Ministry of Finance The Financial Supervisory Authority Sweden Sweden Finansinspektionen Dnr: Fi2010/5474 Dnr. 10-11749 European Commission MARKT-PRIPS-CONSULTATION@ec.europa.eu Consultation by Commission Services on legislative steps for the Packaged Retail Investment Products initiative reply from the Swedish Ministry of Finance and the Swedish Financial Supervisory Authority The Ministry of Finance Sweden and the Swedish Financial Supervisory Authority welcomes the opportunity to submit our comments on the PRIPs Consultation. By way of introduction we summarize our position on selected topics in the Consultation. More detailed comments and answers to particular questions are thereafter provided. If a question or a topic has not been subject to our comments or answers herein, it shall not be deemed to constitute our approval or dismissal to the proposition. Would any further clarifications be needed, we would be happy to assist you. GENERAL COMMENTS We welcome the European Commission s (hereinafter COM ) proposal regarding legislative initiative within the area of Packaged Retail Investment Products ( hereinafter PRIPs ). Further, we agree with COM that there is a need for improvements in pre-contractual product transparency and alignment of sales rules covering all PRIPs product groups. There is, however, considerable challenge in introducing consistent and equal level of investor protection and a level playing field for firms. We would like to begin our response with few general points, which we consider as necessary to take into account in order to achieve the desired effects of the PRIPs initiative. We support the independence of PRIPs regime which captures the regulatory landscape for several product groups (MiFID, IMD and UCITS IV). We consider the intention to add PRIPs rules to current regulation as an appropriate approach, which contribute to harmonisation of the rules. Furthermore, we agree that proposed pre-contractual product disclosure rules in UCITS IV, as 1(11)
well as the present sales rules in MiFID could be used as a starting point in PRIPs legislative initiative, instead of introducing an entirely new framework. However, it must be clear which particular sales rules or pre-contractual product disclosure rules are applicable for PRIPs. Otherwise, there is a risk for inconsistencies in application of PRIPs rules and risk for circumventions. We believe that the concept of 'retail investor' should be defined for and implemented in a PRIPs regime in order to emphasize the customer segment as the very basis of the regulation. In addition, we consider that such definition should be in line with the corresponding regulatory landscapes. Accordingly, MiFID s equivalent definition of 'retail investor' should be used as a benchmark. See our further comments below in Q. 5. Generally we believe that it is necessary to introduce a definition of PRIPs, in order to ensure a harmonised application. We agree that such definition should be broad and accompanied with an indicative list of products falling outside the scope of PRIPs, see Q. 13 14. It should be borne in mind that an introduction of new rules and definitions often create new complexities with application and interpretation, whereby a careful assessment thereof is crucial before any legislative action is taken. A PRIPs regime should be adapted to the current regulatory landscapes and product groups without creating new instrument categories. Accordingly, we see a need for a closer assessment of the relation between complex products under MiFID on the one hand and PRIPs on the other, and whether there is a risk of creating an additional layer of product category. We agree with COM s proposals on pre-contractual disclosure of information about all PRIPs to investors or potential investors. We believe that standardised and structured information to retail investors (Key Investor Information Document, hereinafter KIID ), irrespective of the PRIPs product group, will contribute to more transparency and better understanding of the different product groups. Further, we consider it important to ensure that the requirements on contents and updating of KIID should be sufficiently flexible and adjusted both to investment advice and to order execution regimes. Further, we would like to emphasize that other information than information provided through KIID should be easily accessible for investors, and that the nature of such information is clearly presented. Pre-contractual product disclosure obligations are only one element among others in the investment decision. Information brochures will without a doubt have a clarifying effect on the product. However, it does not replace or reduce firm s responsibility in respect of other investor protection rules. It is essential that the firms continue to ensure that the investors understand the product. Compliance with these rules, combined with effective supervision and sanction system is equally critical for a well functioning investor protection regime. 2
