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European Savings and Retail Banking Group

Rémy Moura
As a general remark, it worth mentioning that while ESBG agrees on the short list of well-defined Key Questions as a prerequisite in order to establish a common language across packaged products, it should be noted that the precise way those questions are formulated is pivotal for the answer. Indeed, behavioural finance literature (see for example Montier, 2002) labels as “frame dependence” or “mental accounting” the cognitive biases originated by the context into which the decision has to be made.

When the concept of risk is narrowly focused on the possibility of losing some portion of the invested capital in a particular financial product the investor gains insight into the intrinsic characteristics of such a particular product, but it seems hard to assume that such a view could encompass his whole perspective on risk without answering a complementary set of questions, for instance: What are their financial objectives?, Is that financial investment purchased as an investment, or it has hedging or speculative purposes? Etc.

The specification of probabilities (How likely is it that I lose my money?", "How much am I likely to win?") can be relied upon in very rare cases and is also highly dependent on the expectations of the manufacturer, and therefore misleading. It would make sense to specify concrete conditions when the investor makes a profit or would suffer losses.

In addition, it would be better for the investors to have a realistic assessment of the likely loss in addition to the "worst case". A further key question could therefore be "How much am I likely to lose?" Moreover, the representation, under what conditions a profit is made, is missing. A further key question could be therefore "Under which circumstances do I get a profit?"

Regarding the availability of the product ESBG would like to make the following comments:
− The conditions for a premature sale or the investment horizon should be made transparent to the investor;
− Indications on the holding period can usually relate only to the maturity of the product; and
− Indications on the premature sale or on open-end products are usually based on market developments during the term and cannot therefore be identified when manufacturing the KID

In daily practice, risk in investment can take several assertions according to the investor goals and strategies: it could be the probability of a loss greater than expected at a given period of time, not getting a minimum rate of reward or underperform an index or the inflation along a period. ESBG understands that the consumer testing that the ESAs are currently doing will provide in-depth feedback on this topic."
Generally, ESBG shares the view that the different types of risk of a packaged product can be summarised into the three main risks proposed. The main difficulty in our view arises from the need to disentangle market, credit and liquidity risk when they are mutually dependent or tightly correlated.

ESBG considers that market risk is by far the most important risk. Credit risk can cause the heaviest loss, but the probability of that is so little that it is almost impossible for the retail investor to get a realistic feeling for that risk, especially when he wants to compare different issuers. Liquidity risk is relevant mostly for the trading client, not for the hold-to-maturity client.

In that regard ESBG considers that the proposed definition is accurate for market risk put together with the view contained in the DP that credit risk should only involve the credit risk of the product issuer (and not the credit risk of the issuers of the underlying assets). The credit risk related with the underlying assets would translate into market risk of the product. However, ESBG considers that the inflation risk is an external factor and not a product-related risk and therefore affects all products in the same way, unless inflation is a component of the underlying. It should therefore be excluded from the market risks. However, considering market risk the sensitivity is missing.

In what concerns the relationship between market and liquidity risk, it should be noted that many PRIIPs are issued with a contractual maturity and when this is not the case there is often an indication of the minimum recommended holding period. The early termination of the product or an effective holding period that falls short the recommended one entails two distinguishable sources of possible losses: those related to the absence of an active market or equivalent arrangement which is the definition of liquidity risk proposed in the DP, and those that come from the variation of prices of the underlying assets and that had to be labelled under market risk. In products where the return is not linear – i.e. contain optionality – this risk can be meaningful, but should be considered in isolation from the “normal” market risk the product carries out at inception. ESBG sustains the view that, from a KID perspective, such market risk should not be considered but just it should be disclosed under the costs section as an early redemption rate. Alternatively, liquidity risk should be supplemented by the early termination and reinvestment risk.
Regardless of the chosen approach, the identification of risk and the representation for all product classes must lead to meaningful results. ESBG considers paramount that it is ensured that the solution found takes into account that it should be appropriate for stocks, bonds and products under the UCITS as well, otherwise there is a danger that in the absence of such an indication investors would refrain from investing in products outside the PRIIPs’ scope.

