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Sarah Matthews
In general, we agree that the Key Questions cover the main considerations for retail investors. We recommend that the following terms are reviewed during consumer testing:

• We think the term “win” used in the question of “How much can I win?” and “How much am I likely to win?” is counterproductive, as it may put investors off saving for the long term. It could be expressed as “How much can I get?” and “How much am I likely to get?”
• The follow-up question “Any protection and/or guarantee?” should include protection under national law if applicable, not just product attributes.
• In respect of the question “Can I get my money back at any moment?” we think the PRIIPs KID should include a clear warning on any early redemption/penalty fees that would materially affect the return on investment.
Overall, we agree that market, credit and liquidity risk are the three key risks. However, depending on the product, other risk disclosures, for example operational risk (if considered material), may be appropriate. We assume that counterparty credit risk will be included in the generic heading of credit risk. By this we mean the risk that the insolvency of any institutions providing services, such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the PRIIP to financial loss.

It is also worth stressing that both UCITS and open-ended AIFs are required to put in place liquidity risk management policies, in particular to ensure that funds are able to honour requests for redemption. This ability to offer regular redemptions minimises liquidity risk as compared to closed-ended AIFs or other products with relatively long lock-up periods.

In addition, to enable meaningful comparisons between different types of PRIIPS, it is essential to enable off-balance sheet products, such as funds, to highlight that they provide no or little credit risk, as the investor is not exposed to either the product provider itself, or any other single obligor.

From a fund perspective, the terminology used in this Discussion Paper differs considerably from the notion of market and liquidity risk applied for the purpose of risk management/calculation for investment limits and, most importantly, described in the fund prospectus in accordance with the UCITS Directive. We are concerned that the Level 2 measures should not lead to contradicting information being disclosed in the UCITS prospectus and the PRIIPs KID. The overriding aim of consumer disclosure measures must be to provide meaningful information to investors, without causing confusion. Incoherent disclosure standards and different liability standards would defeat this aim.

Additional specific risk which we believe should be considered include:
• Inflation risk
• Depositary and operational risk
• Taxation risk
• Structural risk to capital

Inflation risk
Inflation risk is a further risk which needs to be highlighted. This is frequently misunderstood by consumers, especially the effect that inflation can have on the value of a nominal capital amount over time. Consumers need to understand that simply protecting the capital value of their investment over a medium to long term timeframe is very likely to result in loss of purchasing power, unless further risk is taken to achieve an above-inflation return.

Depositary and operational risk
Neither depositary risk nor operational risk are mentioned. Mitigation of both risk types is a key focus for the fund industry (both for UCITS and AIFs), and in our view, the same should apply to other products to ensure a level playing field.

Taxation risk
Many products may be affected by tax changes either to the structure itself or in respect of the underlying investment of the product. Changes to any tax status could lead to adverse tax consequences for the investor or for the product itself.

Structural risk to capital,
Some fund structures may be allowed to pay dividends or take charges from capital. While this may allow more income to be distributed to investors, it may reduce the value of their holdings and impact the potential for long term capital growth. If this risk is likely to occur, then this type of risk could be included in the relevant performance scenarios.
We prefer an indicator that separates out market, credit and liquidity risks, as this helps to bring out the relative risk between balance sheet PRIIPs and non- balance sheet PRIIPs, such as AIFs or UCITS, which would be lost with a single risk indicator.

If these various risks are combined, there will need to be some methodology on how to aggregate them. If all risks are equally weighted, then the aggregate risk indicator for a UCITS would essentially depend only on one-third of the risk measure (market risk), since the value of credit and liquidity risk measures will be at or close to zero.

When using an indicator showing multiple risks, we recommend completing this with narrative explanation or by reference to a website. It is essential that, as with the SRRI for the UCITS KIID, a clear methodology is determined by the ESAs to allow comparability.
We have commented above on disclosing transaction costs and performance fees, otherwise we see no value in including contingent costs, except by way of a standard narrative.
We would support the use of three scenarios: expected, upside and downside. Probabilistic modelling should be associated with each of the scenarios such that the chance of upside and downside scenarios being realised are equal.

