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Association of International Life Offices

John Beaney
Yes, we broadly agree. We believe there is an additional issue with consumer's understanding of some of the risks in certain structured products where the return may be complex or not directly correlated to markets or specific instruments. For example structured notes linked to 'worst-of' several indices, or linked to numbers of credit events of a basket of companies.
We note the reference in section 3.3.4 first line, should be to section 3.3.1.
AILO agrees with the definitions proposed and whilst these are the main risks, believe there are others that should be considered, such as foreign exchange and concentration risk. In addition, although leverage may be considered a component of market risk, we believe that the impact of leverage may require an additional risk warning or indicator. Long term investment also incurs the risk of erosion of value due to inflation and we believe this risk should also be addressed.
For market risk, we believe the most appropriate measure should be that used by the existing UCITS measures (e.g. historical volatility with various adaptations).
For credit and liquidity risk, we do not believe that it should be “measured”. We believe that credit and liquidity risk should be highlighted in qualitative form in the KID according to the qualitative points set out in Tables 5 and 6. We believe quantification is not appropriate as:
For credit risk
- Market measures such as CDSs are not available for all manufacturers. There are other potential measures but no universal agreement on a single measure. Some judgement would have to be used.
- The risk of default of the manufacturer could change (quite quickly) over the (potentially long) life time of the product.
- A monetary estimate of loss is meaningless where there is one counterparty (the loss is either zero or a large portion of the investment)
- It is difficult to combine the credit risk of the manufacturer and that of the underlying assets, where applicable, into a single measure.
For liquidity risk
- There are a range of possible measures but no universal agreement on a single measure. Some judgement has to be used.
- Market measures are not available for all types of asset.
- Liquidity risk could change (quite quickly) over the (potentially long) lifetime of the product.
In respect of wrapper products which are subject to the article 6(3) derogation, the risk is dependent on the underlying asset mix. In this instance the “average” risk cannot be determined and the risk with a particular PRIIP could be significantly higher or lower than an “identical” PRIIP with a different asset choice. We believe the risk indicator for such products should be either a generic indicator or cover the range of risk profile allowable based on the assets that customers may choose within the product as discussed in answer to Qu 45-46. We believe in general that these products will cover the full range of possible risk levels and therefore the indicator may not be very helpful.
Answer to QU 22 above makes suggestions in respect of performance fees.
AILO considers that customer driven transaction fees should be excluded from total aggregated costs.
AILO would propose that performance scenarios are developed for a number of core asset classes (such as equities, government bonds, bonds and property) calibrated to a stochastic model by the ESAs. These should then be used by product manufacturers together with the detail of the investment profile to develop product specific performance scenarios. This approach would have the benefit of comparability and relative simplicity whilst also allowing for different returns to be reflected for different asset classes and levels of risk.
There may be cases for certain complex products (such as certain derivative instruments or structured products linked to non-standard asset classes such as credit default events) where this model may not be useable. In these cases stochastic modelling may be used by the product manufacturer but this should also carry a complex product warning and a statement that the scenarios may not be directly comparable to other PRIIPS.
We believe these scenarios should be calibrated to probability percentiles such as 75th and 25th percentile for each of the asset classes. These should be provided for different time periods and also have correlation factors between classes. Overall this approach would be similar to that of the standard formula under Solvency II for the SCR calculation.
We believe a low (25th percentile), medium and high (75th percentile) is sufficient. These could alternatively be set at 10th and 90th percentiles to better illustrate the possible spread of returns.
We suggest illustrative amounts and should be rounded to a low number of significant digits (3 or 4) to avoid the impression of spurious accuracy.
AILO also believes there are potentially conflicts between the PRIIPS KID projection requirements and similar local projections, for example UK illustration requirements. We believe this creates potential confusion for consumers and ideally only one set of requirement should apply thus NCAs should be encouraged to use the PRIIPs basis elsewhere.
See Qu 6 which would ensure consistency in return scenarios (before product charges / costs).
Projections should include the return after 1,2,3,4 & 10 years and the period of any early redemption penalties. Projections should extend to the maturity date or any recommended holding period for the product. We believe, unless the product is shorter in term, that the projection should be at least 10 years long.