Furthermore, the chosen method for the determination of the risk indicator for market participants must be transparent and comprehensible. Manufacturers need a specific method in the regulation for the determination of the risk indicator in order to avoid legal uncertainty, which would allow them, at their choice, to produce the risk indicator themselves or to externalise it to a third party.

Market risk:

ESBG believes that a quantitative measurement for the market risk is indispensable.

Credit risk:

Regarding credit risk methodologies it is questionable whether the credit value at risk is the optimal method.

CDS and credit rating are also common methods, where CDS is difficult to understand and the credit rating has little relevance. In addition, the following criteria should be taken into account: special assets in mutual funds, level of seniority, secured/unsecured nature or other protective facilities (e.g. protective schemes [Haftungsverbund der Sparkassen]).

Liquidity risk:

The average trading volume is not suitable, since a large proportion is traded over the counter. The bid-offer spread is a better indicator even if it is not often available. A stock exchange listing, the number of trading venues and an organised secondary market show the liquidity, whereas permanent trading cannot always be guaranteed. Return policies and return requirements as well as the calculation of the withdrawal prices are important information for investors. However, these criteria are hardly comparable.

ESBG kindly requests that the ESAs specify that as most of the products will only have a limited secondary market (if any) provided by the manufacturer, this situation should not immediately mean that liquidity is low and therefore there is high liquidity risk.

ESBG is of the view that liquidity risk should be better explained in qualitative format (narrative text).
ESBG considers a narrative presentation appropriate.
ESBG believes that the performance scenarios are important, especially for packaged products, as it would help the investor to understand the possible results of the product. The mandatory representation of a negative scenario is thus an important addition to the risk indicator along with the descriptive explanation.

A great majority of PRIIPs are kept by the investor until maturity and therefore an easy and straightforward way of calculating performance scenarios is the methodology based on the final value of the underlying assets. (For more details see response to question 11)

However, ESBG does not agree on introducing performance scenarios based on probabilistic modelling. The use of probabilistic performance scenarios presents drawbacks:
− The computation of probabilities of the performance scenarios implies the use of assumptions and models, which increases the risk of errors. The calculation on the basis of probabilities by means of historical data (back-testing) or market price models (simulations) is difficult to understand and partly not comprehensible for consumers.
− Investors might misinterpret the figures displayed in the probabilities, focusing only on the probability of favourable scenarios or taking them as a guarantee for future performance.
− Different probabilistic models could give different results for the same product which will reduce the comparability of the products and confuse retail investors, this would require that sufficient data exists and uniform methods are applied.

There also could be performance scenarios which show the possible outcomes under a hypothetical assumption based on the product structure. However, none of the options offers reliable information about the actual future development. In either case the scenarios should be based on the total return.
It is nearly impossible to ensure a consistent approach because:
− there is not a single model that is widely accepted by market participants and
− rough market data is handled differently by each manufacturer.

Furthermore, the determined probabilities would hardly be comparable and would be misleading to investors.
Once more, as PRIIPs cover a wide range of products that are very different among themselves, the time frame should therefore be varied according to the maturity of the product. Having uniform holding period in the performance scenario seems to be pointless. If it is set too long, for example, longer than the product life cycle, the holding period cannot be applied. If it is too short, the product features would not come to maturity and the meaning specificities of the product are lost. Consequently, the scenarios would not be conclusive and the investors could not compare between products.

Using several holding periods for a given product is a well-established financial advising practice particularly for open-ended products such as pension funds. If there is no fixed maturity date, the recommended holding period would be appropriate. ESBG does reiterate, however, that the outcome given by such procedures is tightly bound to the data and methodology used and, in particular, to any assumption made on expected returns and risk. A standardisation over all PRIIPs would distort the reality too much.

As a way of example, some practitioners use historical returns and volatilities as the best estimates for future outcomes meanwhile others use adjusted or equilibrium returns so that the information given to the investor can differ substantially specially when those outcomes are projected long way forward. Other issues appear controversial in that regard. Questions as the length and sources of historical data to be considered, adjustments to be made to the data series, the appropriate combination of benchmarks that best mirror the portfolio evolution or how to deal with asset classes with no sufficient historical data still are object of academic work and need to be resolved in a uniform setting.

