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Association française de la gestion financière ( AFG)

Arabelle Conte
AFG generally agrees with the description of the investor´s perspective on risk expressed in the Key Questions, since most of these key questions already form the basis of the UCITS KIID and its SRRI, which were consumer tested and which are already applied by asset management companies on UCITS and most of their AIFs.
But we would strongly caution against the use of certain language in the table on page 23f which uses wording like “How much can I win?” & “How much am I likely to win?”. This language is more akin to the realm of gambling than investments and clearly would not support the Commission’s plans (on the Capital Markets Union) to provide more long-term retail savings to the European real economy. Instead, we would strongly prefer language such as “How much am I likely to get?”.

Also, the phrase “Can I get my money back at any moment?” should be reworded to make clear that the money in question is rather the current value at the date of the redemption request and not necessarily the invested amount.
Market, credit and liquidity are indeed sufficient risk axes that inform retail investors on the PRIIP characteristics.
But we recommend that each risk is explained in the context of each type of financial product (e.g. credit risk might be differently interpreted between insurance products, derivatives or funds).
AFG is against the calculation of an aggregated indicator, which would be meaningless and difficult to grasp; and as such it would bear the risk of conveying misleading information to investors.

Market risk

ESMA has already done an in-depth work on risk measures and the SRRI which is based on volatility is an adequate measure to grasp market risks. Our investors are now accustomed to this indicator and management firms we represent (of all sizes) had already gone through a costly and burdensome development phase to build on the current SRRI. In the perspective of a coherent PRIIP risk measure, the SRRI’s qualities should not be neglected and should constitute a viable alternative for the final PRIIP risk measure. We would like to recall that SRRI is not a proprietary method, can be implemented by all companies, and has already been tested as implemented on a pan-European scale. Since we do not start from a blank page and that the SRRI has an incontestable number of technical qualities, we strongly believe that any evolution of the current measure or any other alternative measure would have to bear a certain number of very convincing attributes in addition of those already filled in by the SRRI such as simplicity but technically viable and meaningful, robust, scalable, permanency of the results, cost of implementation, pan-European solution, non-proprietary, meaningful in terms of risk taken and expected return...

Credit risk
Credit risk for AIFs and UCITS is two-fold: spread volatility and default risk.
Spread volatility: For UCITS and AIFs, the underlying credit risk linked to spread volatility is already taken into account in the market risk indicator.
Default risk: If the managing company fails, investors’ assets are safe with the depository. If the issuer of an invested position fails, the diversification rules are in place to minimize the impact at the portfolio level. Consequently, default risk is fundamentally limited in UCITS and AIFs.
As a consequence, AFG thinks it would be useful to qualify the credit risk as the risk of default of the issuer of the product.


AFG believes that liquidity is an important piece of information for investors to have. Nevertheless, the liquidity concept is tricky to grasp, because it depends on the investor’s investment horizon, i.e. not all investors/investment strategies have the same tolerance to the liquidity risk, depending on their time horizon. Furthermore, we believe that liquidity is not a risk when it fits the investor’s needs. Thus, to be most effective with this section, we recommend a narrative form about the liquidity level of the product. As a consequence, we recommend talking about “liquidity level” or “liquidity horizon” rather than “liquidity risk”.

From a fund perspective, the terminology used in this Discussion Paper differs considerably from the notion of market described in the fund prospectus in accordance with the UCITS Directive. We are concerned that the Level-2 measures should lead to contradicting information being disclosed in the UCITS prospectus and the PRIIPs KID that would create issues in terms of coherence and liabilities, and therefore confusion for investors.
Regarding the market risk, AFG strongly advocates for the continuum. SRRI current methods should continue to be in use for funds. Volatility based measures are appropriate and have already proved their worth with the UCITS SRRI applied currently to both UCITS and a vast majority of AIFs in France. Indeed, the SRRI method offers the following advantages:
- It is easy to understand as it is based on the concept of volatility.
- It is stable (the rules have dealt with the issue of calculation change from one week to another)
- It covers a vast majority of cases with one single method, including specific fund types such as formula funds, total return funds, absolute return funds…

