INVERCO COMMENTS ON LEGISLATIVE STEPS FOR THE PACKAGED RETAIL INVESTMENT PRODUCTS INITIATIVE

Transcription

1 INVERCO COMMENTS ON LEGISLATIVE STEPS FOR THE PACKAGED RETAIL INVESTMENT PRODUCTS INITIATIVE 1.- INTRODUCTION INVERCO (Spanish Association of Collective Investment Schemes and Pension Funds) represents more than six thousands Collective Investment Schemes and more than 1,300 Pension Funds, with more than EUR 254 billion in assets under management. INVERCO thanks European Commission for this initiative that will be an important step to reach level playing field in disclosures and rules for sales of financial products. INVERCO also appreciates the opportunity given by European Commission to all market participants in order to make their comments and express their points of view on legislative steps for the Packaged Retail Investment Products initiative. As a general comment, PRIPs initiative should be referred to all financial products whose surrender doesn t depend on an event related to investor s personal circumstances that may happen. When a person makes an investment decision, that person chooses among available options and it would be easier if she or he has comparable information and equivalent rules of sales are applied. This involves that financial products that could compete among themselves (even simple deposits and direct exposures) should be included in PRIPs regime. An exception would be when that person doesn t have an investment purpose and, instead of this, is looking for protection in case of certain event happens such as death, retirement, disability or dependence. For this reason, pure protection products and pensions should be explicitly excluded from PRIPs regime. Direct sales of UCITS should not be covered by means of including the MiFID sales rules within the UCITS framework, because, with the only exception of investment advice and portfolio management, UCITS management companies are not allowed to provide investment services and activities and the only thing they can do is market UCITS. It would be very difficult and costly to adapt management companies to rules designed for activities that they can not provide. Finally, KIID for PRIPs should be designed in an equivalent way as UCITS by adapting it to include additional risks (for example, risks relating to counterparties or liquidity which are highly controlled for UCITS but may be materially important for other PRIPs) and by including all additional cost involved, even those related to different channels of distribution, (for example, acquisition and maintenance costs that are charged to investors in other financial products). -1-

2 2.- QUESTIONS Q. 1: Should the PRIPs initiative focus on packaged investments? Please justify or explain your answer. PRIPs initiative should apply not only to packaged investments but also to all financial products that could compete among themselves, in order to reach a level playing field and to give sufficient and comparable information to investors. When a person makes an investment decision, that person chooses among available options and it would be easier if she or he has comparable information and equivalent rules of sales are applied. An exception would be when that person doesn t have an investment purpose and, instead of this, is looking for protection in case of certain event happens such as death, retirement, disability or dependence (for example, pure protection products and pensions). So, PRIPs initiative should be referred to all financial products whose surrender doesn t depend on an event related to investor s personal circumstances that may happen. Q. 2: Should a definition of PRIPs focus on fluctuations in investment values? Please justify or explain your answer. A definition of PRIPs should not be focused only on fluctuations in investment values. For example, in case of a financial product that pays a fixed simple interest, the investor should know other aspects (such as conditions in case of reimbursement or sale before maturity date or cost of holding that investment product) that should be informed and presented in a standardized way. Q. 3: Does a reference to indirectness of exposure capture the 'packaging' of investments? Please justify or explain your answer. The reference to indirectness of exposure doesn t capture the 'packaging' of investments, because, as it is stated by CESR 1 and by European Commission 2, there can be money market instruments, bonds or securitised debt embedding a derivative (such as convertible bonds and exchangeable bonds), or incorporating a structure which makes it difficult for the client to understand the risk involved. Besides, direct exposure is subject to risks (such as counterparty or market risks) and cost (such as those related to acquisition or holding of shares and bonds) that should be explained to investors in a standardized way. Q. 4: Do you think it is necessary to explicitly clarify that the definition applies to fluctuations in 'reference values' more generally, given some financial products provide payouts that do not appear to be linked to specific or tangible assets themselves, e.g. payouts linked to certain financial indices, the rate of inflation, or the overall value of a fund or business? 1 CESR Technical Advice to the European Commission in the context of the MiFID Review - Investor Protection and Intermediaries, 29 July 2010, page European Commission Public Consultation on review of the Markets in Financial Instruments Directive (MiFID), 8 December 2010, page