It would be totally misleading, however, the representation of a given holding period for products that are purchased for a short period for hedging purpose or speculation. ESBG therefore suggests clarifying that such products do not fall within the scope of the regulation, which applies to packaged investment products.
ESBG supports percentages as they are easier to compare because they have no units and there is less assumptions to be made (amount invested, investment currency, etc.), even if monetary amounts are easier to understand for consumers. ESBG however agrees that this configuration should depend on the outcome of the consumer testing.
It seems that presenting the performance scenarios net of costs could be challenging as the consultation itself explains in page 34: “if performance scenarios are expressed net of costs, an investor will not be able to distinguish between the ‘intrinsic performance’ of the PRIIP (ie what a PRIIP would yield in a hypothetical case where no costs are incurred) and the effects of costs incurred throughout the life of the product, as these two aspects will be aggregated in net figures, unless the KID provides for a clear visual presentation of these two components (e.g. through a ‘waterfall diagram’).”

What is important is that it is transparent to the customer that the amount shown is not after expenses and taxes. Representing performance scenarios without including the cost would clarify the mechanics of the product more precisely. In addition, this presentation would avoid the problem that the manufacturer does not know all the costs that affect investment performance, putting aside as well that taxes play an important role and are defined at a national level.

Furthermore, the difference between gross and net is variable and it would not be possible to calculate the figures. Where costs (especially sales and distribution costs) are included in the scenario analysis, this will only be possible using estimates based on certain assumptions.
Using the UCITS KIID as the basis, ESBG believes that there should be at least three scenarios for presenting the potential performance. Appropriate scenarios should show a low, a medium or a high return, including, where applicable, a negative return for the investor.

In the case of more complex structures or different redemption options it can be suitable to use more scenarios. Due to the limited space, the maximum number of scenarios should be limited to five. Example equity-linked bonds:
1. Barrier not touched, closing price > 100% => redemption of 100%;
2. Barrier not touched, closing price < 100% => redemption of 100%;
3. Barrier touched, closing price > 100% => redemption of 100%;
4. Barrier touched, closing price < 100% => physical delivery of stocks with a total value < 100%

Performance scenarios should show possible outcomes relevant for the pay-outs without any implications as to their likelihood, because this might alienate the consumers. No manufacturer can estimate the likelihood of a PRIIP (what would be the parameter for such estimation). In the past the clients were satisfied with the “3-performance-model“ (best, worst and neutral scenario) – maybe it would be more transparent if the neutral performance shows a performance with 0%, so the consumers can see the impact of the costs.
ESBG supports that the visual presentation used for the Synthetic indicator in UCITS funds in the form of a numerical scale as showed below. ESBG considers it appropriate to present information on the risk profile of the product in a simple, clear and intuitive way for investors.

Compared to other options presented in the DP, the numerical scale presents the following advantages:
− Neutral presentation
− Uses limited space (the KID has a limit of pages and therefore care should be paid to space needed)
− the possibility of eliminating the use of colours (see below)
− Provide an overview, simple and intuitive risks associated with the product which could be further complemented by a short explanatory text.

Concerning the use of colours, ESBG consider them not appropriate. For example, Red is a colour which leads to an instinctive defensive posture or avoidance behaviour. However, this stigma is not justified since many products with a higher risk correlate a higher expected return. Such products are suitable for certain investors who seek a higher yield and are willing to bear greater risks to achieve the desired objectives.

However, as a result of the simplified presentation, the assessment of the different risks is more difficult. A multidimensional risk indicator illustrates the influence of different risks and reduces the risk of misinterpretation. However, the comparability decreases caused by the higher complexity and the indicator is no longer quite so easy to understand. Thus, a single indicator is more comprehensible for the customer.

Please find below an analysis of the existing indicators and ESBG’s opinion on them:

ESBG would favour the presentation like the UCITS KIID synthetic risk and reward indicator as it is very vivid, but an explanation is required. Risks and possible income are set into proportion. A good differentiation is possible through 7 categories. A more simplified approach with five categories should be checked as well as it is quite a common market practice.
In principle, a single visual element is space-saving and increases the comparability of the PRIIPs. However, depending on the number of scenarios it may be confusing for consumers. Several visual elements allow a more detailed presentation of the individual scenarios. However, the comparability decreases and the relationship between the graphs is no longer quite so easy to understand. The space is also limited. ESBG therefore favours the use of a table as it is simple and save space. ESBG would like to state however that the use of the name “average scenario” is misleading as it suggests that it is the most probable outcome.