Regarding the credit risk, AFG believes that the difference should be clear between a well-diversified exposure and a highly concentrated or even mono-issuer risk. Average rating cannot thus be the only metric used. CDS approach is not appropriate as it is volatile and depends more on market conditions than on credit quality.
Similarly, credit value at risk is not appropriate since it is linked to market conditions and volatile. Furthermore, it is not predictive (cf Greek crisis) and is strongly model-dependent.
Credit risk for AIFs and UCITS is two-fold: spread volatility and default risk.
As a consequence, AFG thinks it would be useful to qualify the credit risk as the risk of default of the issuer of the product.

Lastly, we propose to replace the notion of “liquidity risk” by “liquidity level”, as the liquidity is to be assessed in relation to the investor’s own time horizon. The liquidity level is best described in terms of suitability with the client’s investment horizon. When it comes to earlier redemptions, the liquidity level is answered in the question “Can I get my money back at any moment?”
For actively managed products, contingent costs could only be included on an ex-post basis.
If disclosed on an ex-ante basis, they would need a special disclaimer warning that they are only estimated and do not constitute a legal commitment.
AFG Members think that past performances should be used and are against performance scenarios.

Should the ESAs want to maintain performance scenarios, AFG members are in favour of a limited number and non-probabilistic performance scenarios, but against regulatory and prescribed scenarios; the latter would make investors believe that returns are similar and that only costs differentiate a product from another. Three scenarios, as it is the case currently for structured UCITS, would be recommended so as to have a good compromise between enough information and too much and thus less easily readable information.

Combining notions of forecast performance with risk appraisal (probabilistic view) is very complex and may lead to misleading presentations as based on assumptions that retail cannot grasp. As ESMA’s working paper on “Real-world and risk-neutral probabilities in the regulation on the transparency of structured products” is suggesting there are economic issues such as the fact that “the risk-neutrality hypothesis is acceptable for pricing, but not to forecast the future value of an asset” and that a “risk premium (so-called “real-world” probabilities)” needs to be factored in.
A distinction between close-ended structured product and open-ended products could make sense as applied in the UCITS KIID. Performance scenarios with hypothetical situations would only be provided for PRIIPs similar to structured funds (illustrating the mechanism of the formula) while historical performance would be provided for PRIIPs similar to open ended funds.
AFG members strongly recommend retaining the PRIIP’s recommended time horizon.
AFG members definitely recommend percentage based scenarios, as it is much easier for the investor to apply the percentage to his investment amount. There is a longstanding market practice to present performance in percentage, as this is the case for all products, even the simplest savings schemes such as Livret A, etc.
When scenarios are relevant (see Q.7), i.e. for structured products, AFG members usually recommend 3 scenarios for reasons of efficiency, readability and space left in the PRIIP KID. For other products, we think that past performances should be used.
AFG members prefer clearly the current SRRI presentation in page 37 because it permits to show that regarding the market risk, the performance is directly related to the risk taken. A 7 grade risk for the market risk has now been rather successfully “tested” with the UCITS SRRI.

The credit risk may be added on the format of a narrative. That narrative should mention the diversification or concentration of the credit exposure as well as the average quality (see Q.3, 4 and 5)

AFG members would not recommend the Dutch leaflet presentation that does not take into account that risk means also more performance and bears too much a negative “image” of the investing action. The same with the p. 38 presentation looking like a car speedometer.
The Portuguese example seems difficult to read and putting emphasis on negative aspects (with no link to the expected performance).