Further analysis will be needed on the types of scenarios which do actually deliver this outcome, such as a 1:10 or 1:5 chance of doing better or worse than the central, expected scenario.

We believe that past performance scenarios remain the most reliable indicator with validated/confirmed numbers which accurately disclose to the investor how the product behaves under specific conditions as for benchmark funds in the UCITS SRRI.

For funds, the determination would have to be made at share class level. Rules similar to the UCITS KIID regulation should apply to new products having no past performance, or where there has been a material change in objective e.g. as a result of a merger. In this respect it would be helpful if the ESAs would establish and develop a past performance model that can be relied upon across the board.
As noted in our answer to question 6, we believe consistency can only be delivered with a prescribed methodology similarly applicable to all PRIIPs.
Using the current UCITS KIID criteria, a time frame of 5 years would be appropriate (i.e. normally 5 years) and should be linked to the costs. For investment funds, a probabilistic or a possible outcome model a maximum projection of 5 years would make sense, which should be updated on a yearly basis.
Overall our preference is for percentages, but we are aware that many consumers do not cope well with percentages and may well need to be translated into an equivalent monetary amount. Consumer testing is key to ensure that any accompanying narrative is well understood.
Performance scenarios should be shown net of costs, provided that all costs are clearly defined to maintain consistent application by all PRIIPs manufacturers and maintain a level playing field. We believe it is important to accurately display the link between costs and performance.

We believe that past performance remains the most reliable indicator with validated and confirmed figures that accurately disclose how the product behaves under specific market conditions. Moreover, most funds do not offer capital guarantees and fund performance is heavily dependent on the volatility of underlying assets, which cannot be predicted with any accuracy. We do note that the rules will need to include some flexibility to cover situations where there has been a material change to the fund’s composition as a result of a merger or change of investment objective.

For funds, the scenarios will have to be made at individual share class or representative share class level. Rules similar to the UCITS KIID regulation (see additional third page of the UCITS KIID for structured UCITS) should apply to new products that do not yet have any past performance data.
In the event of a probabilistic or a possible outcome model and subject to consumer testing, a range of three scenarios seems sufficient – please our response to question 6.
In this context, we would like to stress again the importance of considering the results of consumer testing.

As mentioned, we prefer the multi-risk indicator presented at the bottom of page 39 of the discussion paper. It is also closer to practice in the UCITS KIIDs and will facilitate cross–product consistency. We do however believe that a multi-risk indicator would need to be supplemented by a further visual representation showing the relationship between risk and return – for example that in the UCITS KIID, as shown below.

We believe that it is important for consumers to understand that lower risk often correlates with lower rewards and vice versa. In addition, for longer holding period products (e.g. target date funds), inflation risk becomes more important, as mentioned in our response to question 3. The current market implied rate as used by national statistical agencies (e.g. UK RPI) could also be used to provide projections

Regarding the way a multi-risk indicator could be completed by narrative explanations, we refer to our answer to question 4.
We prefer the presentation of the graph on the top of page 43 but percentages instead of value numbers should be used. Prescribing a consistent approach will ensure comparability across different products and we support consumer testing to ensure the presentation has the most impact on investors.

Past performance, which was tested and approved by consumers during the UCITS KIID consultation process and that has been used since 2012, is a recognised and meaningful visual illustration of product performance for investors.
Consumer testing is important here, but we do not see the value in linking the risk indicator with performance scenarios. It is more important to combine the effect of costs on the performance scenarios.
We agree with the presentation of the consumer’s perspective. However, comparing costs as described under n° 8 of the table (“How do these costs compare to other products?”) may be difficult for the investor to understand. We do, however, believe it may be valuable for investors to understand the economies of scale or indeed market access that may be achieved by investing through a PRIIP rather than investing directly. For example, many corporate bonds are not accessible to retail investors unless they are prepared to invest sums in excess of €50,000.

The cost disclosure template (see our response to question 16) should enable investors to compare all PRIIPs accurately.
No comment.
No comment.
The Regulatory Technical Standards must be specific as to what is to be included in each cost category and how each is to be calculated if the consumer is to be able to compare ‘like with like’ across different products. Different products will have different costs and not all will be applicable to all products.

