AmCham EU s Response to the European Commission s Consultation on legislative steps for the Packaged Retail Investment Products initiative

Transcription

1 AmCham EU s Response to the European Commission s Consultation on legislative steps for the Packaged Retail Investment Products initiative American Chamber of Commerce to the European Union Avenue des Arts/Kunstlaan 53, 1000 Telephone Fax Register ID: info@amchameu.eu Secretariat Point of Contact: Tilman Anger (tilman.anger@amchameu.eu (+32) )

2 AmCham EU s Response to the Consultation on PRIPs Page 2 of 8 Date: 31 January 2011 Title: AmCham EU s Response to the European Commission s Consultation on legislative steps for the Packaged Retail Investment Products initiative Introduction AmCham EU welcomes the Commission s intent to level the playing field across providers and intermediaries. We support the move towards a common structural approach across several sectoral directives with the focus on the economic effect on the client, rather than focusing purely on its legal form. AmCham EU views this consultation in the context of wider public policy goals for financial services improved consumer choice medium term savings and increased transparency. Our conclusions took into account the wider MiFID review. AmCham EU wants to ensure open European capital markets and a deepening of transatlantic integration, and we therefore urge the Commission to consider this international aspect when drawing conclusions. The following summarises AmCham EU s key points in response to the consultation. We agree with the commission intention not to engage in product regulation and instead to focus PRIPS on measures concerning the selling of PRIPS. Structured products on the whole are a valuable investment service to retail clients and can allow the product provider to tailor a product to meet clients needs. Defining a PRIP and clarifying the scope of the PRIPS regime brings significant challenges. A very broad definition would carry with it unintended risks and consequences. It is better to start with a narrower definition and ensure appropriate carve outs are in place. AmCham EU presumes one of key points of the legislation is to improve retail medium to longer term saving transparency. Therefore strategies involving speculative investments such as Contracts for Difference (CFD s) are not intended to be included in the scope. To this end AmCham EU feels that OTC Derivatives should be excluded from the scope. The mere provision of a tax wrapper around an investment should not mean the underlying investment is defined as a PRIP because this is a service accountable to national authorities. Products with unit-linked guarantee features (including VAs) should therefore not automatically be seen as PRIPS, but rather as an add-on or feature of another kind of product. For this reason, VA or unit-linked guarantee pension products should be left out of the PRIPS scope because they are pension products which are not covered by the Commission s PRIPS activity.

3 AmCham EU s Response to the Consultation on PRIPs Page 3 of 8 With respect to the Key Investor Information Document (KIID), AmCham EU believes a common glossary which is separate from the specific KIID should be developed at national or pan-european level. This would improve comparability between KIIDs and allow greater harmonisation. Firms and Trade Associations are likely to be willing to assist in providing this glossary. It is important also that the KIID should allow providers with enough page space to properly describe the product. UCITS page limits may not be appropriate for more complex products. AmCham EU believes there needs to be greater clarity about when it is appropriate to hand over the KIID to the client. In the example of discretionary advice for example, an upfront disclosure of the KIID would not be possible and doing so in advance of executing a sale may not be practical for some clients, creating an unnecessary time delay and the potential loss of profit for the client. On the issue of disclosing the totality of remuneration to a provider, it is not always possible to disclose the totality of remuneration on a structured product at any one time given the various elements of the product. Scope of the PRIPS Regime The consultation considers that any successful definition of PRIPs should: include all the key packaged investment products being marketed domestically and cross-border in the EU at present; exclude VA or unit-linked guarantee pension products; be flexible enough to accommodate financial innovation; avoid incentivising regulatory arbitrage, which could work against the interests of retail investors; and provide sufficient legal certainty about what is and is not a PRIP for legal and regulatory purposes. A proposed definition of a PRIP is as follows: A PRIP is a product for which the amount payable to the investor is exposed to fluctuations in the market value of assets or payouts from assets, through a combination or wrapping of those assets, or other mechanisms than a direct holding. Comments The challenge of taking this approach is that it is novel when describing the breadth of the application of the conduct of business provisions which are at its core.