The Belgian risk label is clearly an incentive to buy low risk products as the “washing machine” type of image indicates that low risk is a top quality product. We would like to remind that investing is an active action of supplying/allocation of capital with the expectation of a financial return and that long term investing is an objective of our societies today.
We thus cannot promote visual indicators that may be misleading in terms of the global perception of the consequence an investor may expect from his action of investing.
Although past performance per se is not a feature of the KID (as compared to the UCITS KIID), it should nonetheless form a basis for the performance scenarios, either through presentation of past performance or used as the starting point for the calculation of the performance figures. We note that this approach was tested and approved by consumers during the UCITS KIID consultation process and has been used since 2012. It is a recognized and meaningful visual illustration of product performance for investors.
AFG members see no value in combining the performance scenarios with the summary risk indicator, which is not required by the Level-1 Regulation. We agree with the importance of consumers understanding that risk and reward are linked, but we believe that such a construct would only add confusion about two integral parts of the KID and would be better placed in each of its proper KID sections.
On REITS, “real estate operating expenses and capital expenditures” should be taken into account separately from the on-going charges as it is the case in the French REITs UCITs funds.
In MIFID II level 2, ESMA has given the EC some technical advices on cost disclosures and consumer types but with wordings and definitions different from PRIIPs; this could lead to problems for professionals in implementing the European regulation as well as for a retail consumer to find its way. We recommend that MIFID II and PRIIPs are linked and coordinated on these two topics.
That is also the reason why we strongly advocate that we rely as much as possible on the former work that has been done on the UCITS/KIID; discussions and testing have been performed several years in order to reach satisfying solutions on costs disclosure. A lot of technical issues faced today by the ESAs have been studied and solved within the UCITS/KIID discussions. We recommend taking this work into consideration and making the PRIIPs /KID very similar to UCITS/KIID.
Structured products issued by banking departments and those issued by asset managers must have the same treatment.
Showing a RIY (reduction in yield) needs a yield assumption that could be misleading but in the same time it gives the right idea that costs are meant to generate return.
See our answer below Q.22
1. We don’t think that an implicit or explicit growth rate is absolutely necessary; as an example, the table shown in option 5 page 68 doesn’t show any growth rate and still remains quite effective on a cost disclosure perspective.
2. We don’t think either that if an implicit or explicit growth rate were to be used, it has be included in the performance scenarios. The table shown in option 6 page 69 uses a theoretical growth rate and still remains quite effective on a cost disclosure perspective.
Besides using several performance scenarios in the cumulated cost effect disclosure leads to a long table of possibilities as displayed in option 8 and 9 on pages 70-71, difficult to read for a retail consumer ( if he reads it at all).
3. A solution could be to show the RIY on the optimistic performance scenario
4. A solution could be to show costs (and cumulated costs) without any growth rate or with the minimum growth rate needed to offset the costs (see illustration Q.26)
The challenges lies in the fact that the fees are not charged at the same time and with the same methods.
More precisely, some products take large upfront fees and then have regular and foreseeable on-going fees. But when it comes to actively managed products such as investment funds, some costs cannot be calculated on an ex-ante basis (typically performance fees and transactions costs).
Transaction costs are a very small part in the total costs; as an example, for a European equity portfolio, transaction costs would be circa 0.10% of the portfolio value on average.
Transaction costs on other financial instruments (derivatives, bonds, forex…) are included in the price and are directly reflected into the performances.
As for performance costs, there should only be a narrative explaining the calculation method.

Lastly, French REITs have specifics in their KIIDs, i.e. costs are presented in % of both net value and gross value.
And as mentioned in Q.17, French REITs UCITs funds include “real estate operating expenses and capital expenditures” that are disclosed separately from the on-going charges.
The same differences and presentation should be maintained for PRIIPs/REITs.
Some members think option 6 is the best option in terms of simplicity and fairness for the consumer. Besides, using one single rate of return for all products, it clearly shows the difference between products in terms of costs. But, in the same time, it would make investors believe that returns are similar between products and that only costs differentiate a product from another.
Other members are not comfortable with the 5% rate shown in option 6 and can’t figure out what other single growth could fit. They would favour option 5.
Other members point out that option 5 only shows one holding period and as a consequence it doesn’t display the cumulated costs on the first years ( crucial for insurance-based products).
We would suggest a model combining option 5 and 6 while matching the level-1 requirement (see table in document attached and below).
Holding periods Investment € Cumulated Total costs€ Annualized rate of total costs
1 1000 7,5 0,75%
3 1000 17,5 0,58%
5 1000 27,5 0,55%
10 1000 52,5 0,53%
7* 1000 37,75 0,54%

