Response to joint Discussion Paper on Key Information Documents (KIDs)
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Further on, we would like to recall the attention to the definition of liquidity risk as provided by the DP: “we would define the PRIIP´s liquidity risk as (i) the absence of a sufficiently active market on which the PRIIP can be traded or (ii) the absence of equivalent arrangements. Absence of these two aspects impacts the uncertainty about whether the PRIIP can be cashed-in during its life in a reasonable time and/or for its fair investment value”. It is worth noting that in Italy since CONSOB Notice No. 9019104, dated 2 March 2009 and the respective Industry’s Guidelines for the application of the CONSOB level 3 measures on the intermediary's duty of correct and transparent conduct in the distribution of illiquid financial products interested parties have been adopting specific arrangements in order to address situations where the absence of a sufficiently active market could jeopardize the liquidity of financial products. The existence of similar solutions allows to consider as liquid a financial product that is lacking the prerequisites otherwise recalled in this Discussion Paper.
Similarly to the credit risk, liquidity risk may be of little impact to a specific product because of its intrinsic features.
- offer clients simpler and easier for comparison representation of the information on risks (qualitative approach);
- guarantee quantitative measurement, only in presence of a largely diffused and consolidated methodology practice in the sector (quantitative approach);
- overcome the limits of the quantitative measures that may not take in due consideration the specifics of the different issuers.
Further on, we propose the following treatment with regard to the three risks subject to discussion.
Adopt quantitative measures for the market risk assessment. Amongst such methodologies one of the most appropriate is the VAR (Value-at-risk) being the latter largely used in the sector to monitor both assets and clients related risks. Similar set-up will require the definition of assumptions concerning the calculation methodology of the risk indicator both in terms of historical data (cost of the PRIIP/inherent risk factors) and calculation periods. Similar approach may imply the necessity of a product repricing according to future scenarios for the risk estimation and consequently the use of pricing functions developed ad hoc. Finally, VAR may be preferred for the following reasons:
• it is prudentially wiser as it describes possible losses at a certain level of confidence;
• clients’ major difficulties in comprehension may be overcome by not directly providing information on numbers but instead by specifying different classes of risk (for further details please refer to the answer provided to Q7);
• VAR may be linked to volatility (and vice versa) by means of suitable model assumptions (e.g. The Square root rule) for those products ( e.g. funds) where volatility is the risk indicator actually applied.
Another appropriate methodology may be the Historical (ex post) volatility, which: i) could raise minor difficulties in the process of its implementation by issuers of small dimensions that often need to engage third parties for the pricing and the risks valuation even for those products they issue; ii) it is easily presented to and easily understood by clients.
We believe the rest of the methodologies proposed with this DP are difficult to elaborate by manufacturers and difficult to understand by retail clients.
With regard to the credit risk, it would be appropriate a qualitative measure. In this regard it could be appropriate to: i) consider indicating the Rating where available, despite the limitations such an indicator may also present. On this regard it could be useful to make clear, as well as envisaged by the same DP, how to coordinate this indication with the relevant provisions of EU Regulation N° 1060/2009; ii) inform clients on the existence of possible guarantee schemes to protect investors; iii) consider a narrative description to envisage the existence of the risk of insolvency of the issuer and of the respective mitigation measures where issuers are subject to prudential oversight, as already suggested under the DP and presented in Table 5.
As to the liquidity risk, we consider as appropriate the application of a qualitative type of measures, especially in view of the relevance of the countermeasures issuers may apply against illiquidity for products lacking active markets per se.
i) how should revenues presented by the manufacturer in the KID be aligned with revenues that take in consideration distribution costs as well;
ii) where costs for the provision of the investment advice do not refer to the single product but to the whole portfolio, how should such a cost be aligned?
