In this context, it is understood that these key questions have been identified to describe the consumer perspective rather than being used in the KID itself. The only question related to the risks that should appear in the KID is “what risks and what could I get in return?” as is established by Article 8 (3)(d) of the PRIIPs regulation.
In regards to the key questions in table 3, it is vital that risks and reward features for PRIIPs are properly balanced. While the questions identified in table 3 focus on the main characteristics of risks and rewards we are concerned by the following;
Regarding the question on “how much can I win” and “how much am I likely to win”. We do not feel that this terminology is appropriate as it implies that investing is simply a game and is very informal. Furthermore we feel that the first question on “can I lose part/all my money” could be merged with this question on return. It is important to draw a distinction between circumstances where for example due to market risk, a consumer may receive back less than their original investment, and where a consumer suffers a loss which they are entitled to recover through compensation.
The question on “Is risk and return balanced” could potentially be misleading to investors as it borders on advice.
Also when setting these questions it is important to consider that risk and performance will also depend on the actual fund(s)/investments selected and these can vary greatly depending on the options selected. The risk and the performance will be driven by the funds/investments that the retail investor selects.
Overall, we agree with the questions, however they are framed in an overly negative way. This is particularly apparent when compared to the requirements for UCITs funds. Too much divergence from UCITs will put PRIIPs at a competitive disadvantage. Furthermore whilst we can see the benefits in using questions in the first person, this could also potentially create the impression that the KID contains personal advice/information.
Generally these three risks seem to be the main risks that could be faced by investors. Market, credit and liquidity risk will probably be the three main risks associated with a PRIIP, especially unit-linked investments. However whether all these risks are relevant to the retail investor will depend on the product. The KID regulation should also provide for flexibility to allow those who are required to, to draw attention to a particular risk where relevant. So for example with a purchased life annuity, the investor would need to be aware of longevity risk.
While a more granular approach could be taken it would be very difficult to achieve as be harder to explain to the potential investor and therefore complicate the ease of comparability.
We agree that for certain PRIIPs products, in particular unit-linked products, evaluating each risk is appropriate. However it is vital that consumers have a clear explanation or pictoral diagram that is not misleading and thus result in unintended consequences. The UCITs KIID requirements could be used as a starting point as past research has indicated that customers prefer a simple risk indicator, alongside a brief narrative of the risk/risks.
As the scope of the PRIIPs is very wide, certain elements relevant to one group of products , might be irrelevant for another set of products. It may therefore be necessary to use different KID methodologies and templates for different types of PRIIPs.
Contingent costs are only paid in specific situations or under specific conditions and therefore should not be included in the total aggregated costs.
It is essential that retail investors understand the performance scenarios. Therefore deterministic modelling is more suitable for performance scenarios.
From previous research carried out by the ABI probabilistic modelling was the most understandable and engaging for consumers.
While we understand the ESAs reluctance to use historical returns, from previous ABI research there was general agreement that the inclusion of past performance information was very useful, and 79% rated it as quite or very useful in the quantitative research. It was seen as giving a clear indication of the recent volatility of the investment, which in turn conveyed a sense of risk to capital and to any subsequent growth. It was also seen as giving a ‘real-life’ illustration of the risk category awarded to the investment on the previous page, and as such was a useful benchmark for deciding whether or not this was an acceptable risk.
Leaving the modelling approach to the individual firms risks creating an un-level playing field. However fine tuning or detailing the assumptions at EU level might prove very difficult because of the wide scope of the products available and the differences across the EU markets. Therefore high-level general principles for performance scenarios should be set at EU level while the fine-tuning and the detailing of assumptions should be developed at a national level with the competent authority in cooperation with the different PRIIPs manufacturers to ensure a certain level of comparability between the different products and within certain product classes. This would also ensure that the assumptions and methodology used do not impact the product development and ultimately the product design.
The timeframes will need to be very flexible depending on each product. ABI members felt that a 1 year timeframe was not realistic for their products. Instead it was suggested that there be three performance scenarios based on 3 years, 6 years and 9 years.
It is necessary to have flexibility here because otherwise there is the risk that inadequate and irrelevant scenarios, which are not tailored to the product, would lead to confusion for the investor. Flexibility is especially important for fixed term products. The timeframe and other assumptions should be set in line with the product features, ensuring sufficient flexibility
From previous ABI research, consumers are often not very confident with percentages and can find them confusing. However monetary amounts could potentially give the impression that the consumer is receiving personalised information rather than general pre-contractual product information.