Moreover, there needs to be a single, common understanding of costs across the various regulations, otherwise we risk a patchwork application across Member States when the overall product is delivered to investors. MIFID II provides, for example, no clear template and the risk of leaving this to individual member states runs the risk of a proliferation of different standards which would be confusing to the end investor as well as being unnecessarily complex to implement.
The use of estimated costs must be accompanied by appropriate narrative to ensure the investor is fully aware they are not intended to be actual costs. There should be a full, standardised basis for making the relevant estimate.
We support the use of a RIY or similar calculation method provided that consistent, mandatory assumptions are used (e.g. growth rates, turnover/transaction volumes, FX rates, holding periods, etc.) to calculate the published figure. The narrative must make it clear that the RIY should not be treated as an ‘expectation’ of future performance (re. Endowment Policies in the UK).

A RIY is useful in terms of comparing product costs but is unlikely to be a practical way of expressing any distribution or point of sale costs that a consumer may also be charged. If used, the RIY must make it clear that its purpose is to allow comparison between different products but not as an accurate representation of the total costs of investing.

In addition, including unpredictable costs such as performance fees or transaction costs in any ex ante presentation of costs would probably best be shown as part of a possible performance scenario, with for example one scenario showing a high probability of charging a performance fee and another with a conversely low probability.
Consideration should also be given to an enhancement of the current ‘On-going Charge’ figure disclosed in the UCITS KIID.
See our response to question 20.
Portfolio transaction costs (PTCs) are currently required to be disclosed in the annual report and accounts of UCITS funds. These should form the basis for any disclosure on the KID on an ex-post basis.

We would also draw attention to the UK Investment Association’s comments on portfolio transaction costs being inseparable from the investment return and therefore the growth rate should be set net of PTCs. We consider the examples they have provided to be very useful in showing the different possible outcomes of this approach.

If transaction costs are to be disclosed separately, specific guidelines would be needed to ensure consistency and also ensure they are presented in a way that is consumer-friendly.
The key challenge will be to balance the detail and volume of information required against the need to make the information understandable so that it assists the consumer to make an investment decision. This will include having the information in a format that is comparable across different products.
Consumer testing is key here and due attention should be paid to the consumer surveys carried out in respect of the UCITS KIID rules. The presentations should be shown in a way that minimises misunderstanding by investors. The presentations should be based, to the extent possible, on historical data.

Option 5 is simple but misses out information on costs in relation to different periods.

Option 6 is probably the easiest for a consumer to understand but may need to be amended to show early redemption penalties, and/or multiple growth assumptions.

Option 7 also provides for a clear pictorial presentation of the impact of costs but does not include a clear holding period. Challenges exist with how to incorporate all the relevant costs, especially on an ex-ante basis.

Option 10 also includes the impact of early termination, which is otherwise missing.

Overall as suggested by EFAMA the most accurate way may be a combination of Options 5 and 6 depending on the level of consumer understanding.
It is important to distinguish between whether the representation is required on an ex ante or ex post basis where the required information is actually available. On an ex ante basis it is important to separate out unpredictable and therefore estimated costs from other costs which are definite.
As noted in our response to question 4, we recommend using a multi-risk indicator designed after taking consumer feedback into account.
We recommend presenting cumulative costs using the RIY approach.
Our primary concern is that the information is provided in an understandable format and not so detailed that it makes it difficult for a consumer to arrive at an informed investment decision. Too many cost categories are confusing for the investor.

While the product may include certain costs (e.g. front-end or redemption charges on funds) these may not be payable depending on the distribution channel through which the product is purchased. It will be difficult for the product manufacturer who prepares the KID to provide details of the actual costs that a consumer may incur. The distributor, or the party who has primary contact with the end client, is responsible for disclosing their costs as well as the costs of the parties that precede them in the chain.

Moreover, the disclosure of portfolio transaction costs is not meaningful unless a specific link is made to the performance net of costs. We believe it is important to show performance net of costs as this equates to the investment experience that the end investor actually receives. This process is also consistent with standard UCITS practice.