- retail investors have difficulties in understanding them as evidenced in a recent consumer testing exercises launched by CONSOB in collaboration with University researchers and performed amongst Italian banks’ retail clients (to be published);
- the respect of the principle of the risk neutrality does not guarantee uniform results as it takes into account the quantification of a risk premium, based on a number of assumptions, all of them inevitably subjective. Even where a product with identical features is being issued by different issuers, each of them may use market data that due to a number of reasons (e.g. the different day of collection of data, etc.) result slightly different and show different final results;
- it is necessary to identify at EU level (a) model(s) for the estimation of expected returns of the product and/or the underlying assets so as to avoid any proliferation of subjective probabilistic models;
- associating a probability to a return would generate certain expectations in products’ end-users. Still, such an expectation should not be based on envisaged scenarios presented as the possible returns related to investment (so that one might run paradoxically in a situation where issuers of different “view” may offer similar products with different probabilistic distribution on returns).
Moreover, it must be recalled that CESR in its Technical Advice to the European Commission on the format and content of Key Information Document disclosures for UCITS* already examined two possible options for performance scenarios for structured UCITS as it follows:
“The work carried out by CESR in that respect envisaged two possible options for performance scenarios:
• Option A: prospective scenarios showing the return of the fund under favourable, adverse and average market conditions;
• Option B: tables showing the probability of certain defined events: achieving a negative return or achieving a positive return worse, equal to or better than the risk-free rate.
A large majority of respondents to the consultations expressed a preference for Option A, prospective scenarios. Many of the respondents that supported Option A expressed strong disagreement with Option B on the basis that it would be misinterpreted as a guarantee and that the reliance on risk-neutral probabilities in the methodology was flawed. Option A was retained by CESR in its final advice. “
In the same document (see page 22) CESR also stated “…considered carefully the merits and drawbacks of the two disclosure options for structured funds, as well as the comments made by respondents on each. Taking into account the support from a strong majority of respondents for Option A, prospective scenarios, CESR has confirmed this approach in its final advice. This choice is also based on the results of the Commission’s consumer testing exercise, which showed that prospective scenarios lead to a good level of understanding by investors.”
In light of the above considerations and in view of the ultimate goal to inform clients on a PRIIP’s characteristics and returns opportunities, including where compared to other PRIIPs, the adoption of the deterministic approach seems to be the best option in terms of:
- communicability (simplicity of information);
- uncertainties as to the estimation/calculation of the scenarios (it would be more appropriate indeed to identify common supranational scenarios/models that would lead to results that are much alike);
- clients’ expectations (not linked to specific returns on investments but rather based on the underlying assets’ behavior when markets go in one or in another direction).
With regard to some insurance products whose yield is strictly exposed not only to the fluctuations of the financial markets but also to fluctuations internal to the PRIIP manufacturer (e. g. insurance policies whose value increase due to the link to internal separate asset managed by the insurance manufacturer) we believe it is potentially misleading the adoption of simulating methodologies which would imply many specific assumptions necessarily divergent. For this kind of products it could be appropriate to represent historical performance associated alternatively to market measures for the same period.
Finally, we would like to stress out the importance to succeed in identifying common scenarios applicable at EU level, so as to guarantee uniform results in terms of returns on investments envisaged in the scenarios.
*) Dated 19 April 2010, Ref.: CESR/09-995.
- simplify the information provided to clients;
- offer a more immediate confrontation between the risks inherent to different products;
- ensure higher levels of conformity with clients’ risk profiling under MiFID where the methodologies for measurement used by the investment firm may be different with those set under the PRIIPs regulation;
- overcome the so called model risk, or that is to say the risk of obtaining different results for the same product due to the different models applied or the different parameterization of identical models;
- guarantee a major flexibility to the sector in defining risk models and their parameterization and with this reduce regulators’ obligations to determine in detail the models to be applied.
• for fixed term PRIIPs, the time horizon should meet the scheduled maturity date of the product. Where for the same PRIIP are envisaged different maturity options left to the discretion’s discretion, we ask to make clear whether it is possible to apply Art. 6 (3) of the Regulation;
• for PRIIPs without a fixed term, the time frame could coincide with the holding period necessary to compensate for the costs incurred by the investor as long as specific criteria aimed at ensuring the consistent behavior among clients are being codified. In alternative it is possible to indicate a maturity date aligned with the suggested time horizon to define autonomously by the issuer and in consideration of the different types of PRIIPs.