AILO considers that performance figures should be based on monetary figures as these are easier for consumers to understand and for comparison between different products. However it would be essential to base information on an assumed standard investment amount which would take account that some products may have minimum and maximum investment parameters in Member States (such as ISAs in the UK).
It is appropriate to present scenarios net of costs in order to properly inform the customer what they might get back from the product. Some costs, however, such as transaction charges triggered by customer actions may not be possible to reflect given the wide range of possible outcomes.
Such charges are typically switch charges or transaction charges, for example for unit linked insurance product, where the customer drives the level of trading in the assets within the contract. We believe in this case such transaction costs should be excluded from the projections (even within the Article 6.(3) derogation) but otherwise disclosed explicitly.
We believe a low (25th percentile), medium and high (75th percentile) is sufficient.
The summary risk indicator should reflect the link between risk and possible returns (i.e. that typically lower risk will yield lower returns and vice versa) and we therefore favour an indicator such as the UCITS KII indicator that shows this. Indeed use of any other indicator may well hinder comparison and lead to confusion.
Such a summary indicator may, however, fail to capture certain non-linear product return profiles (for example in the case of certain derivative or structured products) where small changes in a reference value could have a disproportionate effect on capital returned. In these cases a specific risk warning may be required and/or warning that the product is ‘complex’ as envisaged in the PRIIPS regulation.
In our view the summary risk indicator should focus on the market risk component with counterparty risk and liquidity risk covered by way of narrative explanation of the nature of the risk. The ESA’s may be able to develop some standard descriptions for these risks for different types of asset classes and product types to assist consistency across PRIIP manufacturers.
For unit liked insurance PRIIPs and other “wrapper” type products subject to the article 6(3) derogation then AILO considers a summary risk indicator inappropriate as explained in answers to Qu 43 -46 below.
AILO would prefer the single visual line graph graphical representation showing lines for an “optimistic” outcome and a “pessimistic” outcome.
The “optimistic” and “pessimistic” lines should be based on 75th percentile and 25th percentile projections based on (an offline) stochastic analysis for various asset classes (e.g. equity, government bond, corporate bond & cash). It would show monetary returns at the end of the period as per the graph; however these should be “real” amounts (after inflation).
The projected rate of return for each of the percentiles would be published by the ESAs and used by all manufacturers depending on the underlying asset mix of the product.
This measure has the benefit of showing the projected return as well as providing an assessment of risk.
In relation to the definition of “risk”, we would caution against the use of “high risk” without some qualification. The objectives of the investor need to be taken into account particularly the time period of the investment as over longer time periods the risk of not beating inflation becomes a large risk.
We prefer the use of the line graph in isolation
Cross border providers will inherently suffer greater costs than domestic Manufacturers due to the need to provide documents in a number of languages depending on the Member States in which they transact business. As mentioned in answer to Qu 48, language in itself may prove a problem due to the difficulty in compressing some languages into three sheets of A4 hence the desirability of templates.
Many cross border manufacturers have as a main and sometimes only target market native expatriates. In that case we would maintain it to be unreasonable for the Host Competent Authority to require the KID to be translated into the local language(s). Instead it should be sufficient for the Home State competent authority to inform the host authority that the KID is compliant and so automatically be a language “accepted by the competent authorities” as provide by Article 7.1
AILO considers that the discussion paper has identified key areas of difficulty including explicit disclosure of insurance cover charges. As envisaged in answer to Qu 24 we believe it critical that where possible the costs of insurance cover be excluded from any RIY figure in order to facilitate comparability with returns from non-insurance based PRIIPs – a problem perhaps exacerbated should the KID be based on an assumed investment amount.
We believe it is difficult to compare products with fixed charges with those based on percentages especially with an assumed investment amount. As an example a €100 fixed annual charge represents a 10% p.a. fee on €1,000 investment but less than 1% on any amount above €10,000.
We believe there may also be difficulties comparing products with fixed charges subject to inflationary increases particularly where manufacturers are operating in different base currencies from each other and therefore subject to different rates of inflation on their costs.
The ESAs need to consider whether currency specific investment and inflation assumptions are required.
These could be estimated by requiring the structured product provider to provide an immediate encashment value of the product on the assumption that it was liquidated (rather than cancelled) the day after it was sold to the client. The difference between the price paid by the client and the liquidation value would allow for the costs embedded in the structured product.