We would welcome clarification that dividends can be considered a cost to the investor only if they are withheld from the investor (and therefore indirectly form part of the manufacturer’s fees). In such instances, dividends should clearly be regarded as costs. In the case of funds, where these costs are credited to the client, they should be considered as a source of income rather than costs.

With regards to bid-ask spread and market impact costs, we question the analysis that transaction costs arising on non-equity markets have to be made transparent as part of the overall product costs separately from the market impact cost of spreads. We believe this is inconsistent with ESMA’s Technical Advice to the Commission on MiFID II and MiFIR. In it, ESMA notes that “transactions costs should be understood as costs incurred in order to acquire and dispose of investments. ESMA acknowledges that in some markets (bond market, derivatives market, foreign exchange market) these transactions costs are embedded in the bid-ask spread” [p. 118; para. 24] and that “the underlying market risk should be understood narrowly and relates only to movements in the value of capital invested caused directly by movements in the value of underlying assets” [p. 119; para. 25]. These statements thus imply that the bid-ask spread covers market impact and may include transaction costs without further separating out transaction costs). It is essential that both MiFID and PRIIPs adopt the same methodology here.

Furthermore, given the list of cost categories that are included, disclosure would only be possible on an ex-post basis.
In our view, the following information should be included:

• Where available, the product identification code identifying the PRIIPs (ISIN or other identifier). In the case of funds, we recommend the use of the identification code of the respective share class;
• Name and web site of the PRIIP manufacturer;
o Adding the address etc. of the product manufacturer would only cater for a small minority of retail investors who may not have access to the internet. Therefore, we suggest putting the name, website and any call centre of the PRIIP manufacturer on the face of the KID.
• Name of the competent authority.
We believe that the comprehension alert as phrased in Recital 18 could include products that are specifically designed to be bought directly by the end retail investor and so will not be helpful for the investor.

Further clarification from the ESAs would be welcome. The fact that a retail fund uses derivatives to hedge or efficiently manage its underlying portfolio assets (e.g. for efficient portfolio management) should not of itself generate the need to include a comprehension alert. We believe it is important to have clear guidance on when the comprehension alert should be triggered so that a product manufacturer has clearly understands when to include the comprehension alert.
We do not believe it is necessary to go beyond the underlying regulatory types: insurance policies, funds (UCITS and AIF), structured bonds and structured deposits. We believe that going beyond level 1 definitions will cause too much complexity for investors.
No comment.
We agree.
Such measures could include:
• indirect exposure shown by listing the instruments that create higher exposure than simply their holding,
• the use of leverage which can be measured by a specific rate/indicator,
• the use of portfolio management techniques provided they are described in plain language.

The use of a glossary or standardised sentences developed by the ESAs can assist in the presentation of a number of key terms.
MiFID II only considers the term “retail investor” without any further categorisation. It is up to the person or entity at the point of sale, not to the product manufacturer, to determine the suitability of a product.

In addition, some retail products are for the mass market, requiring a level of flexibility dependent on the specific needs of particular investors. This makes the target market analysis requirements of MIFID II and the advisor’s role in guiding clients to an appropriate product choice (in the context of specific client needs and risk appetite) all the more critical and relevant. This practically extends beyond the more macro scope of defined consumer types. A retiree, for example, with other assets and a life expectation of more than 20 years may, more appropriately, choose income at a later date and instead favour greater market exposure. This could be difficult to cater for within the constraints of consumer types, whilst too many types will become confusing. We therefore believe that the consumer type should stay sufficiently high level for product manufacturers to be consistent with the requirement of the “identified target market” in MiFID II and not to preclude the necessary suitability and appropriateness test being conducted during the advisory process.
No comment.
The use of standard sentences would be helpful for fixed length or open-ended funds.