• require making assumptions (not related to the PRIIP) obscuring the analysis;
• make comparison very difficult due to the different cost structures of different types of PRIIPs.
In our view the information should be simple, engaging and understandable and the section covering costs should be balanced compare to other sections in the KID.
Furthermore, the presentation net of cost may combine too many hypotheticals and end up misleading consumers. We are in favour of presenting costs separately and not to include them in the performance scenarios.
It is worth noting that it may be appropriate to identify the number of possible scenarios depending on the different types of PRIIPs.
Further on, being the comparability of difficult representation in view of the PRIIPs diversity, it would be useful to adopt a common glossary.
As to the other products, we believe there are no other costs to add but it may be appropriate to consider the elimination of some of the costs listed in Table 12, as already noted in the answer to Q19.
For example, in the Italian market there are mixed insurance policies referable to Class I (Life insurance), which apart from the financial investment component offer demographic guarantees as well (e.g. in the event of the subscriber’s death the amount to be received by the beneficiary will be higher than the initial investment made). Such policies present additional costs depending on client’s age and insurance policy time of maturity). Apart from the insurance of Class I, those of Class III may contain as well a demographic coverage (e.g. a guarantee covering the minimum threshold value of the investment in case of a cashing-in and/or in the event of the investor’s death, independently from the fund shares market quotes).
In similar cases indeed, it would be appropriate to leave out the demographic coverage and disclose them separately instead so that to ensure consistency between costs and returns of the investment.
• the list of costs categories indicated in Table 12 (page 58-59) of the DP is overly detailed and of little contribution to retail investors’ level of comprehension of the PRIIPs. Furthermore, quantifying these costs would give rise to a number of practical issues;
• taking in consideration the fact that the KID aims at informing retail clients on costs they will incur to when investing in a PRIIP, contingent costs and charges borne by the manufacturer should remain out of KID’s scope.
- avoid the discretional choice by the issuers with regard to the revenues to be adopted in the index calculation ( Please refer to Q22 answer for more details);
- specify the criterions to adopt for the identification of the payments ( and possibly leaving to the issuers the freedom to identify a payment considerate as appropriate due to PRIIPs characteristics), of the duration and possible estimations referring to costs that could not be identified ex ante.
• academically speaking, integrating risks even partially is still considered controversial and implicates a series of difficult choices in terms of methodology to apply as they may lead to significantly different results for identical products;
• over or underestimation is an ever-present risk when informing or providing clients the service of advice, so that introducing an additional risk indicator may imply further assumptions in the attempt to guarantee the achievement of uniform results amongst all different manufacturers;
• benefits in terms of simplification and transparency, on the other hand, may result negligible. Unless the summary indicator is preferred to the separate risks representation, a combination of the two would rather end confusing instead of facilitating clients’ level of comprehension, by multiplying quantitative and qualitative information.
In line with the answers provided so far, to suggest the adoption of a combination of quantitative and qualitative indicators in view of the specific type of risk, we believe that it is preferable to give the three risks a separate representation, leaving at the same time “empty” those risk indicator fields that result irrelevant for the specific type of a PRIIP.
Final considerations. Should the credit spread risk be placed inside the market risk, and by this considered as such ( CDS and Swaps are listed and regularly exchanged on the markets, so that the relative implicit spreads vary on a daily basis and depend on market prices), and should at the same time be applied qualitative measures to the credit (only with reference to the default) and the liquidity risks, the client would find himself in front of only one quantitative type of measure (Market risk could be also presented by means of a qualitative scale. For further details, please refer to the answer to Q7) along with two qualitative ones, in a way that there would be no need for aggregating the three risks.
• ISIN code of financial instruments where available;
• The alphanumeric code (for the insurance policies);
• PRIIPs manufacturer’s internet site;
• Indication of the distribution period (window) or in case of a distribution on a continued basis, the date of its start.
