In the view of UNI Europa, it is the duty of bank personnel to inform people of the different aspects of the potential investment: suitability, costs, investment policy, risks, and possible performance. Until now, mis-selling has often been associated with selling too risky products to investors for whom these are not suited or selling needlessly expensive products to investors when cheaper alternatives are available. However, there is another element to take into account: potential reward. PRIIPS are a means to broaden the possibility of deriving (some) income from financial assets to a wide range of retail investors. Hence, one of the key issues is the trade-off “risk – potential reward”. Particularly in the current economic climate, characterised by low interest rates, it is important that people are made aware of the two sides of the coin: no risks means little or no potential reward, but at the same time there is no guarantee that more risk will result in more return.
This requires a balanced approach. As possible ingredients, UNI Europa Finance would suggest the following considerations:
- It should clearly indicate that when we are speaking about reward, it is about potential reward, not guaranteed reward. The current SRRI, for example, clearly specifies ‘potentially higher reward’.
- The risk indicator(s) must be conceived in such a way that they allow the investors to understand the mechanisms to reduce risk. For example:
- risk diversification (in the context of credit risk): a diversified fund which invests into many issuers has a different risk profile than a fund which is concentrated on a limited number of issuers;
- holding period: risk is flattened out over time. One year may be a good year, another year may be a bad year, but over a long investment time span, these fluctuations flatten themselves out.
- Visualisation is a powerful tool. However, a visualisation, which overemphasises risk, could result in people not being sufficiently aware of the trade-off “risk-potential return”.
Among the criteria listed to assess the presentation are “engaging” and “understandable”. However, several of the proposals by the ESAs introduce concepts that are very difficult to understand and to convey to retail investors. As such, they would be neither ‘engaging’ nor ‘understandable’.
Statistical indicators like VaR are often misunderstood, if understood at all. Model-based performance scenarios require awareness of the underlying assumptions in order to be properly interpreted. We would suggest that consumer testing does not only focus on the way the KID is used and interpreted by retail investors on their own. It must also be easy to convey these concepts to investors, by constantly asking the question: “are these and these concepts easily communicated to the client?” This being said, we see it as most important to ensure that employees properly understand the concepts themselves before being asked to convey them to the customer. This should apply to all levels of employees and ties in with the general importance of proper training for employees in the sector.
UNI Europa would like to add the following comments:
- Irrespective of how good a KID is designed, the availability of investment advice should be safeguarded. There is a risk that access to advice comes under pressure for retail investors that do not belong to the upper wealth classes.
- In the independent distribution model, advice is paid for separately, but is often prohibitively high, unless the amount you can invest is sufficiently high;
- In the dependent model, advice is not paid for separately, but part of a bundled product fee. However, this results in an unlevelled playing field when fees are compared in situations where advice is or is not included.
In this context, we believe that the provision of the PRIIPS Regulation, article 8.3.f is important, stating that: “the key information shall include a clear indication that advisors, distributors or any other person advising on, or selling, the PRIIP will provide information detailing any cost of distribution that is not already included in the costs specified above”. We believe it is equally important that, to the extent that distribution costs are implicitly included in the product price, it should be mentioned on the KID that this is the case and hence, distributors will not ask an additional fee.
It is our concern, that too detailed a breakdown of costs could lead to the essential message being deluded. We fully support the view expressed on page 63, point 4.5.1 of the discussion paper: “consumer research suggests a trade-off between the level of detail provided on costs and the extent to which consumers engage with and use this information or find it important to their investment decision”. While some of the costs mentioned in the consultation paper should obviously be disclosed (for example: performance fee, early redemption fee), others are extremely technical. It would probably be better that they are integrated into a summary indicator. More generally speaking, both for investors and for sales staff, it is important that details are avoided, whenever possible. Materiality and easy to digest messages in the kind of information to be provided to the investor is crucial. This ties in with the fact that fees are often very misleading and difficult to understand. Sometimes, different names (from one bank to the other) are used for the same type of fees. Generally, there are entrance fees (buying a fund/a security/any financial product) and management fees. Management fees can be variable, depending on the performance of the financial product. IOSCO and the national supervisors have made recommendations on fees. It should be made sure that employees understand the fee structure in order to be able to explain it to the client. This should also include training, as stated above, at least specific product training.