We believe this is equivalent to the ‘fair value’ method discussed in the document and we favour this. These values should be further subject to a minimum of any explicit commissions paid or fees paid to third parties.
Ideally this calculation would be subject to an ‘arm’s length’ requirement when companies are determining the liquidation value. We believe that this approach does leave some scope for different results from different manufacturers of similar products but that these differences should be on the whole small.
Yes. This method is used for the purposes of disclosure of charges in the UK and Ireland and we believe that it is a simple yet effective measure.
We think that for this purpose it may be best to use a ‘constant investment value’. i.e. the growth assumed is just sufficient to bring the value back to the initial value at each step in the calculation.
This effectively calculates the RIY = growth required to maintain the investment. If, as an alternative, 0% were used then this would lead to a decreasing value and an increasing effect from fixed fees.
In the case of a performance fee we suggest that the ‘core’ RIY could be calculated as above. An additional RIY at the ‘high’ scenario rate of return including the performance fee would then be calculated and the additional RIY generated disclosed separately as the effect of the performance fee if positive returns are achieved.
The key challenge is to come up with a single measure which captures all the costs over various agreed periods of time. We believe the best way to address this is to show a reduction in yield and sample monetary costs (in real terms) at various time points.
We have a preference for an adaptation of Option 10. We suggest each year setting the growth rate to that required to cover the charges. Insurance costs should be shown separately (except where either too trivial to account and so implicit, or too complex to apportion for example with profit policies). In this approach the table can show the monetary effect of charges plus the ‘growth required’ to cover the costs (effectively an annual RIY).
We do not believe that credit and liquidity risk should be integrated with market risk. Rather we believe that statements along the lines of the following (subject to not duplicating other Article 8 disclosure requirements) should be used to highlight the risks:
Credit -“Please note that should [the manufacturer] not meet its obligations, you would be exposed to the loss of some or all of your investments”.
In the case of additional credit exposure to underlying assets that is passed on to the customer a further disclosure should be added along the lines of “furthermore the product invests in the securities of [one or more issuers] and if one or more of those issuers defaults on their obligations to us this loss will be passed on to you”.
Liquidity - “The underlying assets of this product may be subject to liquidity risks in that your investment may not be realisable in the short term and/or may be realised at value significantly lower than the latest quoted price”.
We believe it may be appropriate to require some explanation of the types of triggers for liquidity problems such as, for example, a significant increase in redemption requests. It may also be desirable to develop standard warnings or disclosures for certain asset classes such as property.
Therefore we agree that there should be no aggregation and only market risk be represented within the summary indicator.
AILO considers these should be shown as per Option 10 in the Discussion Paper.
In general we agree with the list of costs and charges listed in Table 12 with the proviso that all costs disclosed should be those negotiated on an “arm’s length” basis.
In addition, the annual management charge should be consistent with the “Total Expense Ratio” disclosure required under UCITS.
The telephone number, website address and a contact email address should be provided in addition to the legal lines as required by company law in the relevant jurisdiction. AILO does not favour including ISIN numbers and they may confuse customers.
AILO believes that the criteria are sufficiently clear. However there would be merit in the ESAs clarifying that for products subject to the Article 6(3) derogation the comprehension alert should only be included where a customer purchases a product which includes a choice of an underlying asset within the recital 18 criteria.
you have views on how these might be set?
We agree that a type will be required and the suggested categories appear to be logical with possible further categorisation by product sub type. For example in the case of insurance PRIIPs with profits, part guaranteed interest, unit linked, Capital Redemption/Capitalisation, Variable Annuity.
Redemption/Capitalisation contracts may need consideration for they may be insurance products in some jurisdictions but banking products in others so straddle the legal type classification.
In addition the offerings of “Platforms” may present difficulty in deciding a legal type. In general they do not provide a “product” but rather may be viewed as a service provider or an intermediary. See answer to Qu 48 below.
Yes , subject to our answers to Qu 43 –p46 in respect of unit linked policies with a choice of two or more underlying assets.