On the contrary we do not agree that it would be appropriate to take the list of assets in Article 50 of UCITS Directive as a proxy for assets in which retail investors commonly invest.
Generally speaking, in our opinion it is preferable to identify the different types of PRIIPs in reference to the legal type the belong to ( e.g. security, structured deposit, funds). In this regard, it is necessary to clarify the category under which the derivatives should be inserted.
In view of the above, we agree that the summary information on the pay-off structure in the KID might be supported by a cross-reference to where more detailed information is provided (eg the Prospectus documentation or the contractual document).
In this regard and as indicated to ESMA in our reply to the Consultation Paper on the Technical Advice on MiFID II, focused on the target market identified by the manufacturer, we strongly highlight that in order to avoid confusion with the more detailed information to be given by distributors it is essential to recognize that the consumer type defined by the PRIIP manufacturer must be high level (based on a qualitative and generic description, not too detailed).
• insurance policies of Class I and Class III linked to term life expectancy (i.e. whole life insurances);
• certain types of mutual funds, typically open-ended funds which can issue and redeem shares/units at any time depending on clients’ request.);
• open-end certificates.
• the draft RTS contain specific clarifications, including examples;
• it is possible to integrate the information inserted in the KID with a cross-reference to the relevant section of the offering and/or contract documentation;
• it is further clarified whether it is possible to eliminate from the KID the information included in the Bail-in Regulations;
• specific indications are provided with relation to the case of the regulated derivative instruments.
On the contrary, it should be considered that similar “question” is irrelevant in the case of the asset management products (e.g. collective funds and unit-linked policies).
In this regard, it is necessary to outline that:
• “cooling-off/cancellation period” it should be intended as the period, defined by the PRIIP’s manufacturer, when the client has the right to disinvest without having to pay any penalties for redeeming a PRIIP and may refer to: i) an early exit (e.g. before the insurance policy maturity date); ii) contract termination in case of whole life insurances; iii) cancellation of mutual fund units on maturity of a scheme;
• providing information on the cooling-off period as may be agreed between parties goes beyond the purpose of the KID as it rather relates to the specific offer and distribution modalities (such as for example the cancellation rights in the door-to-door selling service) than to the product itself.
• the right of cancellation refers to only few types of PRIIPs.
These rights may be exercised - in compliance with the offering or contractual documentation - preliminary to the entry into force of the contract with the manufacturer and take in consideration the different national provisions of the countries where the product is marketed.
The information on the right of withdrawal, however, may be disclosed only where such a right is provided in the contract and represents a feature of the product itself ( as the case of the insurance products, for example);
• the definition of a minimum holding period is crucial and requires uniform regulation approach with regard to the assumptions build on the performed estimations and the assumptions pertaining to the performance scenarios and to the summary cost indicators.
In view of the above, it may be appropriate to include: i) a cross-reference to the offer and/or the contract documentation containing further details on the complaints procedure set up by the manufacturer; ii) the description of the procedure on the handling of complaints by intermediaries can be found in the contract stipulated between investor and distributor.
Such policies may present different structures and therefore a large scale of possible investment choices, to give some examples: i) policies that offer to investors several preset investment combinations in internal funds and/or matching with investments in internal separate asset managed by same insurance company; policies that offer to investors the faculty to select one or more internal collective funds managed by the same insurance company; iii) policies that offer to investors the faculty to select one or more collective funds established by third to the insurance companies entities (e.g. Asset Management Companies, SICAV).
Said that, we consider that the options offered by the insurance policies not with a view to the investment but to the final performance should fall out of the scope of application of Art. 6 (3). More in detail, reference is made to the faculty left at investors’ discretion at maturity date, to opt for a unique performance in capital account or in life annuity.
In view of the above, it is worth noting that it is not possible to cover in detail with just one KID all the information requested for each of the investment options envisaged in the unit-linked policy (or hybrid when referring to the life insurance contracts linked to investment funds and indices) and offered to clients and that is therefore necessary to search for possible alternative solutions.