Therefore a combination of all three (absolute figures, monetary amounts and percentages) would probably be more appropriate. However this should be driven by consumer testing and what consumers prefer and find easiest to interpret.
It is important that the performance scenarios are consistent with the information on costs included in the cost section of the KID so that there is no duplication of information. If performance scenarios are presented net of costs, it should be clearly stated in the documents and understood by retail investors.
A practical issue will be that some providers will have different charges based on amounts invested; so for example in tiered charging structures if the KID prescribes a certain amount invested, the PRIIPs KID may not reflect the charged amount that could apply to the consumer if they are investing a higher amount that is subject to lower charges.
We feel that three scenarios is a sufficient number and that more than three would overload the consumer and would be difficult to include within three sides of A4.
It is important that the upper and lower scenarios must not be titled “best” or “worst”. This could create a false impression with customers that the investment is structured with limits on return or loss. The manufacturer could also be held liable for any looses greater than the “worst” scenario or failing to meet the “best” scenario, as the manufacturer is liable for any errors or inaccuracies in the KID. Instead it would be more appropriate to have a positive, negative and a neutral scenario where there are no growth outcomes.
A visual element of the risk would be most beneficial to consumers. Research by the ABI has shown that pictorial presentations of investment risk are generally more effective than purely text based description and can improve people’s ability to pick the right investment by over 20%, and that design is crucial to effectiveness.
The UCITS risk indicator is felt to be the most appropriate indicator as this model is clear for consumers and it will allow ease of comparability between UCITs and PRIIPs investments. Furthermore this design is neutral as far as design and colours are concerned. This is important as it prevents positive or negative visual connotations linked to the risk categories. It can most usefully be seen as giving a general or first impression of the risk of a product.
By using the UCITs risk indicator it will also create a more consistent level playing field for all packaged retail investment products, ironing out competitive distortions due to inconsistent disclosure standards.
However the negatives with the UCITs risk indicator are the bunching of risk on the scale of 5-7 and that this indicator will not be appropriate or feasible for a PRIIPs KID with underlying investments because these investments will not be known in advance by the manufacturer.
If the indicator differs from that used in the UCITs KIID then, not only should it use the same number of categories as the UCITs KIID, but the same methodology should also be used when allocating the funds/products to each category.
The energy indicator is an alternative as it is a well-known graphic so its interpretation should be easier for consumers. If the energy label indicator is used then it should be increased to give 7 different ratings, consistent with UCITs. We would also suggest that ratings of 1 to 7 are used instead of using A to G, for greater comparability.
A graph that gives an indication of what the different levels of risk could actually mean for the investor in terms of return could also be helpful. This will help to highlight to investors that higher risk has the potential for higher returns and so the lowest risk investment is not always the most appropriate investment
The performance visual element showing three scenarios in one graph would be the most appropriate presentation for investors as this will allow clear comparison. Similarly to the summary risk indicator, it is important to ensure that the presentation of the performance scenarios remain neutral as far as the design, the colours and any terms used to avoid negative connotations. However a drawback to this graph is that it may create expectations of the potential level of pay-out at the end of the term.
A single visual element for performance scenarios (in one model) combined with a single visual element for risk (Criteria 2b in table 9), is felt to be the most appropriate combination as this will not overload the consumer whereas multiple visual elements risk being difficult for consumers.
Similarly to the key questions under the Risk & Reward criteria, the key questions identified in table 10 should not be used in the KID itself otherwise this will be going beyond the provisions of the PRIIPs regulation.
There is no mention of what the consumer is receiving in return for the costs. This will lead to consumers being unable to tell, at first sight, the range of services they may be paying for. These can go beyond the basic product price and are not related adviser costs. This reduces the comparability of the KID, so a “like for like” comparison cannot be made which is not helpful.
Customers also need to be aware that PRIIPs with guarantees, such as with profits, will have higher costs than standard PRIIPs as a result of the guarantees. Standard PRIIPs may have lower costs and a higher potential return, but customers need to be aware that there are no guarantees on the return with these types of PRIIPs.