For insurance PRIIPs products AILO Members believe that identification of a target market is essentially a matter for the distributor who then chooses a product from a manufacturer for a particular customers demands and needs. AILO has also made this point in its submission to EIOPA on Product Governance and Oversight. We consider that the insurer should provide no more than a generic statement such as suggested in answer to Qu 43-46 in regard to appropriate holding periods and perhaps age limits.
A tabular form may be appropriate showing (as relevant)
When benefit payable (according to sub type for example whole life, redemption , variable annuity
The monetary amount/ percentage of surrender value payable.
Life insured (or insured) relevant for payment of the benefit.
Description for any rider benefit included such as accidental death benefit.
In principle AILO Members would not have difficulty in providing details of the compensation scheme if any applicable to their products. However as AILO Members transact business cross border it is possible that schemes (if any) in Member States may differ in the coverage provided depending on the residence or nationality of the policyholder and whether business is conducted on a Freedom of Services or Freedom of Establishment basis. It is conceivable that this could mean a clear succinct description within the 3 page limit of the KID will be difficult and so sign posting to the scheme website might be appropriate.
Insurers would also need to clearly state that any scheme in existence applies to the failure of the insurer and not to failure of an underlying asset which might not result in any compensation.
If the product itself has (or includes a choice of ) early encashment charges or includes a lock in period then they will need to be referred to and might mean manufacturers would need to consider each charging structure as requiring a unique KID albeit all other features of the product would be the same.
So far as underlying assets of a unit linked policy is concerned then it could be appropriate for the product KID to make a generic reference to these possibilities in terms of the derogation under Article 6(3).
Manufacturers tend to adopt fairly standard wording in each of the jurisdictions where they are based. We can see difficulty in trying to provide a link to information regarding complaints against distributors/manufacturers of underlying assets. Manufacturers may use distributors based in many jurisdictions. Additionally the Manufacturer has no contractual part to play in the relationship between distributor and customer. Perhaps a statement along the following lines would deal with the distributor complaints: “Your Adviser will have provided you with information regarding how to make a complaint in respect of the services they provide to you”.
Article 6(3) should be available whenever the product enables the customer to choose between two or more underlying investments (collective funds and/or other assets).
Unit-linked insurance PRIIPs and other wrapper products. In 2013 AILO Members unit linked business premiums amounted to some €15,178,248,000
Unit-linked insurance PRIIPs policies giving the choice of two or more underlying assets may offer a) a selection of internal unit linked funds only b) a selection of internal funds and/or a selection of external collective funds, or c) a wider universe of admissible assets which could include for example cash deposits non EU collectives and ordinary shares (where typically a discretionary mandate may have been given to an investment manager).
The product itself will not have an investment profile nor risk/ reward categorisation - -they will depend on the individual customer’s decision and investment choices of that customer. As such they are impossible to represent within the product KID other than on a generic basis.
There may however be instances where the Manufacturer (as distinct from the distributor) offers customers a product with a restricted choice of funds within a stated risk categorisation (model portfolio/guided architecture). We still believe the Article 6.3 derogation should be available but with the modification that the KID should include risk/reward information in respect of that particular model. Only if all assets that may be chosen under the model have the same costs should non-representative costs be shown.
In the event of the distributor rather than the manufacturer offering its customers a restricted choice of funds then it may be considered a PRIIPs Manufacturer within Article 4.(4)(b) and so have an obligation to produce a KID.
The product KID should provide a generic description of the range of assets that the customer can choose from and sign post to where further information can be obtained (for example a UCIT KIID or an internal unit linked fund KID)
The Product will bear its own charges but the asset charges will be unknown hence in order to comply with the Regulation AILO considers that the KID should show representative costs and performance using perhaps two or three examples (our answers to Qu 4 – 16 are relevant in this context). The text should include a clear statement that these are examples only and may not be reflected in their actual choice. It also has to be borne in mind that some underlying might not have any explicit costs for example cash deposits.
In respect of a comprehension alert, AILO is of the opinion that this should only be required where the asset choice includes any within the recital 18 meaning (see also answer to Qu 31).
See also answer to Qu 46. Where the underlying assets are internal unit linked funds then the product KID should sign post to the website where KIDs for all the underlying funds can be found. If the product provides for a wider range of assets then it should be sufficient for the Manufacturer to state that the customer should refer to the website of the relevant fund manager. However it may be that Manufacturers will prefer to have links on their own websites to the other websites.
