Response to joint Discussion Paper on Key Information Documents (KIDs)
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Yes
Do you agree with the definitions the ESA’s propose for these?
Yes
The parameters assumed should be coordinated with the cost section.
Due to the difference in pricing structures all scenarios should be presented net of costs.
The parameters assumed should be coordinated with the cost section.
The RIY calculation is interesting but has some methodological problems. For example it includes alternative costs (which is not a cost paid from the investor to the provider) that is highly sensitive to the performance assumptions. For example, a scenario with negative performance will end up with a “negative cost” (i.e. an income) for the investor if the alternative cost is included.
Regarding the aggregated cost figures: We prefer option 6, but question whether the “What might you get back at 5%” column is needed. In any case, it needs to be stressed that it is an “assumed example” so that the investor does not believe it is a promise.
(But we do not understand the figures in the example. For example, in year 1, if you have invested £5000 and had a 5% yield and £328 in costs, you would have £4922 back)
Most of the other options are far too complicated.
Contact details: Whereas in the KIID regulation the contact details of the KIID may be included in the section “practical information” (see article 20), contact details are requested in the beginning of the PRIIPs document. SIFA would recommend that such information is standardized and kept short.
Information about the competent authority: Regarding information about the competent authority SIFA suggests that only the name and a current web-address should be requested.
Universal identifiers (ISIN): SIFA is of the opinion that ISIN or other identifier, should be included where available .
Other: SIFA is also of the opinion that the document should contain the date of its publication.
2: Do you agree with the description of the consumer´s perspective on risk expressed in the Key Questions?
Yes, but risk should also be discussed in the context of return. Too much focus on “possibility of capital loss” and “uncertainty of return” could lead customers to avoid all risks. There is also a risk in avoiding all risk, a zero risk investment normally has a negative real return in the long run.3: Do your agree that market, credit and liquidity risk are the main risks for PRIIPs? Do you agree with the definitions the ESA’s propose for these?
Do you agree that market, credit and liquidity risk are the main risks for PRIIPs?Yes
Do you agree with the definitions the ESA’s propose for these?
Yes
4: Do you have a view on the most appropriate measure(s) or combinations of these to be used to evaluate each type of risk? Do you consider some risk measures not appropriate in the PRIIPs context? Why? Please take into account access to data.
Risk measurement is, in our view, best quantified by historical data. It could be calculated on the existing product, if available, or by the historical data of the investment type/underlying (for example, equity, bonds, MM and so on. History may of course not be a perfect predictor of future risk but this problem of uncertainty of the future is not solved by forecast models. Instead we believe that the shortcomings on using history in the risk measurement could be offset by a narrative explanation.5: How do you think market, credit and liquidity risk could be integrated? If you believe they cannot be integrated, what should be shown on each in the KID?
Probably best done as a narrative description.6: Do you think that performance scenarios should include or be based on probabilistic modelling, or instead show possible outcomes relevant for the payouts feasible under the PRIIP but without any implications as to their likelihood?
Although probabilistic modelling could help the customer in assessing likelihood, we dismiss it since it gives the customer a false sense of security. It is better to use a (headline) text like “Let´s say, hypothetically, that” show how the product would perform under one or more scenarios. Scenarios should be in line with/have some kind of relevance to (if any) historical data.The parameters assumed should be coordinated with the cost section.
7: How would you ensure a consistent approach across both firms and products were a modelling approach to be adopted?
Modelling would have to involve too many complex and uncertain parameters.Due to the difference in pricing structures all scenarios should be presented net of costs.
8: What time frames do you think would be appropriate for the performance scenarios?
We have no specific view on time frames, although for comparison reasons they should be expressed in “percentage per year” in order to be able to compare products with different holding periods. Percentage per year is also a concept most consumers are familiar with, think of interest on loans and return on deposits. We would prefer some sort of connection to the products recommended (minimum) holding period.The parameters assumed should be coordinated with the cost section.
9: Do you think that performance scenarios should include absolute figures, monetary amounts or percentages or a combination of these?
We prefer a combination: aggregate monetary amounts and annualized percentages. This is also consistent with the cost section.10: Are you aware of any practical issues that might arise with performance scenarios presented net of costs?
Arguments claiming that net of costs is practically hard to present normally origins from complex fee structures, constructed in order to make it hard for the consumer to see the net return. We strongly prefer net of costs. A (gross) scenario that needs a “prominent warning” and needs to be cross read with the cost section is of little help to the investor. Performance is by definition net of costs, especially from a consumer viewpoint that this KID is supposed to deliver.11: Do you have any preferences in terms of the number or range of scenarios presented? Please explain.
Three is a reasonable number: no promise but not too many to make it complex.12: Do you have any views, positive or negative, on the different examples for presentation of a summary risk indicator? Please outline advantages and disadvantages, and provide any other examples that you are aware of that you think would be useful.
We prefer the UCITS KII risk and reward indicator, mainly since it captures both perspectives: risk and reward. The Dutch indicator in the financial leaflet is in our view especially harmful, since it gives the impression that the best is to take on as little risk as possible, which is not always in the best interest of the consumer.13: Do you have any views, positive or negative, on the different examples for presentation of performance scenarios? Please outline advantages and disadvantages, and provide any other examples that you are aware of that you think would be useful.