4 AmCham EU s Response to the Consultation on PRIPs Page 4 of 8 The approach requires starting from an economically-based definition for PRIPS, which would then be supplemented by a more detailed list of what is in scope and what is out of scope, or both. This is a change from the usual legallydefined approach. In order to add clarity to what is likely to be a broad economic definition, the more detailed lists need to be based at least partly on legal form. This could lead to complexity and ambiguity in the language and concepts on which the PRIPS initiative is based and would make it necessary to keep the additional detailed lists up to date rather than relying on ad hoc guidance. It is essential to have both appropriate flexibility around scope and also sufficient legal certainty that a product is not a PRIPS to cover off any risk that a firm may accidentally consider a product not to be a PRIPs and later discover that it is in fact a PRIPS. Bringing in intermediation of structured deposits should be subject to appropriate transitional provisions to allow those currently doing this business to continue to do so with the minimum additional burden of altering the scope of authorisation. The proposed definitions of PRIPs both the Commission s and the recent 3L3 Task Force Report can be interpreted as including derivatives, but it is not clear whether this is the intent. There are differing views among providers and distributors whether or not derivatives should be covered by any PRIPs requirements. Likewise there are differing views about whether savings-type, traditional /non unit-linked life insurance and personal pension products should be included. The key question for regulators would be, what regulation might the consumer reasonably expect be applied to a medium to long-term savings product. AmCham EU recommends that the definition exclude OTC derivatives (e.g. exchange rate forwards used to cover future FX exposure on a house purchased overseas) and excludes exchange traded derivatives that are capable of being used for hedging purposes (especially as intended effect is unknown in execution only deals). AmCham EU welcomes the Commission s exclusion of "vanilla" share and bond trading from the scope of the initiative; however their drafting challenges in this area are significant. An appropriate mechanism is needed to separate PRIPS from ordinary equities. A holding company may in principle fall within the broad definition of a PRIPS since its revenues may relate to the holdings of shares. We recommend excluding from the definition of PRIPS equities relating to companies whose holdings in underlying financial assets are principally majority shareholdings. Finally, a consumer might reasonably expect that traditional, as well as unitlinked, life insurance should be regulated as a medium to long term savings product and within the scope of PRIPs. AmCham EU therefore supports inclusion of all savings-type life insurance products within the scope of PRIPs, but not VA products and unit-linked pensions.

5 AmCham EU s Response to the Consultation on PRIPs Page 5 of 8 The legislative approach to be taken in delivering the PRIPS regime In order to provide the right level of client protection without unnecessarily restricting clients freedom to choose the right product and service combination for them, it is important that the product disclosure requirements be appropriately targeted. This includes placing the regulatory obligation on the intermediary in some cases and on the PRIPS provider in others and providing for duties to hand over a KIID in some cases and simply to make it available in others. Services provided in relation to PRIPS The four primary services through which a PRIP is sold to the retail client are: execution-only; advisory; non-discretionary management; and discretionary management. The importance of the client s own decision making varies here, with an expectation amongst clients that they need to make investment decisions without reliance on the firm when buying execution-only, and placing total reliance on the decision making of the firm in discretionary management. Also there is no issue here of forceful or persuasive selling of particular products by intermediaries, consumers decisions are their own (this takes this area out of the market failure at the heart of the PRIPS initiative). As described above, in relation to the service itself, the existing MiFID conduct duties ensure that a client is clear about the role of the service provider in relation to each type of service and has appropriate protections. The duty to produce and either provide or make available the KIID should be appropriately tailored depending on the product and service concerned. In a discretionary management arrangement, the client has no trade-by-trade decision making role and so has no need to see a KIID before or after the trade. By contrast in the execution only space, the client must take the right decisions themselves, and may value the opportunity to trade rapidly where prices move throughout the day. The execution only dealer has little or no role in the selection of the product so there are fewer potential conflicts. Here the duty should generally be on the provider to produce the KIID and make it available. The intermediary should not be required to do any more than flag the existence and location of the KIID to the client before the client s decision to trade. Where the client is trading on an execution-only basis in PRIPS whose prices do not move intra-day, the provider should be required to provide the KIID to the