3 Yes. Q. 5: Do you have any other comments on the proposed definition? If you consider it ineffective in some regard, please provide alternatives and explain your rationale in relation to the criteria for a successful definition outlined above. For reasons explained in question 1, PRIPs initiative should be referred to all financial products whose surrender doesn t depend on an event related to investor s personal circumstances that may happen. Q. 6: Should simple (non-structured) deposits be excluded from the scope of the initiative? Please justify or explain your answer. No, because it is a financial product that is perceived by investors as equivalent to other investments, such as guaranteed fixed and variable returns Collective Investment Schemes (CIS): Guaranteed fixed return CIS are CIS backed by the guarantee of a third party and which guarantee the investment plus a fixed return. Guaranteed variable return CIS are CIS backed by the guarantee of a third party and which guarantee the recovery of the initial investment plus a possible amount fully or partly linked to the performance of equity instruments, foreign currency or other asset. Additionally, they include CIS backed by the guarantee of a third party which guarantee the recovery of the initial investment and include an active management of a part of their assets. Additionally, other Collective Investment Schemes with a low risk investment profile (for example, Monetary Funds and short-term Bonds Funds) are perceived by investors as equivalent, because their volatility is minimal. Consequently, last 19 May 2010, CESR published its Guidelines on a common definition of European money market funds (CESR/10-049), that will set out criteria to be applied by any Fund that wishes to market itself as a Money Market Fund. As CESR states (CESR/10-575), The criteria reflect the fact that investors in money market funds expect the capital value of their investment to be maintained while retaining the ability to withdraw their capital on a daily basis. To take into account properly all substitutive financial products by investors, simple deposits should not be excluded. Q. 7: Do you consider option 1 or option 2 preferable for achieving this? Please explain your preference, and set out an alternative if necessary, with supporting evidence. Please see question 6. Q. 8: Should such an exclusion be extended to financial instruments which might raise similar issues as deposits (e.g. bonds), and if so, how might these be defined? Please justify or explain your answer. No. Please see questions 3 and 6. Q. 9: Should pensions be explicitly excluded from the PRIPs initiative at this stage? Please justify or explain your answer. -3-

4 Yes. As it is explained in question 1, participants in pension products have a purpose different to investment in financial products and they are seeking protection when an event related to their personal circumstances happens. Besides, these pension products and the way they are configured are highly linked to Member States decisions on promoting sustainability of their systems and, consequently, there are many variations depending on the Member State considered. These facts justify that pensions will be explicitly excluded from the PRIPs initiative. Q. 10: Should annuities be treated in the same fashion? Again, please justify or explain your answer. Annuities should be treated in the same fashion and excluded from PRIPs regime, because they only represent how the protection is effective. Q. 11: Do you have any comments on the proposed manner of achieving this exclusion? As retirement is only one of the different contingencies covered by pensions, the exclusion should be extended to other contingencies such as death, disability or dependence. Q. 12: Do you agree that variable annuities might need to be treated as a special case? If so, how should these be defined, and how do you think they should be addressed? Variable annuities should not be treated as a special case and should be also excluded from PRIPs regime because they only represent how the protection is effective. Q. 13: Do you see benefits from such an indicative list being developed? If not, please provide alternative proposals and evidence for why these might be effective. Yes. It would clarify PRIPs regime and avoid uncertainty. Q. 14: Do you have any suggestions on the possible contents for such a list, including on how to define items placed on the list? Items placed on the list should be defined considering level playing field to all financial products. Q. 15: Should direct sales of UCITS be covered by means of including the relevant rules within the UCITS framework? Direct sales of UCITS should not be covered by means of including the MiFID sales rules within the UCITS framework, because, as a general rule, UCITS and their management companies are not allowed to provide investment services and activities. UCITS management companies can only market UCITS shares and units, so they can only attend their clients with this limitation. When people get in touch with a management company, they know that the only thing that such management company can do is market UCITS. The only exception of such general prohibition is investment advice and portfolio management provided by management companies according to article 6 (3) of Directive -4-