DETAILED COMMENTS Q. 1: Should the PRIPs initiative focus on packaged investments? Please justify or explain your answer. We agree with COM that the PRIPs initiative should focus on packed investment products. Such products are generally more complex by their nature, e.g. with regard to their structure and risk involved, which modify the exposure compared with direct holdings. Also price and revenue structures are more complicated for these packaged investments. It can therefore be more difficult for a retail investor to understand the product and assess the true risks and costs of such product. Q. 2: Should a definition of PRIPs focus on fluctuations in investment values? Please justify or explain your answer. We support COM s opinion in this respect. Market fluctuations, i.e. the uncertainty for future payments or returns constitute the risk. The approach provides a very broad definition of a high abstraction level. We are in favour of a broad definition and that it would be implemented in level 1. However, such a broad definition can cause interpretation problems that may have a negative impact on the legal certainty. Therefore, additional clarifications in level 2 are necessary in order to achieve uniform application of the PRIPs rules. See also our comments on Q. 13 and 14 below. Q. 3: Does a reference to indirectness of exposure capture the 'packaging' of investments? Please justify or explain your answer. We agree that reference to indirectness of exposure captures the packaging aspect of an investment. As concluded in the report of 3L3 Task Force on Packaged Retail Investment Products (PRIPs), we are of the opinion that packaged products are those that expose investors to the performance of assets or other financial instruments indirectly, through other mechanisms than a direct holding. 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? 3
We would prefer the referral to 'market value' (instead of 'reference value') in order to obtain a sufficient broad definition. 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. We believe that a definition of PRIPs needs to contain the concept of 'retail investor'. Such referral would clarify that PRIPs regime is applicable for this particular category of investors. Further, we would like to emphasize that the definition of 'retail investor' in PRIPs regime should be harmonised with the other relevant regulatory landscapes in order to avoid inconsistencies in application and ensure harmonised investor protection. We suggest that the definition of 'retail investor' in MiFID could be used as a benchmark. Q. 6: Should simple (non-structured) deposits be excluded from the scope of the initiative? Please justify or explain your answer. We support COM s proposal to exclude simple (non-structured) deposits from the scope of PRIPs initiative. Such product does not fall under PRIPs definition due to the fact that they are not characterized by any uncertainty on the future payments or returns that would constitute the risk. 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. We do not have any view on this at this stage. 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. We agree that simple financial instruments raising similar issues as deposits, see Q. 6 above, should be excluded from the scope of application of PRIPs regulation. Such financial instruments are not characterized as PRIPs with regard to their structure and do not fulfil the criteria for PRIPs, see also our justification in Q. 6 above. 4
Q 9 - Q 12 Pensions We welcome the discussion whether pensions and annuities should be covered by the scope of PRIPs. However, we note that this issue is currently being assessed by EIOPA (Report on pre-enrolment information to pension plan members). Furthermore, COM s continuing work on pensions (which follows the Green Paper on Pensions) should be taken into account in the further work on PRIPs. 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. We are positive for the introduction of an indicative list of products which the PRIPs regime would not apply to. Such an indicative list would be necessary both for making the definition more concrete and for facilitating the application. In addition, such a list would also contribute to greater transparency and reduce risks for inconsistent application and circumvention. It is also important to decide when and how the list shall be reviewed. For further justification, see Q. 14 below. 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? As already concluded in Q. 13 above, an indicative list should, in our opinion, contain those instruments falling outside the scope of PRIPs definition. We believe that such list would be easier to administrate and to update, as non- PRIPs instruments are more traditional by their nature and not subject to further product development into same extent as packaged and complex products. Moreover, such a list would be more concise and would not be needed to update as often as a list of products falling under the scope of PRIPs. Q. 15 Should direct sales of UCITS be covered by means of including the relevant rules within the UCITS framework? We welcome the initiative to implement the code of conduct rules and sales rules as regards to PRIPs UCITS applicable for fund management companies into UCITS IV regime. These rules and regulations are applicable for direct sales of UCITS products and will become even more comprehensive and structured followed by the implementation of UCITS IV directive. Fund management companies are e.g. obliged to provide harmonised KIID to investors before investment decision. 5
