kid should be clearly distinguishable from any marketing communication… [and] this regulation should establish uniform rules on the appropriate media that might be used for the document.” There is also a requirement that the Kid must be kept up to date, although it is unclear when and why product providers should provide this information.
“If investors are better able to compare different types of products, it will encourage choice and increase investor confidence in the market,” says Green. “On the flip side, more complex products may be regarded by some of the manufacturers and distributors as too burdensome and costly and not be produced at all, thereby decreasing investor choice.
“A kneejerk reaction away from complexity per se is, however, misconceived and will decrease investor choice and lead to less efficient markets,” says Green. “What is important is that investors properly understand the risks involved with the products they are buying.”
This article was first published on Risk