We believe that past performance should be the base for performance scenarios. If no or too short history, methods should be standardized (for example return for the market as a whole, return for the product type as a whole).14: Do you have any views on possible combinations of a summary risk indicator with performance scenarios?
We prefer 2B or 3B, a single visual element for performance and single or multiple visual elements for risk. The A-alternatives will lead to too much focus on risk and the C-alternatives will be too complex.15: Do you agree with the description of the consumer´s perspective on costs expressed in the Key Questions?
Fairly ok but it should be kept in mind that it is too ambitious to believe that a 3 page KID could give answers to 8 “key questions” and 21 follow-up questions on costs. Prioritization is needed, preferably on key question 1 and its follow up questions.16: What are the main challenges you see in achieving a level-playing field in cost disclosures, and how would you address them?
Yes17: Do you agree with the outline of the main features of the cost structures for insurance-based investment products, structured products, CfDs and derivatives? Please describe any other costs or charges that should be included.
Na18: Do you have any views on how implicit costs, for instance costs embedded within the price of a structured product, might be best estimated or calculated?
It is fairly easy to list all costs. The main challenge is to find a standardized way to present them in order to make a comparison among products. Standardized rules for presentation are the best way to address this. The rules must be not benefit any particular fee structure.19: Do you agree with the costs and charges to be disclosed to investors as listed in table 12? If not please state your reasons, including describing any other cost or charges that should be included and the method of calculation.
Intrinsic value seems to be the best approach, but it needs a standardized mechanism for estimating fair value.20: Do you agree that a RIY or similar calculation method might be used for preparing ‘total aggregate cost’ figures?
We prefer (an improved version) of the “ongoing charges”.The RIY calculation is interesting but has some methodological problems. For example it includes alternative costs (which is not a cost paid from the investor to the provider) that is highly sensitive to the performance assumptions. For example, a scenario with negative performance will end up with a “negative cost” (i.e. an income) for the investor if the alternative cost is included.
21: Are you aware of any other calculation methodologies for costs that should be considered by the ESAs?
NA22: Do you agree that implicit or explicit growth rates should be assumed for the purpose of estimating ‘total aggregate costs’? How might these be set, and should these assumptions be adjusted so as to be consistent with information included on the performance scenarios?
We think that the growth rate should be consistent with the performance scenarios. A growth rate higher than 0 (which is likely in the long run) will give both a higher performance and (in the case of most cost models) a higher cost. Both need to be shown in order to give the investor a balanced view.23: How do you think implicit portfolio transaction costs should be taken into account, bearing in mind also possible methods for assessing implicit costs for structured products?
NA24: Do you have any views on possible assumptions that should be made, and how these might be calibrated or set?
NA25: What do you think are the key challenges in standardising the format of cost information across different PRIIPs, e.g. funds, derivatives, life insurance contracts?
Regarding the summary indicator: We prefer Option 2, because it is simplistic and easy to understand and gives the investor a sense of what is to be considered price worthy vs. expensive.Regarding the aggregated cost figures: We prefer option 6, but question whether the “What might you get back at 5%” column is needed. In any case, it needs to be stressed that it is an “assumed example” so that the investor does not believe it is a promise.
(But we do not understand the figures in the example. For example, in year 1, if you have invested £5000 and had a 5% yield and £328 in costs, you would have £4922 back)
Most of the other options are far too complicated.
26: Do you have a marked preference or any objection for any of the presentational examples? If so, why? Please provide any alternative examples which you believe could be useful.
No27: In terms of a possible breakdown of costs, are you aware of cost structures for which a split between entry or exit costs, ongoing costs, and costs only paid in specific situations or under specific conditions, would not work?
On the one hand aggregation is better since it will be easier to communicate. On the other hand, no aggregation is better since we believe that the risks are so different in kind that they need to be kept separate in order to be understandable. We have a slight preference for a multidimensional summary risk indicator, but consumer testing is the way to decide this.28: How do you think contingent costs should be addressed when showing total aggregated costs?
They can be shown like in Option 6.29: How do you think should cumulative costs be shown?
We basically agree but have a reservation on taxes. You could argue whether taxes should be considered as costs. But if they are considered as costs, why only transaction tax and stamp duty and not other taxes (such as tax d’abonnement and VAT)?30: Do you have any views on the identity information that should be included?
SIFA would recommend that the same requirements on identity information as in the Commission Regulation (EU) No 583/2010 (the KIID regulation) article 4.4 – 4.6 are applied on the products covered by the PRIIPs regulation.Contact details: Whereas in the KIID regulation the contact details of the KIID may be included in the section “practical information” (see article 20), contact details are requested in the beginning of the PRIIPs document. SIFA would recommend that such information is standardized and kept short.
Information about the competent authority: Regarding information about the competent authority SIFA suggests that only the name and a current web-address should be requested.
Universal identifiers (ISIN): SIFA is of the opinion that ISIN or other identifier, should be included where available .
Other: SIFA is also of the opinion that the document should contain the date of its publication.