Where the product is distributed by other than the Manufacturer itself then we consider that it should be for the distributor or investment adviser to assist the customer in obtaining relevant information regarding underlying assets. It is also essential that the role of the discretionary asset manager is recognised and their obligations under MiFID for they will make any investment decisions based on the mandate given by the customer. There should be no unnecessary duplication.
It will be a significant challenge to provide all the mandated information within 3 pages of A4 given the varying lengths language translations will require. The need for jargon free language may present a further challenge as use of “simple” language may result in ambiguity. Clarity to avoid that may itself extend the space required.
There may also be a challenge with “Platforms”. Essentially they compete with, for example, wrapper unit linked insurance PRIIPs and may offer the customer the choice of identical collective funds. Unless they are considered to be a manufacturer and so have the same obligation to prepare a “product level” KID and disclose their charges then insurance PRIIP manufacturers will be at a disadvantage.
We broadly agree with the measures outlined for periodic review, revision and republication of the KID where material changes are identified.
As alluded to in the Discussion Paper, it is likely that material changes to the product affecting existing customers will require disclosure under other European (For example the Consolidated Life Directive) or national Law especially as the KID is designed as a pre-contract disclosure document. We consider that it would be helpful for the ESAs to issue guidance on situations where it is considered a review should be necessary and further the circumstances in which existing customers should be advised of material changes. Guidance should avoid use of words implying subjectivity and should be coached in objective terms for example when costs for the product will increase by more than x% from those previously disclosed , or when the investment objectives or risk rating changes.
It would also be welcome if guidance would address the position of products no longer available to new customers and in particular “closed” books of business for example a life insurer no longer open to new business but with existing legacy business which may result in contractual obligation running for decades.
Where a secondary market exists and the PRIIP is also still available there should be no issue as the KID would need to be up-dated anyway, and in many cases the transfer of ownership of the PRIIP would need to be communicated to the PRIIP manufacturer. If the KIDs are made available on web-sites, particularly where generic/ representative sample data is being used, then the KID would be easily accessible. It is key to inform the KID reader details of the web-site address where the KID, and future up-dates will be published.
No, our answers to Qu 43 – 46 are in point. On the basis the Article 6.3 derogation applies then we do not regard any change of information as being necessary other than when the generic classes of assets available to the investor (internal unit linked funds, shares, bonds, UCITs, structured notes) changes. We concur with the comment in the Discussion paper that a change in the range of investment options available does not change the legal structure of a product.
No. For insurance PRIIPs we believe that the existing requirements of the Consolidated Life Directive coupled with provisions of Unfair Terms in Consumer Contract legislation provide adequately for notification of material changes to existing customers.
Yes, but subject to ‘in good time’ not mandating a longer period than the cooling off period required under the relevant EU Directive (UCITS IV, MiFID or Solvency II etc).
Yes. For life insurance PRIIPs then it is necessary to provide brief details of the benefits provided (and explicit cost if any) – see answer to Qu 37 above. The amount of benefit to whom and when payable and other possible benefits will differ according to the type of product and may be expressed in different ways by Manufacturers.. In view of the limited space available and to aid comparison then a standard template would be beneficial. The space problem may well be exacerbated depending upon the language the KID is written in hence the potential benefit of a template.
There may also be benefit in a template for use with products subject to the Article 6.3 derogation
Yes. Where such options are available and the customer wishes to invest (whether contractually or otherwise) then the KID should be prepared showing cost and performance and risk. For unit linked products then generic assumptions need to be adapted to take account of probable reduced volatility. For products based on an interest rate account would need to be taken of the fact that there will on average be only half a year’s new savings relevant for calculations on that regular payment basis. For products subject to the Article 6.3 derogation then representative costs and performance assumptions should be provided as indicated in our answers to Qu 6-16 and 46 above with substitution of a representative regular savings amount probably on a monthly payment assumption.
Taxation is of relevance as both a benefit and potentially an additional cost of many PRIIPs and will be a key measure in comparing one family of PRIIPs against another (as will for example potential succession planning benefits of trusts, foundations and nominations).
Association of International Life Offices