Some analysis of the existing representations in the EU:

The first example tested in Italian research is very clear and easy to understand by the short declaration and has therefore ESBG’s preference. The example from Spain is too mathematical and rather unsuitable. Also the example designed and tested in academic research with the representation of a probability might be too complex. The approach itself is good. The presentation of three scenarios in a graph in the shape of a V" used by ABI is very vivid. The approach should be further pursued. However, the linear performance over the term is rather unlikely for most PRIIPs. That is why the consideration at the due date (as tested by the Netherlands) is more suitable. However, for reasons of space, a transverse instead of portrait format should be selected.

The three performance scenarios from the Dutch financial leaflet are also vivid. Depending on available space in the KID this could also be a possible visualisation."
ESBG does not believe that combining the summary risk indicator with performance scenarios would simplify retail investor’s ability of understanding. ESBG supports the representation of a visual risk indicator and in addition the narrative representation (in a table) of usually three performance scenarios (positive, neutral, negative) to be simple enough to make the presentation. The addition of a narrative presentation of the performance scenarios offers the advantage that the product mechanics are well illustrated.

ESBG would like to analyse some options for presenting the summary risk indicator and the performance scenario:
− In each case a single visual element for performance: A single visual element is easy to understand and makes the PRIIPs more comparable as well. Risks and potential returns are balanced. However, the explanatory power is reduced. In addition, investors may, do not, or hardly understand relations.
− A single visual element for performance scenarios and multiple items for the risk indicator: A comprehensive presentation of the different risks is possible. However, it also entails more effort by the consumer
In case the ESAs ultimately decide to combine the summary indicator with performance scenarios, the methodologies use for both should be consistent so as to have homogenous results. Otherwise, there is a risk that the combination leads to a meaningless result.
An isolated disclosure of the cost of different products is problematic since the cost is always in connection with a service or return opportunities; a pure cost comparison is therefore misleading. The investor can compare as part of a holistic product comparison costs and performance, in which he sets out the respective adjacent KID.

The total cost is of decisive importance for the investor. These total costs would guide the investment success regardless of how they are composed. However, it may be of interest for investors to know the elements that make up the total cost. But even more important is to specify whether the total cost disclosure is fixed, if it is based on estimates or presented as an indication, and that the taxes should be considered when considering the return.

Generally speaking, the costs intrinsic to the product should only be those that refer to the structuring, marketing and maintenance of the product till maturity or end of the recommended period according to its original purpose. This can be achieved through a fixed categorisation of costs to be borne by the consumer that reflects fixed values when they are established at inception and estimates elaborated under regulatory standards when they don’t in order to foster comparability.

However, ESBG considers that most consumers are not aware of or rather are indifferent to so many different costs. The difference between one-off and ongoing costs is quite crucial and for the investor but difficult to understand. This issue has to be addressed sensitively and aligned with MiFID II regulations.

Taking as a general principle the requirement under the PRIIPs Regulation that costs to be borne by the consumer have to be disclosed, our understanding is that Key Question number 4, specially in what concerns the following-up question “How does the product manufacturer calculate what I must pay?” is not required by the Regulation.

When a penalty clause for early withdrawal is agreed in the terms of the contract this can be as a prefixed lump sum – e.g. a fixed percentage of invested capital or on share value – or can be deducted from a formula that closely tries to replicate the market value of the product at recovery. In both cases we should expect that those penalties are disclosed at inception, but given that they compensate the issuer for the loss incurred as a consequence of a decision made by the customer, be it the loss of market value of the derivative repurchased or hedged, or the cost of fund portfolio restructuring, their treatment should be clearly differentiated, not included in performance scenarios and not mandatorily assimilated to the costs supported by the consumer on an ongoing basis. This type of penalty clause should be considered as a “contingent cost” as it will only occur if the investor decides to exit the investment before the recommended holding period.