5 2009/65/EC 3, so only in the case of these investment services and activities MiFID rules should be applied. Q. 16: Do you have any comments on the identified pros and cons of this approach, and any evidence on the scale and nature of impacts (costs as well as benefits)? Application of MiFID rules to direct sales of UCITS will involve many costs to management companies. Unlike investment firms and credit entities, they can not provide investment services and activities so, consequently, they can not charge any amount for these services and it would be very difficult and costly to adapt management companies to rules designed for activities that they can not provide, with the only exception of investment advice and portfolio management. Q. 17: Should the design of the KIID be focused on delivering on the objective of aiding retail investment decision making? If you disagree, please justify or explain your answer. Yes. Q. 18: Should the KIID should be a separate or 'stand alone' document compared with other information that might be necessary, e.g. background information, other disclosures, or contractual information? Please justify or explain your answer. Yes. KIID should be a separate or 'stand alone' document in order to facilitate comparability between different PRIPs. Other information that might be necessary (e.g. background information, other disclosures, or contractual information) should be available for investors in a different document so as to provide additional information that is not so essential to make such comparative investment decision. As it is stated by article 3 (1) of Regulation 583/2010 4, the key investor information document shall be provided in such a way as to ensure that investors are able to distinguish it from other material. In particular, it shall not be presented or delivered in a way that is likely to lead investors to consider it less important than other information about the UCITS and its risks and benefits. Q. 19: What measures do you think will be necessary to ensure KIID remain streamlined and focused solely on key information? Measures adopted for UCITS KIID should be the reference to reach these objectives. Q. 20: While the same broad principles should be applied to all PRIPs, should detailed implementations of some of these principles be tailored for different types of PRIP? Please justify or explain your answer, and provide examples, where relevant, of the kinds of tailoring you might envisage. 3 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS). 4 Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards key investor information and conditions to be met when providing key investor information or the prospectus in a durable medium other than paper or by means of a website. -5-

6 Detailed implementations of some of broad principles should be tailored for different types of PRIP only when it is necessary to understand the PRIP, so as to guarantee homogeneity. Q. 21: Do you foresee any difficulties in requiring the KIID to always follow the same broad structure (sequence of items, labelling of items)? Please justify or explain your answer. No, provided that each element of this structure would be applicable to the concrete PRIP. Q. 22: Do you foresee any difficulties in requiring certain parts of the key information and its presentation (e.g. on costs, performance, risks, and guarantees) to be standardised and consistent as possible, irrespective of tailoring otherwise allowed? Please justify or explain your answer. The key information and its presentation (e.g. on costs, performance, risks, and guarantees) should be standardised and consistent as possible, in order to facilitate comparability between different PRIPs. Q. 23: Can you provide examples and evidence of the costs and benefits from your experience that might be expected from greater standardisation of the presentation and content in the KIID? Every change (such as introduction of KIID) involves costs of adaptation (related to process, designs, qualification of employees ) that UCITS and their management companies will have to assume. In terms of fairness, in relation to other substitutable financial products, an equivalent KIID should be elaborated and the related costs should be assumed. Q. 24: Should the content of the KIID be controlled so that there is no possibility for firms to add additional information unless expressly allowed for? Provided that it is already required for UCITS, that requirement should be introduced for the remaining PRIPs in order to respect level playing field. Q. 25: Do you foresee and difficulties in applying these broad principles to the KIID for all PRIPs, as the building blocks on content and format for a 'level 1' instrument? Please justify or explain your answer. No, as these broad principles are sufficiently general and adaptable to any PRIP. Q. 26: Are there any other broad principles that should be considered on content and format? It is missed the prevision included in article 79 (1) of Directive 2009/65/EC that states the following broad principle: Key investor information shall constitute pre-contractual information. Q. 27: Should product manufacturers be made generally responsible for preparing a KIID? Please justify or explain your answer. Product manufacturers should be made generally responsible for preparing a KIID when they have all information of the PRIPs (specially, all the costs involved when distributors are allowed to charge different costs to investors). -6-