At the present stage of considerations, we believe it is reasonable to limit the unit-linked KID to a general description of all considered options offered to the investor and to further to cross-refer to the offer and/or contractual documentation in order to represent in detail single options’ features. By choosing this setting for the KID, the attention will be transferred to the policy itself, considering that obtaining a detailed information on the underlying asset is only possible via the analytical documentation of the policy.
• offered on a continued basis, it is appropriate to foresee a periodical review of the information covered by the KID, as well as at event;
• characterized by a limited offer time, and in particular bonds and certificates, they are being concieved to maintain stable the contractual terms for the whole period of the contract. In view of the above: i) it seems appropriate to foresee the obligation of review at event only in the presence of a significant raise in the risk levels to be defined in accordance with the risk management measures as set out in the draft RTS and taking into account as well the information in the prospectus supplements and the information to be provided to the trading venues; ii) it is sufficient to give a proper evidence of the limited duration of the placement period and of the fact that the costs indicated in the KID are applicable only during this period.
Nevertheless, we consider essential that all events to trigger the review/revision/update of a KID must be codified. In order to be able to draft in detail such a regulation it is necessary to align the process of update with the one concerning the offering documentation.
i) where products costs variation occurs only after the placement period comes to an end and therefore such placement costs shall no longer be applicable, the KID should not be subject to an update. Negotiation costs indeed do not pertain to the product as such, but rather to the investment service performed by the investment firm in charge of the clients relationship and, therefore, such costs are irrelevant for the purposes of the KID;
ii) significant variations of the product riskiness should trigger the necessity of the KID’s update;
iii) variations in the daily market valuation fall out of the KID’s informative scope. They are reflected in the negotiations price trends rendered public by the single trading venues.
• provides an adequate level of investor protection, as the KID contains a clear indication of such a website and with this allows investors to follow any change in the document autonomously;
• necessitates some further arrangements aimed at ensure that: i)investment firms are immediately informed of any updates of the document performed by the PRIIPs manufacturers. In view of the above, specific arrangements may be needed within the placement agreements; ii) trading venues may themselves provide immediate updates of the KID for those PRIIPs negotiated on their own venues so as to facilitate investment firm in finding the most up-to-date version of the document, especially in cases firms are about to execute buying orders of PRIIPs not part of their own products catalogue.
2: Do you agree with the description of the consumer´s perspective on risk expressed in the Key Questions?
We do not foresee any contraindications in concentrating the information on main risks as proposed by the DP. Nevertheless and in order for investors to achieve further details and a better understanding of the different risks related to a specific type of PRIIP, we consider as appropriate the inclusion of a cross-reference to the respective section of the offering documentation within the section of the KID titled “What are the risks and what could I get in return?”Further on, we would like to recall the attention to the definition of liquidity risk as provided by the DP: “we would define the PRIIP´s liquidity risk as (i) the absence of a sufficiently active market on which the PRIIP can be traded or (ii) the absence of equivalent arrangements. Absence of these two aspects impacts the uncertainty about whether the PRIIP can be cashed-in during its life in a reasonable time and/or for its fair investment value”. It is worth noting that in Italy since CONSOB Notice No. 9019104, dated 2 March 2009 and the respective Industry’s Guidelines for the application of the CONSOB level 3 measures on the intermediary's duty of correct and transparent conduct in the distribution of illiquid financial products interested parties have been adopting specific arrangements in order to address situations where the absence of a sufficiently active market could jeopardize the liquidity of financial products. The existence of similar solutions allows to consider as liquid a financial product that is lacking the prerequisites otherwise recalled in this Discussion Paper.
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?
Generally speaking, we agree that market, credit and liquidity risks are the main risk factors retail clients must be informed of. Nevertheless, it is also true that they may impact differently the different types of PRIIPs. To give an example, credit risk is not to be considered when assessing risks inherent to the asset management products investing in multiple underlying assets (being the latter bonds, indexes or funds) or in relation to which the asset manager applies trading strategies implying the substitution of securities issued by undertakings with strongly deteriorated creditworthiness. The same concept should apply to structured deposits guaranteed by States and to the Class I life insurance policies.Similarly to the credit risk, liquidity risk may be of little impact to a specific product because of its intrinsic features.