For the avoidance of doubt, we would like to stress that investment firms and credit institutions distributing PRIPs UCITS should continue to fall within the scope of MiFID. Further, we are of the opinion that the current legal structure between UCITS (direct sales of fund units) and MiFID (indirect sales of fund units) should be considered satisfactory. We would also like to note that there is an ongoing review of the Insurance Mediation Directive (IMD) at the European Union level. IMD review includes proposals in sales regime, by using MIFID s sales rules as a benchmark. In this context, we would like to stress the importance of aligning the sales rules in IMD with the equivalent rules in MiFID. Such alignment is in our view necessary in order to achieve a harmonised approach in respect of the proposed sales rules within PRIPs initiative covering all product groups. 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)? We do not have any further comments in this respect at this stage. 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. We welcome the proposal that the design of KIID should be focused on delivering information necessary for a retail investor s well-informed decision making. For further justification in this respect, we would like to refer to our statement under Q. 18 below. Based on the proposed contents and purpose of the KIID, we believe that KIID would be an effective tool for minimizing the risk of information overload for retail investors. The existing regulation contains pre-contractual information disclosure obligations, which vary between different product groups. The experience has shown that diverse product information material tends to be defective in various aspects. For instance, an exhaustive list of risks of crucial importance for making a well-informed investment decision is often missing. Product information material is often similar to marketing material, which may further mislead investor in distinguishing relevant information from irrelevancies. Therefore, it should be borne in mind that any extensive regulation approach of pre-contractual disclosure of information should always be proportionate and balanced against the effectiveness of the regulation as well as the desired effects. 6
Q. 18: Should the KIID 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. We are positive for the proposal to consider KIID as a 'stand alone' (rather than complementary) document necessary for a retail investor to make a wellinformed investment decision. At the same time, we can already now see the challenge in designing of such concise and all-embracing document. Further, the exclusion of any possibilities for a firm to refer to additional documents beyond KIID, necessary for a retail investor to make a wellinformed investment decision, is in our opinion essential in order to achieve the desired effect with the proposal of 'stand alone' element of KIID. We regard the proposal of KIID s 'stand alone nature' as a necessary step in enhancing the investor protection and would like to provide closer justification below. We believe that retail investors are more likely to be governed by the advisor s advice, rather than any information material provided to the investor. This is identified in the report Consumer Decision-Making in Retail Investment Services: A Behavioural Economics Perspective (November 2010) that has been published in connection to PRIPs initiative. Accordingly, we believe that inconsistencies between an advice provided to an investor and the contents of diverse information documents are a common problem from the investor protection point of view. We therefore believe that the KIID should focus on explaining risks and costs and other issues that could be of importance when deciding to invest in the product. Firms should furthermore not be able to rely on disclaimers and refer to additional risk information not provided in KIID in order for investor to make a well informed investment decision. Q. 19: What measures do you think will be necessary to ensure KIID remain streamlined and focused solely on key information? This should in our view be ensured through a closer regulation by level 2 measures, combined with a continuous follow-up in connection to product developments in the market and subsequent review of the indicative list. 7
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. We support the proposal that high-level principles for information disclosure should apply to all PRIPs to such extent as possible in order to enable effective comparison of different types of PRIPs. These high-level principles should be introduced through level 1 measures. Likewise, we welcome the initiative to standardise the information disclosure and to adjust the information to each PRIPs product group. However, due to the specific characteristics of the different PRIPs product groups, further guidance and adjustments should be implemented by level 2 measures. Level 2 should therefore include closer details for design of KIID for each PRIPs product group. Standardised information in KIID with respect of each product group is in our view necessary. Notwithstanding the foregoing, we would like to emphasize that the level of ambition for standardisation should be proportionate and balanced against the effectiveness of the regulation. A too far-reaching standardisation approach could in worst case make it more difficult for investors to compare different PRIPs. We are also concerned that a full standardisation approach would de facto result in more extensive protection for firms rather than for investors if the firm can show that the KIID is designed according to law requirements. 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. As already concluded in Q. 20 above, we can imagine that the same broad structure for KIID applicable for all PRIPs could be challenging. Therefore, we see advantages with level 2 measures providing closer guidance for design of KIID as regards each product group (MiFID, IMD and UCITS IV respectively). Such approach could furthermore minimize the eventual challenges with the high-level principles. 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. We would like to refer to our answer in Q. 20-21 above in this respect. 8