Regarding the Key questions themselves;
• Questions related to the “uncertainty of costs”. There needs to be a bit more clarity regarding the updating of costs as surely this is part of the revision of the KID rather than a separate requirement.
• Questions related to the “comparability of costs”. Whether a product is more expensive than another is not for a manufacturer to disclosure with the KID. Rather the information on costs should be tailored to the features of the products appropriately so that the cost indicators are useful for the consumers and allow them to compare within a certain group of products.
We believe that these cover the main costs however it’s important to disclose all costs, but not at the cost of overcomplicating the KID and resulting in unnecessary complexity. There are many costs associated with investing in PRIIPs and if all costs were disclosed individually this would require an understanding of how underlying investments are managed and operated. Some PRIIPs will have variable costs in the early years of investment. Explaining variable costs and why these costs are incurred in such a way is very difficult to explain, in terms of what the variables are and how these fluctuate during the duration of the PRIIP. Consumers should have the cumulative effect of the costs they incur identified and if they are variable this should not be overly complicated or require detailed explanation to enable retail investors to understand. Variable costs are calculated based on technical issues such as mortality rates. Attempting to accurately estimate or calculate these costs, pre-sale, in a way that is representative of the customer experience of the majority of investors will not be achieved easily. Including these costs within a KID will require detailed explanation and caveat descriptions to ensure the customer is aware what these costs are, how they vary and that they might not be the costs that they incur, adds a degree of complexity for which there appears no tangible benefit.
The challenge of achieving a level playing field is ensuring that disclosure is meaningful and that the features of insurance- based investment products are taken into account.
At the pre-contractual stage, the manufacturer will not have any information about the amount the retail investor will invest. Costs will however vary depending on the initial investment or on the options chosen during the lifetime of the product. Furthermore some products may have a cost structure which will decrease when the amount invested increases. This may apply to the total charge or be on a tiered basis. It is quite common in our industry for different charging levels to apply depending on amounts invested, even within the same product. In this scenario providing a single presentation of costs and charges when there is a wide range of contribution amounts will be challenging.
The discussion paper refers to disclosing costs on a ‘full look-through basis’ -showing the ‘compounded’ impact these costs could have on the return. It also talks about the cost disclosure in the KID including costs of all types whether direct, indirect, and one-off or recurring. Our initial reaction is that, for certain products, this could be extremely challenging. For example, some of the products we offer allow the customer to nominate a discretionary investment manager who, in turns, buys and sells assets for the policy based on the investment objectives that have been agreed with the client. In this case, there is very wide universe of assets that can be bought and sold and, since the life company does not get involved in implementing the investment strategy, it will be challenging to disclose costs on a look through basis. The duration of the product will also impact on costs. Different durations may be available and this will impact on the cost. Additionally without knowing the initial investment the monetary amounts and percentages of all future costs will have to be estimated. Therefore a manufacturer may charge a 2% management fee every year but what this 2% represents in monetary value will depend on the amount invested.
For investments with underlying options, the manufacturer will not know the funds chosen by the investor especially if the investor choses a combination of internal and external funds.
Distribution costs are another type of cost that cannot be anticipated at the pre-contractual stage as they will depend on the distribution channel and the amount invested. In addition as there is no definition of distribution costs, it remains unclear which costs exactly should be disclosed.
Consistency is very important across different fund structures and harmonisation with UCITs should be a key objective. OCF disclosure is now being used for UCITs and the OCF approach should be adopted for as far as possible for PRIIPs as well. However overall achieving a level playing field will be very difficult to achieve and is potentially unachievable.
It is important to ensure a level playing field between PRIIPs and UCITs. There isn't an agreed-upon methodology on how to quantify implicit transaction costs, such as market-impact costs. Thus, requiring the disclosure of total trading costs would not provide adequate means for investors to compare trading costs across funds and could result in investor confusion.
The RIY is an appropriate way to disclose the aggregate costs figures. However this depends on the appropriate definition of costs and that the relevant costs are included. A RIY will also need to be accompanied by a statement of what services the potential investor is receiving in return for the costs.
The performance scenario should show the explicit growth rate, and the assumption should
Therefore be consistent with that.
