Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry

Proposals for Better Management of Non-Financial Risks within the European Fund Management Industry - December 2012

2. Key Topics on the European Regulatory Agenda

The PRIPs KID is tasked to play a key role in the information of retail investors as it requires product manufacturers (and remanufacturers i.e. parties that substantially alter the risks or costs of a product) to provide standardised information about each of their products. 54 The KID is a short, concise and stand-alone document written in plain language and drawn up according to a common format. The use of a standardised structure (and metrics 55 ) is meant to allow investors to compare and select investments in an informed manner; the document is expected to help investors make sense of complexity. In the spirit of the Commission’s communication on sanctions (COM(2010) 716), the proposed Regulation introduces provisions to harmonise sanctions (list of breaches, minimum administrative measures and sanctions to be available to competent national authorities, publicity of sanctions). The manufacturer is liable if the KID is misleading, inaccurate or incomplete, or if it contains information inconsistent with other information documents required by law; the burden of proof is on the manufacturer. Draft implementing measures are not available at this stage and consultations on the precise format and contents of the KID are ongoing. The section on the possibility of capital loss holds promises in terms of disclosures; the section does not exist in the KIID and there is no requirement to underline the risk of loss, except for structured UCITS when such a risk exists. The KIID implementing measures (Commission Regulation (EU) 583/2010) require the mandatory SRRI to be supplemented by explanations of material

risks not (properly) captured by the indicator. However, describing the materiality of these risks is not required; in its guidance, CESR suggests disclosing risk exposure, likelihood of materialisation and severity as an example of good practice communicating the producer’s assessment of materiality to help the investor in decision making (CESR/10-673). In its present form, the transparency on non-financial risks mandated by the KIID seems to be more protective of the asset manager than of the investor. Listing material non-financial risks in the KIID is likely to be sufficient to discharge the asset manager of its liability to inform would-be investors of material risks but without an assessment of materiality, this is of little help to the investor and fails the Directive’s stated objective of ensuring comparability amongst funds. The version of MiFID in force, its proposed revision and the proposed IMD II all require that appropriateness tests be applied to would-be investors in the context of non-advised sales; suitability tests are required for advised sales. For execution only services, no such tests are required if, inter alia, the service relates to a “non complex” financial instrument. The appropriateness test is only one of the obligations of the firm with respect to disclosing and explaining risks to clients. MiFID requires that appropriate product information be provided in a comprehensible form so that investors are reasonably able to understand the nature and risks of the investment service and of the specific type Non-advised sales and non-financial risks

54 - This includes the product’s main features (type, objectives and means for achieving them, etc.), risks of loss, recommended minimum holding period and expected liquidity, risk and reward profile, costs and past performance. The PRIPs KID is thus more general than the UCITS KIID; the Commission has proposed that UCITS continue to use the KIID for a minimum of five years after the introduction of the KID. 55 - Measures for risks and costs will be defined in later standards.

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An EDHEC-Risk Institute Publication