Response to joint Discussion Paper on Key Information Documents (KIDs)

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2: Do you agree with the description of the consumer´s perspective on risk expressed in the Key Questions?

We agree with the proposed descriptions of the consumers’ perspective on risk.

3: Do your agree that market, credit and liquidity risk are the main risks for PRIIPs? Do you agree with the definitions the ESA’s propose for these?

We agree that market, credit and liquidity risk are the main risks for PRIIPS and agree with the definitions proposed.

4: Do you have a view on the most appropriate measure(s) or combinations of these to be used to evaluate each type of risk? Do you consider some risk measures not appropriate in the PRIIPs context? Why? Please take into account access to data.


5: How do you think market, credit and liquidity risk could be integrated? If you believe they cannot be integrated, what should be shown on each in the KID?


6: Do you think that performance scenarios should include or be based on probabilistic modelling, or instead show possible outcomes relevant for the payouts feasible under the PRIIP but without any implications as to their likelihood?

The vzbv strongly doubts that any models predicting future performances are in any way reliable. In this case it does make no difference if modelled or historical data is used. We understand that customers seek confirmation and want a clear performance forecast but this is impossible to deliver, if you prefer reliable results. Even the providing of historical data without a clear prediction can be misleading, because investors will often falsely assume, that this data may be relevant for future performance. This phenomenon is described by behavioral economists under the terms ‘framing’ (depending on the presentation and order of presentation of information), ‘availability’ (depending on the access to old/early information and data) and ‘representativeness’ (depending on previous experience).
Because future performances are only hard to predict, we prefer a narrative presentation of the expected yield and factors and parameters on which it depends on. This includes:
• Developments and other assets on which the performance depends on.
• Potential costs which decrease the overall yield.
• Asset categories in which the capital gets invested in.
There have already been several scientific studies in an experimental environment, which support our arguments. To verify this position we propose that there will be further consumer testing in a real market environment, executed by the ESAs.

7: How would you ensure a consistent approach across both firms and products were a modelling approach to be adopted?


8: What time frames do you think would be appropriate for the performance scenarios?

We support an approach using several holding periods for the performance scenarios. They must accommodate a clear distinction between performance scenarios in the short and long run.

9: Do you think that performance scenarios should include absolute figures, monetary amounts or percentages or a combination of these?

The performance scenarios should be foremost presented in monetary amounts, because retail investors can relate to them the best. Additional relative figures can be only complimentary to the monetary figures.

10: Are you aware of any practical issues that might arise with performance scenarios presented net of costs?

We would like to stress here the importance of having costs accounted for in the performance scenarios, as this is essential for the retail investor to understand the real amount he could be receiving in the end. Any reference to “intrinsic (or gross) performance” should only be added additionally to the expected real payout for the retail investor.

11: Do you have any preferences in terms of the number or range of scenarios presented? Please explain.

We feel that disclosing three presented scenarios with projected probabilities would serve the necessary variety in scenarios, while not confusing retail investor with abundant information.

12: Do you have any views, positive or negative, on the different examples for presentation of a summary risk indicator? Please outline advantages and disadvantages, and provide any other examples that you are aware of that you think would be useful.

As laid out in our answer to Q5, a good overall risk indicator is of utmost importance. The Belgian example serves here as a very good example. Such a presentation does a better job in alerting consumers to potential risks than the classic numerical approach of the UCITS KIID.
Furthermore additional options for separately displaying credit or liquidity risk need to be assessed.

13: Do you have any views, positive or negative, on the different examples for presentation of performance scenarios? Please outline advantages and disadvantages, and provide any other examples that you are aware of that you think would be useful.

For the sake of clarity, we prefer an easy to understand single visual element which presents a plausible best, plausible middle and plausible worst case. The example on page 43 (thermometer tested in the Netherlands) is a good example.

14: Do you have any views on possible combinations of a summary risk indicator with performance scenarios?


15: Do you agree with the description of the consumer´s perspective on costs expressed in the Key Questions?

We basically agree with the description of the consumer’s perspective on costs as expressed in the key questions. However, one helpful additional dimension would be to disclose the nature of the costs expressed in the KID. For consumers, it is important to understand why some costs exist and consequently evaluate if a particular cost is of administrative nature or whether it reflects a substantial fee/commission/margin taken by the issuer/distributor of the product.

16: What are the main challenges you see in achieving a level-playing field in cost disclosures, and how would you address them?