Assumptions will need to be made here, as long as they are realistic. These could be based on past experience and be able to be justified by the firm. Accountability will be key here. It will need to be made clear that past trading activity will not necessarily be a guide to future activity. This area is very challenging, particularly for ‘fund of funds’ approaches.
The main challenge is finding a similar format for products that have completely different cost specificities. Furthermore for PRIIPs with underlying funds, the costs of these funds will not be known in advance because it will not be known which funds will be chosen. We understand the PRIIPs objectives and the need for comparability but we do not see how these different products can have a similar format and still constitute meaningful disclosure.
Customers must be able to understand whatever format is used. A visual representation is preferable but this will also need narrative and figures to explain costs. Customers should not be overloaded with narrative and figures.
Therefore it may be worth considering having different formats and different methodologies for the different products.
It is important to avoid examples where the potential investor is overloaded with information and cost figures such as options 8 and 9. Others are too simplistic and provide no meaningful information on costs such as options 1 and & 7.Option 6 presents a good summary of the information and meets the requirements of the Regulation. The graph for the performance scenarios would be on a low / intermediate / high basis, so consumers would be able to make the link to the intermediate basis quite easily. The low and high scenarios would be simply to show how the investment might progress; consumers may want to focus on what may be regarded as a fair return and not be overburdened with the effects of charges on three different bases. For charges that are calculated on a percentage of fund, low performance would produce lower charges, whereas outperformance would produce higher charges. We believe consumers accept this and over-disclosure would serve little purpose.
Overall however the consumer testing here will be vital in indicating the most appropriate presentation.
The effect of charges table gives the consumer, at a glance, the progression of their investment taking into account all relevant charges, including if they withdraw it at the specified points in time. Further disclosure once the product is taken out will give the consumer adequate information about how their investment is progressing, when, for example entry costs are no longer relevant.
It is important to keep the information simplified to ensure that the information is easily understood by the average retail investor.
In the interest of ensuring that the KID is usable for consumers and although different consumers will have different attitudes to risk, the risk indicator should be as clear as possible for consumers. Aggregating all three risks is felt to be the most straightforward for consumers. Otherwise they will need to weigh up the relative importance of the different risk measures or messages.
Previous ABI research has indicated that consumers prefer a simple risk indicator alongside a narrative of the risk/risks. We would therefore prefer that the risks are displayed in a similar way to the UCITs KIID, with a simple description at fund level.
Charges that are to be presented as a cumulative cost should be shown at different points in time that are meaningful for the particular product and after allowing for inflation. It will be very confusing for consumers to be presented with projected summary costs several years hence, which bear no relation to the amounts they are paying today. It may be more relevant to consumers to show the cumulative (and aggregate) costs as a monthly or yearly amount, again in today’s money terms. It has to be more meaningful for the consumer to see the costs they are paying, for both the product and the services, in the context of the amount(s) they have paid in
Table 12 is very extensive and we are not convinced that consumers will want or need this level of information. We feel that only entry & exit charges, ongoing charges and any charges taken from PRIIPs under certain specific conditions should be disclosed in order to provide useful information to consumers.
Some costs will only be known on an historic basis while some may be difficult to obtain; for example, with the introduction of a new fund. The same issue arises when adding a fund, particularly one that is to be treated on a look-through basis.
PRIIPs cost disclosure should be harmonised as far as possible with UCITs OCF cost disclosure.
Standardised information on contact details will be helpful to the retail investor. Details that should be included are a reference to a webpage, a company address and a telephone number. In addition, the date at which the KID was developed should be referenced.
In regards to ISIN references, this was not felt to be necessary especially as for some PRIIPs there will be no such identifiers in place.
The current criteria lacks clarity and there is still some confusion over which underlying assest are “not commonly invested”. What is currently understood under recital 18 is that all unit-linked products could fall under the comprehension alert. Also due to the lack of clarity there is a higher chance that the comprehension alert label will be put on KIDs even if the product does not comply with the recital 18 criteria because manufacturers will not risk not complying with the PRIIPs regulation. Firms and different Member States risk interpreting recital 18 differently. Subsequently there is a chance that the comprehension alert will lose its value and not help investors distinguish between different products.
To avoid this happening, it would be helpful to clarify recital 18 at the National Competent Authority level as they will know the different products and therefore which products should have the comprehension alert label. This will at least ensure consistency within Member States.