ESBG considers that Key Question 6 could be misleading. In fact most common market practices in structured products separate which is the guaranteed part of the investment – usually materialised in risk free assets – from the portion of investment at risk which is materialised in risky instruments. Usually the cost of capital protection is not an explicit cost and can be evaluated only when comparing the percentage of guaranteed capital on total investment of two instruments with exactly the same underlying exposure.
In line with what is stated in the previous section the concepts outlined for structured, CFD and derivatives are not costs, but the fair value of the product which is different from the costs that the entity assumes so as to guarantee the payoff of the financial instrument.
There are different kinds of costs for different PRIIPs. Some cost categories might not be relevant for all PRIIPs, making it difficult to compare the PRIIPs. All costs have to be identified, measured and quantified. A fair method has to be established to avoid misleading information and distortion of competition. PRIIPs should be compared on a like-for-like" basis. The challenge is that not all costs are likely to really become relevant, e.g. early redemption costs. It is difficult for the consumer to differentiate and understand which cost will be relevant in which case and what is relevant in his case. It is not possible to value funding costs as they are shown indirectly in the terms and conditions.

In relation to costs incurred directly by the investor to buy/sell shares of investment funds (commissions and redemption) ESBG believes it should be disclosed in percentage terms as it is impossible to reflect these costs in monetary terms because a priori it is unknown what it is the investment or disinvestment decision that the client will take.

In terms of direct costs incurred by the investment fund, the management fee and the depositary fee are already known and disclosed as a percentage, however, all the other current costs (such as regulatory fees, audits, external services, other management expenses...) may vary depending on the activity of the fund and can only be disclosed ex-post on a yearly basis based on the data of the previous exercise.

Currently in the KIID for UCITS the costs are reported in percentage terms of the "Current Expenditures" (Ratio of expenses) which includes all previous concepts (depositary and management fee) and the information is updated annually with the information from the previous year. In the case where the fund invests more than 10% of its assets in other funds, the concept of "Current Expenditures" includes the indirect costs of management fees of the second fund. However, in the "Current Expenditures", commissions paid to brokers for the purchase/sale of financial assets of the funds (in fixed income assets these commissions are implicit and are not indivisible) are not included.

Customising the KIID for each investor is not possible and therefore this information is given annually and not in each KIID. This information on costs is provided in periodic reports to investors. That may be a solution for information that is impossible to obtain in advance in order to be included in the KID."
The IEV (Issuer Estimated Value) has been tested with good results and makes the cost of a product transparent for the investor.
In previous argumentation ESBG has stated its view on that:
− Early redemption fees should be treated in a separate section of the KID
− Costs implicit in the price of the product should not be disclosed at a granular level

With those qualifications ESBG understands that RIY might be used. However, ESBG fears that it might be too difficult to understand for the investor.
As a general comment, ESBG considers that the section on costs and performance scenarios should not conflict. However in a way there should be consistency with performance scenarios and expected maturity or recommended holding period. Notwithstanding the requirement could differ according to the type of product.

For open-ended funds and ETFs a TER approach comprehensive of entry and exit fees, and performance fees tied to scenarios seems the most suitable. In what concerns on-going fees – for those products – financial literature has well established the significance of portfolio turnover as a factor impacting returns in the long run but administrative expenses, audit costs and depository receipts among others are significant too. An “expenses ratio” is the most widely used measure to reflect it.
This is critical because it is not clear how many transactions will take place. So there would be assumptions and no valid calculations.
ESBG agrees that the key challenges for the KID lie in setting out simple and easily understandable information for the consumer and, as mentioned, ESBG thinks that some cost information specificities related to the differences in expected holding periods, consumer objectives and structure characteristics between types of products are not only unavoidable but probably convenient.

Furthermore, it should be taken into account that the more detailed the information about costs is, the less consumers will be interested to deal with it.
When the summary cost indicator shows total aggregate costs, option 2 is easy for investors to understand and gives a good overview. However, it might be too simple and only bear a low informative value. Option 3 could be an alternative but only if it is combined with further information about the cumulative effect and the breakdown of costs.