Entry-fees: 0.25% On-going fees: 0.50% Exit-fees: 0.25%
*Recommended time horizon
The table intends to show the cumulated costs in Euro (column 3) at each time horizon (column 1) together with the equivalent expressed as an annualized rate over the period. (e.g. at end of year 5, the cumulated cost from year 1 is 27.5€ and 27.5€ represents a cost of 0.55% per year over 5 years).Only the recommended time horizon in the last line (year 7) includes the exit-fee, while year 1 bears the entry-fee.
French REITs funds usually have specific costs, “operating expenses and capital expenditures”, that are shown separately from the on-going charges.
Considering that risks are different from a product to another (insurance contracts, derivatives, structured products, funds…have their own risk factors), we recommend that market, credit and liquidity risks are not integrated into a single risk indicator. Such an approach would unnecessarily expose retail clients to oversimplified risk aggregation that will provide too general information and will not allow them to compare the different risk profiles characteristic of different PRIIPs types.

The KID should show:
- A market risk indicator that also takes into account daily volatility of credit spreads
- A narrative qualifying the default risk. That narrative should mention the diversification or concentration of the credit exposure as well as the average quality
- A liquidity level
See Q.26
• Transaction costs, when “included in the spread” and bid-ask spreads, are not measurable. Market spreads are a result of the combination of different factors such as market conditions and marketing fees. Asset managers have no means today to identify the part corresponding to a transaction cost.
• Market impact cost is a notion too vague to be measured. No asset managers, nor brokers, are able to measure it according to our inquiry.
In our view, the following information should be included:
- Where it exists, a product identification code (e.g. ISIN) and as for funds, the identification code of the respective share class
- Name and website of the PRIIP manufacturer
- 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 agree with just putting the name and website of PRIIP manufacturer on the face of the KID
- Name of the competent authority that has registered the product
- Name of the custodian
We consider the current Recital 18 to be too widely drawn and therefore generally welcome the ESAs’ initial suggestions on how to better capture what PRIIPs should be excluded from the comprehension alert.
Considering that PRIIPs cover a wide and diversified range of products, the KID/PRIIPs should be assigned a ‘type’ based on the underlying regulatory types. These are (i) UCITS or AIF (open-ended or closed-ended), (ii) insurances (unit-linked or with profit), (iii) structured bonds, (iv) structured deposits and (v) derivatives (as defined on page 13 of the Discussion Paper).
A special mention should indicate that the product is certificated by a local regulatory, and as such must complies with Directive 2009/65/EC (UCITS) or local legislation (AIF) (possibility of redemption at any time, ……..)
As for funds:
- Product primarily invested in financial instruments
- Product primarily invested in real estate
- Product primarily invested in other instruments
Should the ESAs consider common principles or further guidance for those products, it is in our view crucial to use and refer to existing standards such as:
- Objective of investment
- Recommended time horizon
- Investments universe
- Benchmark if relevant
The content of the section “Objectives and investment policy » of the UCITS KIID seems well suited (art 7 regulation 583/2010)
Unfortunately, the PRIIPs Regulation does not refer to the known constituents of ESG: Environmental, Social and Governance. The G for Governance is essential to ESG strategy, because if a shareholder has no relevant rights vis-à-vis the management of a corporation, it cannot effectively engage in a dialogue with the management and hence may not be in the position to improve social or environmental issues the corporation might have. We believe that it should be possible for PRIIPs manufactures to include in the description also governance criteria where applicable. This would also improve the quality of the information for the retail investor who would then be able to evaluate the product with respect to the complete criteria.
We insist the consumer type must 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 a necessary suitability and appropriateness test being conducted during the investment advice.
Typically, UCITs don’t have fixed terms.
When they do, standard sentences should be specified for fixed length or open ended funds. If necessary, the conditions for an anticipated term could be specified or it could only be mentioned that an anticipated term is possible (e.g. open ended funds that can become closed ended).