6 AmCham EU s Response to the Consultation on PRIPs Page 6 of 8 investor, although the provider and the intermediary could agree that the intermediary would discharge this duty. Advisers (including non-discretionary investment managers) should be required to provide a copy of the KIID to the client when they advice the client to buy a PRIP, in good time before he decides to trade. As we mentioned above, derivatives should not in all cases be covered by the initiative. Where the derivative is traded over the counter, there should be no duty to produce or provide a KIID. Where the derivative is exchange traded, there should be a duty on the provider to produce a KIID and make it available in relation to execution only trades. Where advice is given to the client by the counterparty or an intermediary there should be a duty on the adviser to provide a KIID to the client. UCITS and the extension of the appropriateness test This is less likely to create difficulties for consumers where they are intended to trade in UCITS which do not have moving intraday prices (for example investment trusts). Introducing a complex/ non complex distinction for UCITS will create an additional judgment that firms need to take to whether to provide the test and diversity of approach between providers should not lead to the perception that a cautious view is the only correct view. Additional clarity would be welcome to ensure that a level playing field operates in practice, for example, if all UCITS whose underlying assets embed a derivative should be in and all of those which do not should be out then that should be made clear in legislation rather that leaving it to guidance. Duty to classify on product provider, not intermediary (duty on intermediary to create a compliance appropriateness test and test it with client) Disclosing profitability of structured products: We think there is an important distinction to be made between different types of products. In particular, there is a distinction between: (a) packaged products based on collective management of a pool of assets for which a fee is charged pro rata between those whose assets are being managed, which would include some forms of life assurance product; and (b) those products which simply operate by reference to a payout formula or which pay a form of fixed return: In the context of a product with a simple charges profile (for example, a set management fee), the question of what should be disclosed may be relatively straightforward. Fees are deducted from the performance of the underlying assets and charged directly to the customer, so the customer cannot calculate expected returns unless he knows the level of such costs. It is right that investments of this sort should therefore be subject to a fee disclosure regime. For defined return products the investor s key interest is in receiving the promised pay out. Fees and costs are built in to the payout formula and

7 AmCham EU s Response to the Consultation on PRIPs Page 7 of 8 the profit made by the manufacturer may vary depending on market conditions. However, the investor s interest is in a specified return rather than in the expertise of a manager in managing a pool of assets with a view to achieving a given objective. Comparison with investments where fees are subtracted from investment management performance is therefore inappropriate. Profits or losses made on a hedge cannot be compared with management fees derived by a fund manager. A more appropriate comparison would be with a deposit paying a fixed return - the investor should be interested in the defined return and the credit risk of the deposit taking institution, not its funding cost. In short, we think only those costs which serve to reduce the payout to the investor such as management fees charged by an asset manager, distribution fees or product entry or redemption fees may be of use to an investor and should be disclosed in the KIID. The content of a possible regime for product disclosure The duty to produce and provide the KIID is a central part of the PRIPS initiative. In order to meet clients needs both the format and content of a KIID and also the requirements on providing it or making it available must be appropriate, as a one-size-fits-all approach is unlikely to work well. The form and content of the KIID The UCITS KID/KII is being held up as the template for all PRIPs products. It is a good starting place but it must be acknowledged that for some PRIPs, risks which are not contemplated in the UCITS work will be central to an investor s understanding. Equally the simple synthetic risk indicator in the UCITS KIID, which many believe to be dangerously misleading to consumers, would have no place in products where volatility is not an issue. Comparisons, however, involve highlighting differences as well as similarities. The problem which could be created by a single, harmonised disclosure document which is used across multiple product types is that it may well have the effect of communicating to investors that there are no significant differences between these products. The differences between products are important to understand. There is a great deal of work necessary before a single disclosure template can be offered with any confidence across such a wide range of products. Experience in the UK shows that its Key Features Document needs to be kept under review and its contents limited to key points and in plain language. We suggest that the core elements of product disclosure must be costs, risks and performance (i.e. reward). The debate should not be whether such disclosures are necessary, but a technical discussion about how to achieve disclosures that are broadly comparable across different types of product, without masking the important differences between products.

8 AmCham EU s Response to the Consultation on PRIPs Page 8 of 8 We also think that to achieve greater readability of the KIID whilst keeping within the tight space constraints, a common glossary which is separate from the specific KIID should be developed at national or pan-european level. Pending that, firms or trade bodies should be able to create glossaries to ensure KIID page limits can be met. *** AmCham EU speaks for American companies committed to Europe on trade, investment and competitiveness issues. It aims to ensure a growth-orientated business and investment climate in Europe. AmCham EU facilitates the resolution of transatlantic issues that impact business and plays a role in creating better understanding of EU and US positions on business matters. Aggregate US investment in Europe totalled 1.2 trillion in 2008 and currently supports 4.8 million direct jobs in Europe. ***