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.
If, on the one hand, we recognize the major impact those three risks play, on the other hand as outlined here above, they do not necessarily relate in the same way with all different types of PRIIPs. Therefore, taking in consideration the PRIIPs’ diversity, a combination of quantitative and qualitative measures may be the best option for representing the overall risk to retail clients for the following reasons:- offer clients simpler and easier for comparison representation of the information on risks (qualitative approach);
- guarantee quantitative measurement, only in presence of a largely diffused and consolidated methodology practice in the sector (quantitative approach);
- overcome the limits of the quantitative measures that may not take in due consideration the specifics of the different issuers.
Further on, we propose the following treatment with regard to the three risks subject to discussion.
Adopt quantitative measures for the market risk assessment. Amongst such methodologies one of the most appropriate is the VAR (Value-at-risk) being the latter largely used in the sector to monitor both assets and clients related risks. Similar set-up will require the definition of assumptions concerning the calculation methodology of the risk indicator both in terms of historical data (cost of the PRIIP/inherent risk factors) and calculation periods. Similar approach may imply the necessity of a product repricing according to future scenarios for the risk estimation and consequently the use of pricing functions developed ad hoc. Finally, VAR may be preferred for the following reasons:
• it is prudentially wiser as it describes possible losses at a certain level of confidence;
• clients’ major difficulties in comprehension may be overcome by not directly providing information on numbers but instead by specifying different classes of risk (for further details please refer to the answer provided to Q7);
• VAR may be linked to volatility (and vice versa) by means of suitable model assumptions (e.g. The Square root rule) for those products ( e.g. funds) where volatility is the risk indicator actually applied.
Another appropriate methodology may be the Historical (ex post) volatility, which: i) could raise minor difficulties in the process of its implementation by issuers of small dimensions that often need to engage third parties for the pricing and the risks valuation even for those products they issue; ii) it is easily presented to and easily understood by clients.
We believe the rest of the methodologies proposed with this DP are difficult to elaborate by manufacturers and difficult to understand by retail clients.
With regard to the credit risk, it would be appropriate a qualitative measure. In this regard it could be appropriate to: i) consider indicating the Rating where available, despite the limitations such an indicator may also present. On this regard it could be useful to make clear, as well as envisaged by the same DP, how to coordinate this indication with the relevant provisions of EU Regulation N° 1060/2009; ii) inform clients on the existence of possible guarantee schemes to protect investors; iii) consider a narrative description to envisage the existence of the risk of insolvency of the issuer and of the respective mitigation measures where issuers are subject to prudential oversight, as already suggested under the DP and presented in Table 5.
As to the liquidity risk, we consider as appropriate the application of a qualitative type of measures, especially in view of the relevance of the countermeasures issuers may apply against illiquidity for products lacking active markets per se.
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?
Taken in consideration the fact that in accordance with the provision of Art. 8 (3) lett. f) of the PRIIPs Regulation, costs related to the provision of investment services to be applied by the product distributor must be specified only by the latter, in order to give the investor the possibility to understand the cumulative effect of such costs, we believe it is necessary to clarify:i) how should revenues presented by the manufacturer in the KID be aligned with revenues that take in consideration distribution costs as well;
ii) where costs for the provision of the investment advice do not refer to the single product but to the whole portfolio, how should such a cost be aligned?
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?
