Response to the Consultation by Commission Services on legislative steps for the Packaged Retail Investment Products (PRIPs) initiative

Transcription

1 Response to the Consultation by Commission Services on legislative steps for the Packaged Retail Investment Products (PRIPs) initiative BlackRock welcomes the opportunity to respond to the European Commission s public consultation on legislative steps for the Packaged Retail Investment Products (PRIPs) initiative. The initiative is important for our investors, whether pensioners, long-term savers or financial institutions in view of the issues it raises in respect of finding a balance between protecting consumers whilst levelling the regulatory playing field for substitute investment products. Executive Summary BlackRock supports regulatory reform globally where it increases transparency, protects investors, facilitates responsible growth of capital markets and, based thorough cost-benefit analyses, preserves consumer choice. The PRIPs initiative represents an opportunity to address consumer protection issues that arise from the choice investors face in planning for their, inter alia, long-term savings and retirement. The leitmotif of the initiative should be to bring consistency and comparability of information over a diverse suite of competing and substitute products. The success on the initiative hinges on finding an appropriate definition of what would constitute a PRIP. BlackRock believes that an a PRIP ought to be a product which maybe constructed either as a separate entity (in whatever form) or by way of a contractual arrangement, that enables multiple retail investors to combine their investments to invest in or obtain exposure to a single asset or range of assets, the value of which is determined by reference to the value of those underlying assets. A PRIP does not include a direct holding of shares and securities by an investor. Thereafter, the initiative has the best chance of success where lessons are drawn and experience applied from the ongoing industry-wide initiative to develop Key Investor Information Documents (KIIDs) for UCITS. Introductory remarks BlackRock is one of the world s leading asset management firms. We manage over 2.5 trillion on behalf of institutional and individual clients worldwide through a variety of equity, fixed income, cash management, alternative investment, real estate and advisory products. We do not enter into proprietary business nor do we act as principal. Our client base includes corporate, public, multi-employer pension plans, insurance companies, third-party and mutual funds, endowments, foundations, charities, corporations, official institutions, banks and individuals around the world. BlackRock represents the interests of its clients by acting in every case as fiduciary. It is from this perspective that we engage on all matters of public policy. In terms of the BlackRock packaged investment funds range, products potentially eligible for PRIPs classification, BlackRock currently runs 257 UCITS sub-funds in four European jurisdictions, 557 funds that could be classified as Alternative Investment Funds and 313 life products. 1 BlackRock is also a risk manager and has advised on a significant number of high profile and complex mandates following the 2008 financial crisis. As such BlackRock is committed, and has made a strong contribution, to the restoration of financial stability in Europe and worldwide. The following response details the issues of greatest concern to Europe s investors. BlackRock expressly supports Commission thinking in the specific areas where it is stated as such in the response. In all other areas BlackRock retains a neutral position. 1 Further details regarding the specific breakdown of the funds and their assets under management are available on request.

2 Responses to questions Q. 1: Should the PRIPs initiative focus on packaged investments? Please justify or explain your answer. Q. 2: Should a definition of PRIPs focus on fluctuations in investment values? Please justify or explain your answer. Q. 3: Does a reference to indirectness of exposure capture the 'packaging' of investments? Please justify or explain your answer. 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? 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. PRIPs should focus on packaged investments because segregated accounts are only typically chosen by large institutions able to take advice. Fluctuation in investment values is a good basis for definition of a PRIP because it focuses on economic reality rather than legal form. There are some instruments which are packaged but do not have the price fluctuations such as an annuity. These should not be in scope because the customer is not taking substantive investment risk. However, other instruments that are not packaged may still provide economic exposure to investments such as an investment linked certificate. These should be in scope because of their economic similarity with funds. A possible definition of a PRIP might therefore be as follows: A PRIP is a product which maybe constructed either as a separate entity (in whatever form) or by way of a contractual arrangement, that enables multiple retail investors to combine their investments to invest in or obtain exposure to a single asset or range of assets, the value of which is determined by reference to the value of those underlying assets. A PRIP does not include a direct holding of shares and securities by an investor. Q. 6: Should simple (non-structured) deposits be excluded from the scope of the initiative? Please justify or explain your answer. 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. 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. It is logical to exclude simple (non-structured) deposits, plain vanilla equity shares and bonds from the scope of the initiative in view of the materially different approaches applied to each in respect of distribution and transparency. Of the options proposed, Option 1 clearly demarcates the notion of structured products from simple products and could become the basis for text that also serves to exclude equity shares and bonds from the scope. Whilst Option 2 works for deposits, distinct criteria would be needed to exclude equity shares and bonds in this instance.