We also note fund types such as ELTIFs allow the product term to be extended so the product manufactures should give a brief description of the terms on which this may occur.
There should be a level-playing field between investment funds and other products. Only banks (EU deposit guarantee scheme) and insurances (national schemes) have compensation schemes, but this is because they are on-balance sheet products. UCITS and retail alternative investment funds are exempted from investor compensation schemes for a reason. Both are fully protected against the insolvency of the product provider due to the specific product set-up (namely asset segregation and the depositary’s oversight and liability under UCITS and AIFMD). The lack of a guarantee scheme should be balanced against the existence of the European depositary liability standard to ensure that funds are not treated less favourably in comparison to other products.
To keep the KID simple, one should only mention in the section the various options where applicable, and add an indication as to where (web site/call centre) where details on disinvestments and/or penalties can be found.
We believe this information should be generic. Particularly in the case of products sold on a cross border basis, reference should be made to where further information can be obtained. The KID would only include a reference as to where to find “complaint” information.

Moreover, contact details for the manufacturer for complaints should be available on its web site and disclosed in section “Other relevant information”.
Yes, we agree once it goes to the URL where documents are needed for this specific PRIIP. It might also be useful to include the contact number of any call centre the manufacturer may have to deal with investor queries.
We agree with the criteria identified by the ESAs as relevant for determining which products might be concerned by article 6(3).
No comment.
No comment.
No comment.
No comment.
No comment.
The UCITS KIID should be considered as the starting point for dealing with these questions (periodic review, revision and republication). Guidelines on the meaning of material changes triggering revisions, for example in relations to changes in the risk presentation, would be appreciated in this regard.
We believe the key issue here is in respect of closed-ended funds. It may helpful to refer back to national definitions of marketing of closed-ended funds under AIFMD. As such, if a product is no longer actively marketed by the manufacturer, there is merit in not requiring the KID to be kept up to date.
The Regulatory Technical Standards should be specific as to what is to be considered as a material change and should be consistent with the provisions for UCITS KIIDs.
As in case of the UCITS KIID, publication of the revised document on the manufacturer’s web site (“passive communication” approach) should be sufficient. Investors / distributors can sign up to be notified if they wish to keep track of changes.
Article 13 (1) and recital 26 of the PRIIPs regulation provide that the PRIIPs KID should be provided to retail investors in good time before they are bound by any contract or offer relating to that PRIIP. This complies with rules applicable to the UCITS KIID. We agree that the rationale and logic of recital 83 of MiFID II could be used as a model for technical standards on the timing of the delivery of the KID. Retail investors should not feel pressured or coerced into making a decision on a potential investment, especially without having been supplied with all the requisite information in due time beforehand. On the other hand, they should not be discouraged from investing due to overly burdensome procedures.
No comment.
Yes, we agree as this was very useful in the case of developing the UCITS KIID. The use of templates or guidelines – at least for the main sections of the PRIIPs KID – would certainly be beneficial to retail investors (as it would allow them to better compare PRIIPs of different players and to understand different investment strategies), the manufacturers (as it would help resolve any doubts on the content requirements for the KID production) and the supervisory authorities (as it would make it easier for them to have a more consistent approach for their review). It is important that there are common templates for all EU member states produced by the ESAs, rather than allowing individual national competent authorities to each product a template which would cause confusion to consumers and limit the cross border marketing of PRIIPs.
As highlighted in the discussion paper, more accurate information on regular payment options and their expected impact on costs, performance and risk, may aid investors in making informed comparisons of investment products and their specifications.

However, there can be significant variety in the way in which regular savings schemes operate, with the wrapper design driven by the distributor and views of local market norms. For this reason, it would be more appropriate for MIFID rules to cover this feature as opposed to PRIIPs.
We refer to the detailed table prepared by EFAMA.
Under UCITS, we produce KIIDs on an automated basis at share class level. With this in mind, we do not agree with the ESAs' view as to the impact of the new regulation on the various industries. Fund manufacturers such as BlackRock will now have to rebuild their automation systems. Considering that the PRIIPs KID will have to provide other information than the UCITS KIID, and has a different format and length, the amount of change to the automated systems is likely to be significant and cost intensive. We would urge the ESAs to be mindful of the operational challenges need to meet what is a tight operational deadline of December 2016.

There may also be substantial costs for keeping the PRIIPs KIDs – which will be three pages long – up to date. Many of the performance scenarios provided by the PRIIPs regulation will require ongoing review.