PRIIPs, KIDs and the future of retail financial disclosures.
Held on Wednesday, March 14, 12.30-2.00pm.
John Kay (St John’s College, Oxford)
Chris Cummings (Investment Association)
Angela Roberts (Financial Services Consumer Panel)
The Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation came into force at the beginning of this year – and has already got right up the noses of both the investment industry as a whole and the financial/economic commentariat.
Among the latter group, our old friend, John Kay, stands out. In mid-January, he wrote an extended piece for the FT (of which he is a contributing editor) in which he argued that the three-page, standalone Key Information Document that now has to accompany packaged retail products is positively perverse in that it forces asset managers to project future investment returns based on historic performance – even if (as today) the last five years have been an anomaly. He quotes the example of Scottish Mortgage Investment Trust, of which he is a director: over the next five years, the KID that it has produced suggests that a “moderate” return would be over 20% per year, and a “favourable” one over 30%. Even an “unfavourable” one would be over 10%.
The reason is a mechanical requirement to project the past five years’ returns into the future and to base risk warnings on the historic volatility of weekly returns over the past five years – a period when, by any historic standards, returns have been high and volatility low.
In his view, this makes nonsense of attempts to ensure that retail clients be given a true and fair indication of the riskiness of their investments.
The industry agrees with him, and also points to further problems in the KID, including pricing information using complex reduction in yield calculations and new methodologies that show apparent negative transaction costs. Meanwhile, following the Asset Management Market Study, the FCA continues its customer testing on disclosures, but is remaining tight-lipped about the results.
But how to do it better? If not the KID as it stands, what could give retail investors enough information that even the least engaged could avoid products that are flatly inappropriate? I am sure John – as one of the UK’s leading economists, whose special talent is his ability to express complex ideas clearly and succinctly – has some thoughts. In addition, I am delighted that we can call on two other distinguished commentators:
- Chris Cummings is chief executive of the Investment Association, a post he took up in September 2016, when he moved over from his founding CEO role at TheCityUK. Chris is one of the country’s leading thinkers in the investment space. Aside from his role at the IA, he is a member of the FCA’s Regulatory Decisions Committee and the PSR’s Enforcement Decisions Committee.
- Angela Roberts is a member of the Financial Services Consumer Panel, which advises the FCA on consumer interests and is keen to see a pragmatic approach to any unintended consequences of the regulations. Before joining the FSCP, she was the director of legal services at the Pru’s fund manager of managers, and senior counsel at PineBridge Investments.
The issues around PRIIPs and KIDs go to the heart of the problem of how to get people to save. At a time when trust is low, how can we get this right and lay the foundation for greater levels of saving for an uncertain old age? If you (or a colleague) would like to join us for what I am sure will be a lively discussion, please let us know by emailing firstname.lastname@example.org or phoning the Centre (0207 621 1056). As usual, there will be wine and sandwiches – and a lot more to get your teeth into.