We would, however, like to point out that besides a fixed length or open-ended term, some products have a fixed term that might be extended. This applies for example to ELTIFs, the manager is required to define a term but may also define conditions which allow him to extend the term . Any rules regarding description of a term should take this into account.
We are not aware of specific challenges in this respect. However, there are PRIIPs where a bankruptcy of the manufacturer is irrelevant because the investment is insolvency-remote, e.g. funds with separate depositary arrangements are effectively ring-fenced from the financial position of the PRIIP manufacturer, so the question of whether the PRIIP manufacturer is able to pay out is not relevant.
In itself the information presented in this section needs to be generic in nature, otherwise manufacturers might need to create different KIDs for the same PRIIP in order to address different distribution channels and jurisdictions, which would be contrary to the concept of a single KID per PRIIP.
This could be accomplished by including a reference to where further information (i.e. website) may be found. In general, the information requirements within this section should be coherent with the ESAs guidelines’ for complaints-handling, where covered firms are required to publish details of their complaints-handling process in an easily accessible manner.
Generally, we agree with the publication of additional information on the manufacturer’s website.
We agree and consider that a generic description of the underlying investment options could be necessary for the underlying investment options in funds, for example, for a unit-linked insurance contract. However, the detailed information on underlying funds should be provided through UCITS/KIIDs.
Unit-linked insurance contracts offering several underlying investment funds would be concerned by article 6 (2a).
They represent around 10% of retail financial holdings.
We would recommend the use of ranges for the risk/reward information and the cost data.
The UCITS KII Regulation should be used as a guide for developing these measures. It is important to remember that the KID is intended as pre-contractual information and any attempt to extend this to inform existing investors of any changes (other than through a broadcast or passive model) would create serious complications (including overlapping existing periodic disclosure requirements) and should thus be avoided at all costs.

Any requirement for the PRIIPs manufacturer to inform the investor of changes beyond a publication of the revised KID e.g. on a website would lead to significant practical issues and a regulatory overlap.

An annual revision would be sufficient in our opinion.

Further clarifications on the meaning of material changes would be appreciated in this regard, as these which will trigger the need for a revision of the KID.
The UCITS KIID regulation should be the starting point and should be adapted to cover PRIIP potential specificities. In particular, the RTS should be specific as to what is to be considered as a material change.
The UCITS KIID regulation should be the starting point and should be adapted to cover PRIIP potential specificities. In particular, the RTS should be specific as to what is to be considered as a material change
Like in cases of the UCITS KID, the publication of the revised KID on the manufacturer’s website (“passive communication”) should be sufficient. There should be no duty to actively communicate modifications of a PRIIPs KID to the existing investors.
While we agree that the technical standards should address the issue of retail investors being given the time they need to consider the KID before making any decision, it is an equally important investor protection concern that they should not be prevented from investing at the point they want to because of constraints imposed by overly prescriptive regulation.

We would consider these technical standards to be in line with the Distance Marketing Directive and MiFID II.
The KIID template published by CESR (CESR/10-1321) has helped consumers by making sure all KIIDs are similar in format and it has helped firms by clearly indicating how to construct a compliant document.

A similar approach for the KID would be most welcome that should take into account the experiences of the past four years since the publication of these CESR guidelines. Otherwise there is a high risk of having to comply with multiple templates for products distributed on a cross border basis, which reduces competition by increasing barriers to entry while being a source of confusion for both investors and manufacturers.
As the KID is designed to be a generic disclosure document, multiple versions reflecting different payment options should be avoided, as such multiplication will just make it harder for the retail investor to locate the right version. One solution would be to produce the KID for any PRIIP on the basis of single payment in/single payment out, unless that payment option is not available in the specific PRIIP concerned, in which case the KID should reflect the reality of the payment profile.
Association française de la gestion financière ( AFG)