We believe that the most appropriate scenarios in terms of facilitating retail investors’ level of comprehension would be deterministic scenarios (what if scenarios). Probabilistic scenarios, in our opinion, should be avoided for the following reasons:- retail investors have difficulties in understanding them as evidenced in a recent consumer testing exercises launched by CONSOB in collaboration with University researchers and performed amongst Italian banks’ retail clients (to be published);
- the respect of the principle of the risk neutrality does not guarantee uniform results as it takes into account the quantification of a risk premium, based on a number of assumptions, all of them inevitably subjective. Even where a product with identical features is being issued by different issuers, each of them may use market data that due to a number of reasons (e.g. the different day of collection of data, etc.) result slightly different and show different final results;
- it is necessary to identify at EU level (a) model(s) for the estimation of expected returns of the product and/or the underlying assets so as to avoid any proliferation of subjective probabilistic models;
- associating a probability to a return would generate certain expectations in products’ end-users. Still, such an expectation should not be based on envisaged scenarios presented as the possible returns related to investment (so that one might run paradoxically in a situation where issuers of different “view” may offer similar products with different probabilistic distribution on returns).
Moreover, it must be recalled that CESR in its Technical Advice to the European Commission on the format and content of Key Information Document disclosures for UCITS* already examined two possible options for performance scenarios for structured UCITS as it follows:
“The work carried out by CESR in that respect envisaged two possible options for performance scenarios:
• Option A: prospective scenarios showing the return of the fund under favourable, adverse and average market conditions;
• Option B: tables showing the probability of certain defined events: achieving a negative return or achieving a positive return worse, equal to or better than the risk-free rate.
A large majority of respondents to the consultations expressed a preference for Option A, prospective scenarios. Many of the respondents that supported Option A expressed strong disagreement with Option B on the basis that it would be misinterpreted as a guarantee and that the reliance on risk-neutral probabilities in the methodology was flawed. Option A was retained by CESR in its final advice. “
In the same document (see page 22) CESR also stated “…considered carefully the merits and drawbacks of the two disclosure options for structured funds, as well as the comments made by respondents on each. Taking into account the support from a strong majority of respondents for Option A, prospective scenarios, CESR has confirmed this approach in its final advice. This choice is also based on the results of the Commission’s consumer testing exercise, which showed that prospective scenarios lead to a good level of understanding by investors.”
In light of the above considerations and in view of the ultimate goal to inform clients on a PRIIP’s characteristics and returns opportunities, including where compared to other PRIIPs, the adoption of the deterministic approach seems to be the best option in terms of:
- communicability (simplicity of information);
- uncertainties as to the estimation/calculation of the scenarios (it would be more appropriate indeed to identify common supranational scenarios/models that would lead to results that are much alike);
- clients’ expectations (not linked to specific returns on investments but rather based on the underlying assets’ behavior when markets go in one or in another direction).
With regard to some insurance products whose yield is strictly exposed not only to the fluctuations of the financial markets but also to fluctuations internal to the PRIIP manufacturer (e. g. insurance policies whose value increase due to the link to internal separate asset managed by the insurance manufacturer) we believe it is potentially misleading the adoption of simulating methodologies which would imply many specific assumptions necessarily divergent. For this kind of products it could be appropriate to represent historical performance associated alternatively to market measures for the same period.
Finally, we would like to stress out the importance to succeed in identifying common scenarios applicable at EU level, so as to guarantee uniform results in terms of returns on investments envisaged in the scenarios.
*) Dated 19 April 2010, Ref.: CESR/09-995.
7: How would you ensure a consistent approach across both firms and products were a modelling approach to be adopted?
In order to guarantee uniform output amongst different manufacturers in cases where quantitative type of information should be preferred, it would be appropriate to identify different classes of risk translatable into a qualitative scale (e.g. low, medium low, medium, medium high, high). In such a way, it would be possible to achieve the following results:- simplify the information provided to clients;
- offer a more immediate confrontation between the risks inherent to different products;
- ensure higher levels of conformity with clients’ risk profiling under MiFID where the methodologies for measurement used by the investment firm may be different with those set under the PRIIPs regulation;
- overcome the so called model risk, or that is to say the risk of obtaining different results for the same product due to the different models applied or the different parameterization of identical models;
- guarantee a major flexibility to the sector in defining risk models and their parameterization and with this reduce regulators’ obligations to determine in detail the models to be applied.
8: What time frames do you think would be appropriate for the performance scenarios?