17: Do you agree with the outline of the main features of the cost structures for insurance-based investment products, structured products, CfDs and derivatives? Please describe any other costs or charges that should be included.


18: Do you have any views on how implicit costs, for instance costs embedded within the price of a structured product, might be best estimated or calculated?

The existence of different (national) markets and the related disparities in the types of PRIIPS marketed, pose a challenge towards ensuring a level-playing field in cost disclosures on a European level. But in general, we believe that the adoption of an overall cost indicator, followed by a detailed cost breakdown, is the good way forward. The overall aim should be giving the retail investor already an ex ante, full picture on how much he will have to pay for a certain product.
In order to ensure comparability, cost disclosures based on standardized investment amounts deserves further consumer testing.
As for structured products, the inclusion of implicit costs is another key challenge. Measures like the presented “intrinsic value” and “issuer estimated values”, which also include the product issuer’s margin can address the overall cost disclosure and are easily understood. The additional disclosure of single types of costs would allow to compare the costs in detail.

19: Do you agree with the costs and charges to be disclosed to investors as listed in table 12? If not please state your reasons, including describing any other cost or charges that should be included and the method of calculation.

We would like to stress first that by all means implicit costs should be taken into account, in order to close loopholes for product manufacturers, rendering any reliable comparison between products very difficult.
Implicit costs can be accounted for by using the above mentioned measures of “intrinsic value” and “issuer estimated values”.

20: Do you agree that a RIY or similar calculation method might be used for preparing ‘total aggregate cost’ figures?

In our eyes the approaches using fair values are well suited methods for preparing “total aggregate cost” figures but its use seems somewhat limited to certain implicit costs. The total expenses ration (TER) method does not include entry or exit costs, performance fees, or portfolio transaction costs. Therefore we think that it can be misleading for customers and do not evaluate it fitting to aggregate costs in KIDs.
One of the problems with the reduction in yield (RIY) approach is, that it does not account for biometrical costs and the value of the RIY depends on the time frame of the PRIIP and its return. This makes it very hard to compare different PRIIPs and can lead to confusing results. Furthermore the RIY is displayed in relative values which shrouds the real value for the investor and it does not include guaranteed costs. Another problem with RIY is that the costs it includes are dynamic and not static. They change during the investment (e.g. issue surcharges or success related costs) and have to be estimated.

21: Are you aware of any other calculation methodologies for costs that should be considered by the ESAs?

The reduction in payment (RIP) approach addresses the issues with other approaches mentioned in question 20 and can also be (and should be) expressed in monetary values via an easy calculation. Therefore we think it is the most suited method to prepare “total aggregate cost” figures.

22: Do you agree that implicit or explicit growth rates should be assumed for the purpose of estimating ‘total aggregate costs’? How might these be set, and should these assumptions be adjusted so as to be consistent with information included on the performance scenarios?


23: How do you think implicit portfolio transaction costs should be taken into account, bearing in mind also possible methods for assessing implicit costs for structured products?


24: Do you have any views on possible assumptions that should be made, and how these might be calibrated or set?


25: What do you think are the key challenges in standardising the format of cost information across different PRIIPs, e.g. funds, derivatives, life insurance contracts?

The Norman key figure is a good an easily understandable tool for comparing the impact of costs.

26: Do you have a marked preference or any objection for any of the presentational examples? If so, why? Please provide any alternative examples which you believe could be useful.


27: In terms of a possible breakdown of costs, are you aware of cost structures for which a split between entry or exit costs, ongoing costs, and costs only paid in specific situations or under specific conditions, would not work?

Market, credit and liquidity risk each have a different impact, depending on the type of product and the type of retail investor involved. The liquidity risk for a retail investor with a long investment horizon taking out a 10 year fixed maturity product is not so important. But the absence of any secondary market for the same product could be very relevant for a retail investor with higher liquidity needs.
At the same time, many consumers prefer having a single indicator which sums up the overall risk.
Therefore we would advocate for having at least one good visual indicator summarizing the overall risk, together with a separate mentioning of liquidity and credit risk (either by a narrative explanation or by a separate visual).

28: How do you think contingent costs should be addressed when showing total aggregated costs?


29: How do you think should cumulative costs be shown?