If the summary cost indicator shows a breakdown of costs, options 4 or 5 are preferable.

When presenting the cumulative effect of costs, option 7 is very vivid but needs further explanation, options 8 and 9 should only be used when the performance scenarios are presented in the same way and option 10 is straightforward and easy to understand but it needs to be combined with a summary cost indicator showing the aggregated costs.
ESBG cannot share any comment on this.
ESBG considers that option 5 shows a way that is easily understood by the investors.
ESBG understands that this level of granularity in cost disclosure is out of scope of the relevant Regulation. PRIIPs are too broad a family of products to expect a “case-by-case” review across all products.

ESBG does not agree with such an extensive list for the following reasons:
− The investor should be aware of the costs that affect his decision (e.g. entry and exit fees, management fees, performance fees, etc.). The overall cost structure combined with the performance/risk information are sufficient to compare different products.
− The information should be simple and understandable, and the cost section should be balanced compared to the other sections of the KID. If all the costs listed in table 12 are to be addressed separately then this objective will be difficult to fulfil.
− Indirect costs such as tax, missing dividends and return from alternative investment should not be addressed as costs at all.
− Dividends, costs of portfolio management, bid-ask spread and market impact costs should not be shown as costs.

However what is really relevant to know is the difference between a direct investment and the investment in the PRIIP – this is what the document calls the “fair value“. This should be enough information for a consumer otherwise it could be too much for him (here would be the danger that the consumer stops reading and does not get the information PRIIPS wants him to get).
ESBG does not agree with including the phone number as it is of little relevance because of the possibility of cross-border use of the KID, contact would often fail due to the language barrier and frustrate investors.

Furthermore, the issuer (= manufacturer) should be specified by providing a reference to the sector and website of the issuer, thus making it easier for consumers to access additional information. In addition, the name of the competent authority should be sufficient. ESBG does not consider a web link necessary. In addition to the date of the document a time stamp might be useful.
ESBG calls on the ESAs to further specify which products should bear this comprehension alert. The comprehension alert would indeed lose its value and would not help consumers if it is used for a wide range of products including some that should not fall under its scope.

The criteria set out in recital 18 do not provide legal certainty as to which structured products would fall under the comprehension alert requirement. There is therefore a considerable risk that PRIIPs manufacturers face a situation where uncertainty brings them to disclose the comprehension alert although these products should not bear it and consumers will be even more confused because the same product from one manufacturer could include the comprehension alert while from another manufacturer may not.
The information about the type is fundamental. The type should include a reference to the legal form (e.g. debt security/obligation, structured deposit, UCITS, life insurance contract). In addition, the classification should also include a differentiation according to product features. In the case of existing market classifications they should be used as a starting point (e.g. fund classification used by the ECB, classification of AIFs related to the reporting requirements under AIFMD).

However, this will not be enough to provide useful information to the investor. The investment purpose, the length of the expected holding period and return and risk objectives have to be seen in conjunction with the particular characteristics of the different types of products and the way each type is suitable in order to meet those specific goals, so that the comparative analysis made by the consumer can be restricted to the set of products most aligned with his interest and, certainly, where the internal structure of products and their main features are most aligned and easily comparable.
Legal classification is sufficient if it is not too abstract. Using general classes such as equity, fund, certificate or insurance is too limited and without added value for the investor. It might even be misleading because completely different risks could be grouped together. Hence, care should be taken that no conclusions regarding the risk class may be drawn from this classification alone.
This information is crucial, as it provides the description of what the product aims to achieve, and how it will do this. This aids in comparing different types of PRIIPs. The potential for confusion amongst retail investors comparing different KIDs increases, if PRIIPs of a similar type are described differently in their KIDs. Guidance on language might be necessary as well as common principles like keeping descriptions very brief and using a summary format. In addition to indications and examples of how to do it concrete text modules will be appropriate to assure that similar product types are described in the same way.
Guidance on language might be necessary as well as common principles like keeping descriptions very brief and using a summary format. In addition to indications and examples of how to do it concrete text modules will be appropriate to assure that similar product types are described in the same way.