3 Q. 9: Should pensions be explicitly excluded from the PRIPs initiative at this stage? Please justify or explain your answer. Q. 10: Should annuities be treated in the same fashion? Again, please justify or explain your answer. Q. 11: Do you have any comments on the proposed manner of achieving this exclusion? 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? Defined benefit (DB) pensions typically have no member discretion required therefore it seems inappropriate to require provision of information in a format designed for investment decisions. Therefore, DB pensions in their relationships with members should be out of scope. Segregated investment management for DB pensions should be out of scope because the investment is not packaged in any way. Some insurance companies are in direct competition with providers of segregated fund management in investing for such schemes. It seems inappropriate to handicap insurance companies rather than asset managers in provision of asset management to such schemes. Defined contribution (DC) pensions fall into two classes: arrangements where members contract with an insurance company directly either as individuals (individual personal pensions) or as groups (group personal pensions). Individual personal pensions (IPP), often provided by insurance companies, place members in a very similar situation to retail purchasers of UCITS funds whereby they have to make their own investment decisions. Therefore, such IPP holders should be provided with similar information to the KIID. Members in group personal pensions (GPP) schemes or trustee DC schemes are in a slightly different position because they have their investment choices pre-filtered by either a trustee body or an employer. On the assumption that multiple fund choices are available, though there is still a significant investment decision to be made by the individual and this choice should be supported by a KIID. If a life company is selling business that gets re-wrapped by means of a feeder fund then it will be the responsibility of the feeder fund provider to provide a KIID. They may call on the original life company for help in data provision or drafting but this can be settled by contract between the two parties and does not require regulation. If an insurance company only has customers that will not require KIIDs they should not be forced to produce KIIDs just to hold them on the shelf. Non-linked and index linked annuities are in their nature a guaranteed investment so need not be subject to these rules. Variable annuities typically have investment choices to be made and so should be subject to these rules. 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. 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? The creation of such a list could be useful in providing clarity as to what is or what is not a PRIP but it will be impossible to provide an exhaustive list of PRIPs owing to the swiftly changing environment and market innovation. The list must therefore be capable of being updated frequently and on short notice and it is recommended that it should be maintained

4 by ESMA. At best the list should indicate at a high level the types of products that should be considered as a PRIP. Possible contents for such a list would include: UCITS; Alternative Investment Funds (AIFs); variable annuities; pension savings products, in whatever form where the investor has the right to choose the type of investment; and other forms of life insurance savings products. Q. 15: Should direct sales of UCITS be covered by means of including the relevant rules within the UCITS framework? 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)? It would be preferable to include direct sales of UCITS within the relevant rules of the UCITS framework, rather than in MiFID. We would also support efforts to ensure greatest consistency across all PRIPs so there would be value in exploring modifications to the UCITS framework to directly apply the relevant MiFID requirements. 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. 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. Q. 19: What measures do you think will be necessary to ensure KIID remain streamlined and focused solely on key information? The design of the KIID should indeed be focussed on the objective of aiding retail investment decision making in general and facilitating the comparability for retail investors across competing or substitute products in particular. Development of the UCITS KIID provides important experience in this area. We believe strongly that it would be prudent and beneficial to draw lessons from this undertaking before embarking on setting out requirements for PRIPs KIIDs. Therefore, we would urge the European Commission to establish a process whereby such information could be gathered from a representative sample of those institutions that are responsible for producing UCITS KIIDs. We also feel strongly that the PRIPs KIID should follow closely the outline of the UCITS KIID unless there are strong and justifiable reasons for not doing so. 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. 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. 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