Classifying according to legal form of the contract or instrument seems to be appropriate.
Some PRIIPS are funds for which assigning a type based on economic exposures or fund classification would work and allow comparison, while other PRIIPs are products offering a range of underlying funds or investments, which will cover many different economic exposures or fund classification levels. This would make assigning a single category and comparison virtually impossible.
The ABI feels that classifying according to legal form is sufficient especially as more detailed information on the objectives of the product is provided to the investor under article 8,3(c).
While guidance on language is useful we do not feel that prescribed statements are necessary especially as the KID document is limited to 3 sides of A4.
As the document is limited to 3 sides of A4 and the information already foreseen in the PRIIPs regulation will already take some space, we do not feel that additional measures will necessarily be helpful to potential investors. For products offering a range of underlying funds or investments the product KID should only include a general description of consumer type and target market. It should also sign-post the customer to where he can obtain more detailed information on these matters depending on the funds or investment options available.
Consumer types need to be consistent across the industry. However the provisions should not be too narrow or too specific so that the types could encompass the maximum useful number of retail investors. While it is important that retail investors receive products that suit their individual needs for a further more detailed assessment, this should be done through personalised advice.
It is important to take into consideration the different specificities of the different types of insurance PRIIPs. Due to their specificities for e.g. unit linked products, with profits, guaranteed minimum return etc., insurance based investment products usually are open to all categories of investors or can be a part of the overall asset allocation of any investor.
To avoid disparity in consumer types between PRIIPs and MiFID classification of consumer types could be aligned with those proposed in MiFID II.
It is important that this information is displayed in a prominent manner in the KID. The presentation of insurance related benefits should be in a short narrative that clearly states the insurance cover that is actually provided, so as to allow retail investors to make an informed comparison.
The term may also depend on the investor and the term that they chose. Therefore there will not always be a fixed term and therefore this description will have to be flexible.
The information to be included in this section is straightforward as in the UK manufacturers are subject to the Financial Services Compensation Scheme (FSCS). However for a product offering multiple options, it is possible that not all the options will be covered by this scheme therefore a link to the website of the scheme should be included to allow the investor to access further information.
Financial penalties should be made clear in the document. For PRIIPs offering a range of funds or investment options, the normal holding period and ability to make withdrawals may also depend on the specific funds or investment options selected.
We agree that it would be useful to contain the distributors contact details, however manufacturers will not always have or know that information. Furthermore if a PRIIPs KID contains information regarding the distributor, this could contain potentially include multiple distributors.
Instead it may be more helpful if the manufacturer could indicate on the complaints page on its website that investors are to contact them if they have a complaint regarding the pre-contractual stage.
A link to a webpage that contains information about underlying fund(s) would be useful.
Yes we agree. However we would like flexibility with this assessment especially as it will be more useful for investors to have a separate KID for each variant of the product rather than a very generic KID trying to address all possible options for the underlying funds.
Unit- linked funds represent roughly 90% of our market.
A unit-linked fund is a fund that allows a consumer to invest their money in a much wider spread of investments than a single investment. A unit-linked fund is divided into units of equal value. The value or price of each unit depends on the value of the assets of the unit-linked fund. The mix of assets held in a unit linked fund varies from fund to fund, and may include direct or indirect investments. In certain circumstances there will also be the choice of external fund links which are investments in a re-insured unit-linked fund or a collective investment scheme which is not managed by the provider. Each fund chosen by the investor may have a different mix of assets and different level of risk. The funds chosen by the investor will not be necessarily known at the pre-contractual level.
Typically, depending on the provider, there can be a choice of up-to thousands of funds to choose from. One of our members offers a choice of 10,000 funds.
A product provider cannot reasonably be expected to provide information in the KID on risks, performance and costs in relation to all investments that are potentially available to the customer as this will extend to most investments available in the market. Rather, the product provider should be able to direct the customer to where such information can be found for the potential investment options.
The pre-contractual information provided in the multiple options KID will have to remain very high level, especially because at this stage the different multiple options will not be known by the investor or the manufacturer. We agree with the ESAs that a purely narrative approach would not be feasible and could diminish consumer comprehension which would potentially put these investments at a competitive disadvantage.
Risk Indicator: It is not possible to develop a single risk indicator for products that allow you to choose different underlying investments. A possible solution would be a summary of the different underlying options and include a range of possible options.