It might be necessary to explain uncommon abbreviations. Complex sentence structures are to be avoided. The mere reiteration of financial-mathematical formulas is no substitute for a generally comprehensible description of how a financial instrument works.

Example of impermissible wording in PIBs according to BaFIN: The x certificate was designed as a recovery product for the holders of the y certificate."

Examples of abbreviations and unknown terms not permissible without explanations being provided in a PIB according to BaFIN:
1. "Settlement currency: NOK"
2. "Stock exchange listing: EURO MTF"
3. "Style of exercise: Bermudan"

The information within the KID should be in accordance with the information given in legal documents, e.g. the prospectus."
Consumer types must be identical to the ones required for the determination of the target market by MiFID II. Without this clarification any institution could create its own target market concept. In general all consumer types should be covered in a similar way. Otherwise the complexity will be too high.

Ideally, information should include a generic description of the consumer type at whom the PRIIP is aimed at. This should include reference to the ability to bear investment loss and the investment horizon. A key aim is to summarise the overall risk/reward profile of the PRIIP in terms that the consumer can relate to. Therefore it should be in line with the summary risk indicator and the recommended holding period. The consumer type must also suit the PRIIPs manufacturer’s defined target market. Information might also include the experience or knowledge expected of the consumer.

Information on a consumer’s investment orientation like “risk-tolerant”, “risk-averse”, etc. should be avoided as long as the terms are not used uniformly throughout the industry. As a result, this might impair comparability until an industry-wide standard has been developed.
Some products can be redeemed prior to maturity due to product features or at the option of the issuer. Open-end products might be knocked-out" and fall due abruptly."
The challenges might arise from different local investor compensation or guarantee schemes in different countries. Depending on the legal form of the PRIIP the risk of losing money because the manufacturer is unable to pay is quite different (e.g. debt security / obligation vs. UCITS / PEPs). So the handling or procedure will be completely different. For example, the transposition of the BRRD into national law could be different in the EU-Member States. Furthermore, the BRRD might not affect all manufactures and the bail-in tool might not affect all PRIIPs.
This part should be in line with the consumer type and the summary risk indicator without providing any repetitions. It is not possible for the manufacturer of the PRIIPs to provide a recommended holding period that applies to all investors as the recommended holding period and the consequences of an early exit depend on the type of product. For some insurance products penalties might apply on early exit. An early exit may also mean a guarantee does not apply, or means that the investor receives market value of components of the product instead of the nominal value. For some UCITS the NAV is calculated only once a day. Some products might not be listed on a stock exchange or there is no secondary market. So it might be difficult or expensive to sell the PRIIP.

Furthermore the recommended holding period is dependent of the investor, in particular its individual situation and its investment objectives. Any recommendation would therefore be simply misleading for a variety of investors.
The manufacturer may not know who the distributor is and may not be able to include specific information for the handling of complaints related to the distributor. Furthermore, for a great number of PRIIPs there will be several different distributors. So it is impossible to give information about all of them. A possible solution might be to include generic information like If you have any complaints concerning the product please contact the manufacturer as mentioned below. If you have any complaints concerning the investment advice please, contact your distributor.""
This section should refer to official documents, such as offer documents, the full prospectus for a fund, or other contractual documents related to a life insurance contract. A reference to the periodic disclosure documents the investor can expect should be also included. This section should refer to the manufacturer's webpage. But it should also contain the postal address of the manufacturer for investors which might not have access to the internet or request the documents on paper.
There should not be a stand-alone KID for every option, there should be one KID for one PRIIP.
In our understanding the key question concerning periodic review is what should be understood by manufacturers, distributors and investors under “relevant change” or “change which is materially important”. Putting aside any requirement under sectorial regulation or national law, it should be understood as a general rule of thumb that no material change occurs as long as the PRIIP’s performance and basic risks remain those that correspond with such of the underlying asset as reflected in the KID at inception. The change should be materially important enough to require a revision, for instance when significant changes to the product (e.g. corporate actions, knock-out, credit event, reclassification of risk) occur. Additionally, KIDs for products that are no longer offered should not be revised and updated anymore.