7 For example, as it is proposed in question 3, PRIPs should include direct exposure that involves different costs of acquisition or different costs of holding depending on which intermediary has received the order or has the securities account. Q. 28: Are you aware of any problems that might arise in the distribution of particular products should responsibilities for producing the KIID be solely placed on the product manufacturer? Please see question 27. Q. 29: If intermediaries or distributors might be permitted to prepare the documents in some cases, how would these cases be defined? Please see question 27. Q. 30: What detailed steps might be taken to improve the transparency of the social and environmental impacts of investments in the KIID for PRIPs? Social and environmental impacts of investments are considered in very different ways depending on national conscience of the financial markets and their investors. For example, in Spain, according to Circular 3/2006, on Prospectus of CIS, Socially Responsible Investing CIS are those whose Management Companies or Depositaries hand over a part or their whole fees in favour of a non-profit organization. However, investors in CIS of other countries or investors in other financial products could be interested in other kind of Socially Responsible Investing due to their specificities. This fact makes very difficult to set out a general approach on this matter, so it should be decided by each country attending the characteristics of its financial markets and investors. Q. 31: How might greater comparability and consistency in product labelling be addressed? Please, see question 30. Q. 32: Should the summary prospectus be replaced by the KIID for PRIPs? Please outline the benefits and disadvantages you see with respect to such an approach. INVERCO has not opinion, provided that a KIID will be prepared for all PRIPs. Q. 33: Should Solvency II disclosures provided prior to the investment decision be replaced by the KIID for PRIPs? Please outline the benefits and disadvantages you see with respect to such an approach. INVERCO has not opinion, provided that a KIID will be prepared for all PRIPs. Q. 34: Do you agree with the suggested approach for UCITS KIIDs? Yes. Member States are in process of adapting for UCITS KIIDs, so it is not convenient to include new changes to the content of the UCITS KIID framework at this time. However, if -7-

8 KIIDs obligations were reduced for other PRIPs, KIIDs obligations should be reduced for UCITS in the same way. Q. 35: Are there any disclosures, e.g. required by the existing regimes, which you believe the PRIPs KIID should not include, but which should still be disclosed, e.g. separately to the KIID? Do you have any practical examples for such elements? INVERCO has not comments. Q. 36: What in your view will be the main challenges that will need to be addressed if a single risk rating approach is to work for all PRIPs? The main challenge is to adapt risk and reward indicator to include additional risks, e.g. relating to counterparties or liquidity, which are highly controlled for UCITS but may be materially important for other PRIPs. Q. 37: Do you consider there are any other techniques that might be used to help retail investors compare risks? Further explanations would be necessary when a specific risk is particularly material (credit risk, liquidity risk, counterparty risk and operational risks). Q. 38: What in your view will be the main challenges that will need to be addressed in developing common cost metrics for PRIPs? The main challenge that will need to be addressed in developing common cost metrics for PRIPs is to include all cost involved (even those related to different channels of distribution). Q. 39: How can retail investors be aided in making 'value for money' comparisons between different PRIPs? Retail investors should be aided in making 'value for money' comparisons between different PRIPs, by including all costs that will be paid by investors and updating this information with any increase or decrease that could happen. Q. 40: Do you consider that performance information should always be included in a KIID? If it is required for some PRIPs as UCITS, it should be required for all other PRIPs in order to respect level playing field. Q. 41: What in your view will be the main challenges that will need to be addressed in ensuring performance information can be compared between different PRIPs? The main challenge would be to fit each PRIP into possible performance disclosure (past performance or prospective performance scenarios). Q. 42: Do you agree that a consistent approach to the description of guarantees and capital protection in the KIID should be sought, e.g. through detailed implementing measures, for different PRIPs? It could be disclosed in risk and reward profile, as it is required for UCITS. -8-

9 Q. 43: What information should be provided to retail investors on the cost of guarantees? All costs that will be charged to investors as a consequence of guarantees should be disclosed. Madrid, 27 January