Comprehension Alert: This statement would need to state that “some of the investment options you can choose for this product are not simple and may be difficult to understand”
Objectives & Means of achieving them: This will have to be very general information and will not be very specific because this will vary according the investments chosen.
Target Market: This will have to be very general information and will not be very specific because this will vary according the investments chosen.
Cost Disclosure: Generic information will need to be provided as it will not be able to reflect a choice of funds when those funds are not known. A possible solution could be to give some generic examples of combinations of different funds and calculate the cost of these. This approach could also be taken with the performance scenarios and the risk indicator. Another possible solution could be for the wrapper KID to include references to where the more detailed and accurate information can be found (referencing individual KIDs).
The product KID should only contain information on costs, risks and performance that are relative to the product wrapper. The product KID should direct customers to where information relative to the investments can be found. This investment specific information should contain detailed explanations of risk, performance and reward relative to the investment.
The aim of the PRIIPs regulation is to ensure greater comparability and deliver meaningful disclosure for consumers. The KID with underlying options risks being very generic and therefore will not be as meaningful as the fund KID. It will be more useful for investors and manufacturers to present the separate KID for each variant of the product rather than a very generic KID trying to address all possible options for the underlying funds. A possible approach could be that a trigger for a wrapper KID could be a product offering more than twelve underlying options. Whereby products offering between 2-11 options of underlying funds will produce the individual KIDs for each underlying fund to the investor.
The product manufacturer could provide a generic description of the investment options available in the KID and direct the customer to where they can find detailed information on the investment options.
Fund KIDs, investment options booklets and layered and hyper-linked website information would all work. Without a single favoured option for the investment options, the underlying investment options information for one PRIIP product could be contained in several different information formats.
While reviewing the KID with underlying funds is not a problem on a yearly basis, the trigger to review that KID will have to be very flexible because otherwise you could end up sending a revised KID on a monthly basis. Where providers offer a PRIIP product with open architecture investment options and the options are chosen by the customer, the manufacturer of the PRIIP product cannot be expected to provide a KID. We believe that customers should receive the KID from their adviser or, in the case where they wish to select the funds themselves, the customer should be responsible for obtaining information on their investment choice. A statement to this effect could be included in the product KID to this effect.
Disclosure requirements for fund switches, whether these occur due to a customer request or automatically due to the product’s investment profile, within a PRIIP that offers a wide range of underlying fund options must be considered.
The PRIIPS KID must be aligned as closely as possible to the UCITS KII. If there is consumer testing evidence that demonstrates that the UCITS KII is effective and understood by consumers, we see no reason why the format of the PRIIPs KID should deviate to any great extent to the UCITS KII.
The measures for the periodic review and revision of the KID are reasonable. The KID is designed as a pre-sale document so we do not believe customers need to be provided with a revised KID on every occasion that a KID is updated.
Updates could be made electronically and the most up to date versions stored electronically.
No it should be the responsibility of the final provider to ensure that the most recent KID is provided.
At product level there are no challenges but with underlying investment options there are. With underlying options, in order to update the KID, all the information on the investment options needs to be updated. Under UCITS there is a fluctuation figure that triggers a revised KIID, a similar figure would be a challenge with multiple investment options.
We cannot see where an active communication model would be necessary or useful especially as the KID is a pre-sale document and such a model would in inappropriate.
It is acceptable to use recital 83 of MiFID II for the timing of the delivery of the KID especially as the KID is to be provided at pre-contractual phase. In this context, there is no need to elaborate further or have additional technical standards as this is not necessary.
It would be useful to have demonstrative templates that manufacturers could refer to but leave it open for manufacturers to use other formats that are compliant with the PRIIPs regulation. Otherwise we feel that by prescribing templates this will reduce innovation and development of the KID.
As the KID is limited to three sides of A4 and payment options are not addressed in the PRIIPs regulation, we feel it is more appropriate to follow the UCITs approach. If regular payments are an integral part of the contract then we believe the KID and projections must reflect that, otherwise it is not providing a proper indication of the possible returns. If a regular payment merely an option then the KID should not reflect them specifically. Instead the regular payment arrangements could be addressed separately in a pre-contractual document specifically addressing this arrangement.