We would like to add one type of cost to table 12: the issuer’s margin/mark-up should be included as an important part of the costs faced by the consumer. This would also be in line with the pending MIFID II requirements.
In practice, different issuers can use different margins for identical products, which is very hard to discern for a retail investor with few experience. Therefore we insist on treating the margin as a separate cost so the consumers can take this into account as well.

30: Do you have any views on the identity information that should be included?


31: Do you consider that the criteria set out in recital 18 are sufficiently clear, or would you see some merit in ESAs clarifying them further?

We have some reservations about using the list, deriving from art 50 of UCITS, as a proxy for assets in which retail investors commonly invest. We would like to emphasize that UCITS are highly diversified products which invest in a broad range of asset classes. Accordingly, one cannot derive from this proposition that retail investors necessarily have experience in investing directly in particular assets from the UCITS horizon.
We would therefore advise that recital 18 should be interpreted as following:
• It invests in underlying assets that are not commonly invested in directly by retail investors.
Finally we would like to point out that the comprehension alert should be placed very near to the summary risk indicator of the KID.

32: Do you agree that principles on how a PRIIP might be assigned a ‘type’ will be needed, and do you have views on how these might be set?


33: Are you aware of classifications other than by legal type that you think should be considered?


34: Do you agree that general principles and as necessary prescribed statements might be needed for completing this section of the KID?


35: Are you aware of other measures that might be taken to improve the quality of the section from the perspective of the retail investor?


36: Do you have views on the information PRIIPs manufacturers should provide on consumer types?


37: What is the key information that needs to be given to the retail investor on insurance benefits, and how should this be presented?


38: Are you aware of PRIIPs where the term may not be readily described, or where there are other issues?


39: Are you aware of specific challenges arising for specific PRIIPs in completing this section?


40: Are you aware of specific challenges arising for specific PRIIPs in completing this section?


41: Are you aware of specific challenges arising for specific PRIIPs in completing this section?


42: Do you agree that this section should link to a webpage of the manufacturer?


43: Do you agree with the assessment of when PRIIPs might be concerned by article 6(3)?

We do agree with the assessment of when PRIIPs might be concerned by article 6(3) and we agree with the expectation of the Joint Committee that these products are mainly unit-linked life insurance contracts and hybrid life-insurance-contracts.

44: In your market, taking into account the list of criteria in the above section, what products would be concerned by article 6(2a)? What market share do these represent?


45: Please provide sufficient information about these products to illustrate why they would be concerned?


46: Do you have views on how you think the KID should be adapted for article 6(3) products, taking into account the options outlined by the ESAs?

When multiple KIDs are used to inform customers about a product with many options it is a high priority for us, that the presented options become as comparable as possible. Examples can be a good way to do this and they can help to understand the product easier. But these examples need to be designed in a coherent way for the different options to ensure comparability.

47: How do you consider that the product manufacturer should meet the requirements to describe and detail the investment options available?

Instead of the use of ranges for the presentation, the correspondent indicators for the different options could be displayed within one graphic respectively for risk, performance and costs.

48: Are you aware of further challenges that should be taken into account?


49: Do you agree with the measures outlined for periodic review, revision and republication of the KID where ‘material’ changes are found?


50: Where a PRIIP is being sold or traded on a secondary market, do you foresee particular challenges in keeping the KID up-to-date?


51: Where a PRIIP is offering a wide range of investment options, do you foresee any particular challenges in keeping the KID up-to-date?


52: Are there circumstances where an active communication model should be provided?


53: Do you agree that Recital 83 of the MiFID II might be used as a model for technical standards on the timing of the delivery of the KID?


54: Are you aware of any other criteria or details that might be taken into account?


55: Do you think that the ESAs should aim to develop one or more overall templates for the KID?

In general we feel that the ESAs should develop a fixed template, as it is a key ambition of the KID is to foster comparability between investment products. Some flexibility to cater for the different product classes can be considered, but this has to be kept minimal in order not to provide loopholes for hiding costs.

56: Do you think the KID should be adjusted to reflect the impact of regular payment options (on costs, performance, risk) where these are offered? If so, how?


57: Are there other cost or benefit drivers that you are aware of that have not been mentioned? Please consider both one-off and ongoing costs.


59: Are you aware of situations in which costs might be disproportionate for particular options, for instance borne by a specific group of manufacturers to a far greater degree in terms relative to the turnover of that group of manufacturers, compared to other manufacturers?


Name of organisation

vzbv - Federation of German Consumer Organisations