5 consistent as possible, irrespective of tailoring otherwise allowed? Please justify or explain your answer. 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? 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? There is a wide range of PRIPs that are designed to achieve different things. Some of them will be pure investment and have similar economic characteristics to a UCITS. Others will be designed to achieve other ends and have investment as only a subsidiary activity. An example would be a unit linked whole life product where the principal purpose of the contract is to achieve mortality cover. While investment information should be provided to the clients it should be proportionate to the significance of the investment component. Therefore, we believe that it would be impractical to require any contract with even a small investment element to follow the same prespecified format. For this reason, firms should be allowed to provide additional information or vary the information when the product is economically different to a fund. Please also see the above response to questions 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. Q. 26: Are there any other broad principles that should be considered on content and format? We reiterate that consistency across all PRIPs KIIDs is of paramount importance in this exercise. These requirements are therefore susceptible to being applied directly across the European Union through a Regulation. Q. 27: Should product manufacturers be made generally responsible for preparing a KIID? Please justify or explain your answer. 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? Q. 29: If intermediaries or distributors might be permitted to prepare the documents in some cases, how would these cases be defined? Product manufacturers should be generally responsible for preparing a KIID. The definition of a product manufacturer is therefore important. We feel that it would be appropriate for the firm responsible for creating a wrapper around investable instruments should be classified as a product manufacturer. 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? Q. 31: How might greater comparability and consistency in product labelling be addressed? There are no real common definitions as to what is or is not socially responsible investing and therefore in the context of the KIID, which by its very nature must be clear and concise, it seems impossible to be able to clearly label a PRIP according to the social and environmental impacts of its underlying investments, which in many cases will be very diverse.

6 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. 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. Q. 34: Do you agree with the suggested approach for UCITS KIIDs? 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? There are many products that bear only a small similarity with funds so we should not force them to disclose information in a way that is contrary to their economic design. 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? Q. 37: Do you consider there are any other techniques that might be used to help retail investors compare risks? Per our response to questions above, to answer these questions fully we would again urge the European Commission to establish a process whereby such information could be gathered from a representative sample of those institutions that are responsible for producing UCITS KIIDs. Q. 38: What in your view will be the main challenges that will need to be addressed in developing common cost metrics for PRIPs? Q. 39: How can retail investors be aided in making 'value for money' comparisons between different PRIPs? Cost metrics are only useful when comparing similar products so for example TERs are useful when comparing lump sum investment products to each other but less so when comparing them with contracts involving a commitment to make regular investments over a period that incorporate non-amc based charges e.g. initial waiting periods such as an endowment. Value for money comparisons can only similarly be made when comparing similar products. For example, it is reasonable to compare TERs for different investment funds. However, if a product also has some mortality benefit and some health cover it seems unlikely that one can compare value for money for it with, say, that for a UCITS. Q. 40: Do you consider that performance information should always be included in a KIID? 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 performance of the fund manager should arguably the primary consideration for the investor. Once the investor has appraised the manager as a whole the choice of product becomes a, nonetheless important, secondary decision. Performance information need not always be included in a KIID it is valuable when judging a variable annuity but virtually redundant for products that generate guaranteed outcomes.

7 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? Q. 43: What information should be provided to retail investors on the cost of guarantees? We agree that it would be desirable in principal to disclose information on the costs of guarantees but acknowledge that in practice it is very hard to see how this could be achieved. For example, a guaranteed price floor is economically equivalent to a put option, the prices of which vary on a daily basis and even within the day. Some more complex guarantees do not correspond to market traded put options but to over the counter put options whose prices have similar levels of volatility but less transparency. Finally some products contain guarantees that are not investment guarantees. For example, an individual personal pension may allow a guaranteed annuity rate.