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? We do not have such information and therefore choose not to accomplish this question. 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? We agree that the content of the KIID should be controlled so that there is no possibility for firms to add additional information unless expressly allowed for. Such allowance should according to our opinion be stated through level 2 measures in order to achieve a uniform application thereof. Moreover, we consider that such control should be carried out by the manufacturer in its capacity as the responsible for preparing a KIID. For further comments in this respect, we would like to refer to our view in Q. 27 below in this respect. Based on our view above, we agree with 3L3 Task Force s report on Packaged Retail Investment Products (PRIPs), see subsection 105, that KIID should not be subject to prior approval by a competent authority. Q. 25: Do you foresee any difficulties in applying these board principles to the KIID for all PRIPs, as the building blocks on content and format for level 1 instrument? Please justify or explain your answer. As already stated above in Q. 20-22, we are positive for implementing the high-level principles in level 1, while the closer guidance should be regulated by level 2 measures. Q.26 Are there any other broad principles that should be considered on content and format. Providing any views on this question would need a closer impact and consequence analysis, whereby we choose not to accomplish this question with our views at this stage. Q. 27-29 Responsibility for preparing a KIID We agree that product manufacturer should be responsible for preparing a KIID. The manufacturer has the expertise of its products and different KIID s for same PRIPs should not occur. The risk of different KIID s for the same 9
PRIPs could occur if the responsibility for preparing a KIID would lie on the intermediary. Furthermore, in order to achieve a level paying field, we consider that the same responsibility for preparing a KIID should apply to all manufacturers, irrespective whether the manufacturer is domiciled within European Union or in a third country. Another important issue concerns the responsibility aspect in case PRIPs product is sold through intermediaries (indirect sales). The intermediary is today responsible for disclosing information to the investor prior an investment decision (compare UCITS and MiFID). However, the liability for predisclosure seems to be somewhat unclear in case the intermediary fails to forward the information on the product to investor or changes the contents of information. Is the manufacturer or the intermediary liable in such case? Which one of the parties the investor should claim damages in this respect? Similarly, we believe that the liability towards investor and between the product manufacturers, where such exist in several chains, should be subject to a closer assessment. Q. 30 31 Labelling and enhanced transparency of PRIPs in relation to socially responsible investments According to our view, the ethical status of financial instruments relates to marketing and sales aspects, rather than to investor protection. Accordingly, we think that such issues should be separated from this legislative initiative. Q. 32 34 Interaction with and amendments to existing legislation We believe that a horizontal legislative approach is suitable for ensuring a common standard both as regards KIID and distribution of PRIPs. However, we consider that there are a number of critical issues that first should be assessed before the proposed PRIPs rules can be drawn up. For instance, it should be ensured that an introduction of a PRIPs regime will not create any additional layer of product category in relation to the existing categories. A closer consequence and impact analysis is of crucial importance in order to clarify the legal standpoints for application for PRIPs rules. We would also like to stress the importance of studying carefully the implementation of UCITS IV directive with respect of KIID and the experiences thereof, before deciding on definitive contents of PRIPs rules. The same should apply even with regard to the experiences from implementing the Prospectus directive (prospectus summary contra prospectus). 10
Q. 36 43 Issues to be addressed by developing appropriate implementing measures We would like to welcome a closer work for developing common principles for the contents of KIID. The fundamental basis on such work should in our opinion be the investor s ability to understand and use the information as basis on his/her investment decision. Further, the principle of KIID as a 'stand alone' document (see also Q. 18 above), should be another critical criteria in the further work in this area. Stockholm, 9 February 2011 Sincerely Ministry of Finance Sweden Sonja Daltung Head of Unit Swedish Financial Supervisory Authority Per Håkansson Chief Legal Counsel 11