Furthermore, the circumstances in which investors are to be informed of a revision, and how this will be done, have to be defined. It has to be kept in mind that in most cases the manufacturer does not know the identity of the investors and that the KID has been designed as pre-contractual information without the obligation of update (this is only a requirement under advice clients with post-sale advice). Therefore, this update information must be provided only to the new investors. The republished KID could be highlighted as well.

However, there must be the possibility at the discretion of the manufacturer to change a KID if it considers that it improves the quality of the information provided to the investors.

Without further clarification of what a relevant change in a KID framework is, risk of conflicts with clients might arise in the measure of expected disclosure by customers could have a different meaning on a case by case basis. ESBG therefore requests the ESAs to set a common understanding on what a relevant change is, so national supervisors follow the same principles.
There are several challenges in keeping the KID up-to-date. Indeed, depending on the scope of other information points in the KID, e.g. costs on non-continuous offers, the drawing up of a reviewed KID could take place on the first day of listing on a secondary marketplace. Costs could be included in the primary market price but not, or different, in the secondary market price.

As far as the secondary market is concerned, it is our understanding that the KID must be updated/reviewed only in a situation where the manufacturer ‘facilitates the secondary market’ on which the retail investor can still buy/sell such a product. In a situation where there is no interference of the manufacturer, the product didn’t reach the maturity and the retail investor sells the PRIIP to another investor, it is unclear whether the KID should have or should not have been updated by the manufacturer.
ESBG cannot foresee under what circumstances an active communication model should be prescriptive. Active communication is impossible in many cases, since the manufacturer does not know the investors. But even if the manufacturer knows the customer, the active communication would be made with disproportionate effort, because on the one hand the contact information would have to be updated constantly and on the other hand, many customers do not have sufficiently secure online communication tools. Sending information by e-mail is subject to many possibilities for manipulation and therefore should be excluded from an investor protection perspective.

Furthermore the KID has been designed as pre-contractual information. Therefore, an active communication model where manufacturers and distributors should alert retail investors to the new KID should be rare.

A relevant issue is the decision under MiFID II if the seller is offering post-sale advice. For post-sale advice an active communication model might be needed.
While ESBG agrees that Recital 83 of the MiFID II could be used as a model for technical standards on the timing of the delivery of the KID, ESBG would suggest that retail clients may be able to voluntary agree not to receive the KID in “good time before” if they are in a hurry to conclude a transaction or for other possible reasons. Further clarification would be welcomed however.
One might distinguish between investment advice provided to persons present or respectively absent (but provided with advice via telephone), and deals made without advice.
Prescribed templates, i.e. documents that manufacturers may complete, but with samples of layout and content, would be helpful and ESBG considers that it would be possible to provide its expertise through a consultative process. It would make implementation much easier for manufacturers, especially smaller ones, and they would enhance the comparability and quality of the KID. Furthermore, manufacturers get an idea of what is requested to fulfil legal requirements. Templates will create a standard across the EU and templates for the most important types of PRIIPs would be useful.

It should be clear however that prescribing templates does not relieve manufacturers from taking responsibility for developing the KID. KIDs should be permanently enhanced. However, the use of these templates should be voluntary in order to continue to provide innovation and development of a KID by the market. It should be possible to adapt the templates to the precise features of different PRIIPs if necessary.
One possibility could be to follow the UCITS approach which does not address regular payment structures in the KID itself. In this case the regular payment arrangement should be addressed separately, e.g. in a pre-contractual document specifically. The more accurate information on regular payment products is, the more helpful it is to aid investors in making decisions. But it would make comparisons between single and regular payment products more difficult. A KID for regular payment products should include specific information according to that fact.
The more complex the requirements concerning the compilation and distribution of the KIDs are, the more elaborate and expensive the drawing up and putting new documents into circulation would be. Depending on the type of risk indicator, the display and calculation of the performance scenarios and the cost disclosures used, procedures have to be implemented or adapted. The extent might be tremendous.

A great challenge will be to keep the KIDs up-to-date, especially, when a PRIIP is offered in a secondary market. Many documents and data have to be stored. Systems for monitoring data related to the ongoing accuracy of the risk, performance and cost information in the KID and devices for producing the KIDs on a continuous basis will be needed.
European Savings and Retail Banking Group