Taking in due consideration existing divergence between PRIIPs including time horizons, we do not consider as feasible opting towards a time frame common to all types of PRIIPs. In view of the above, we would like to suggest the following time frame differentiation:• for fixed term PRIIPs, the time horizon should meet the scheduled maturity date of the product. Where for the same PRIIP are envisaged different maturity options left to the discretion’s discretion, we ask to make clear whether it is possible to apply Art. 6 (3) of the Regulation;
• for PRIIPs without a fixed term, the time frame could coincide with the holding period necessary to compensate for the costs incurred by the investor as long as specific criteria aimed at ensuring the consistent behavior among clients are being codified. In alternative it is possible to indicate a maturity date aligned with the suggested time horizon to define autonomously by the issuer and in consideration of the different types of PRIIPs.
9: Do you think that performance scenarios should include absolute figures, monetary amounts or percentages or a combination of these?
In our view, percentages are easier to compare (annual percentages facilitate comparison among products with different time frames and holding periods) because they have no units; which means less assumptions (amount invested, investment currency, etc.).10: Are you aware of any practical issues that might arise with performance scenarios presented net of costs?
We believe that it is preferable to avoid presenting performance net of costs because this approach would:• require making assumptions (not related to the PRIIP) obscuring the analysis;
• make comparison very difficult due to the different cost structures of different types of PRIIPs.
In our view the information should be simple, engaging and understandable and the section covering costs should be balanced compare to other sections in the KID.
Furthermore, the presentation net of cost may combine too many hypotheticals and end up misleading consumers. We are in favour of presenting costs separately and not to include them in the performance scenarios.
11: Do you have any preferences in terms of the number or range of scenarios presented? Please explain.
We consider it is appropriate to establish different scenarios (at least three) based on rules on standardization and conformity capable of ensuring an adequate level of representativeness of the deterministic performance model.It is worth noting that it may be appropriate to identify the number of possible scenarios depending on the different types of PRIIPs.
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.
In our view it is preferable to represent the risk level of a PRIIP in qualitative terms, i.e. by identifying a scale of possible qualitative risk levels (e.g. low, medium low, medium, medium high, high) so as to avoid the use of different colors (color print copies may not be easily available to some branches of the intermediary). By applying standard methodologies to analytically identify different risk levels in the KID, such a presentation should facilitate retail investors’ level of comprehension and comparability of the PRIIPs, as well as the adequate risk measurement (if need be, differentiated by typologies of PRIIPs).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.
In our opinion the first scenario representation in the Table on page 41 could be easily understood by retail clients.14: Do you have any views on possible combinations of a summary risk indicator with performance scenarios?
Deterministic performance scenarios seem little appropriate for combining with summary risk indicators. Therefore, each deterministic scenario may be accompanied by a risk indicator.15: Do you agree with the description of the consumer´s perspective on costs expressed in the Key Questions?
In our view key question No 8 concerning the cost comparability amongst different PRIIPs should not find its answer inside the KID of the single PRIIP, taking in consideration the difficulties and vulnerabilities any approach may entail, but rather should be the result of the simple comparison between the KIDs of the different PRIIPs.Further on, being the comparability of difficult representation in view of the PRIIPs diversity, it would be useful to adopt a common glossary.
16: What are the main challenges you see in achieving a level-playing field in cost disclosures, and how would you address them?
Reference is made to Table 11 on page 54 of the DP concerning the insurance-based investment products. We retain it is necessary to further clarify the meaning of “costs for managing the insurance cover” as it seems to us that this section does not apply to any category of the indicated insurance products.As to the other products, we believe there are no other costs to add but it may be appropriate to consider the elimination of some of the costs listed in Table 12, as already noted in the answer to Q19.
18: 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?
Depending on products different nature, the PRIIPs cost structure may differ significantly as well. Therefore, it appears problematic adopting a standard approach that would cover all differences.For example, in the Italian market there are mixed insurance policies referable to Class I (Life insurance), which apart from the financial investment component offer demographic guarantees as well (e.g. in the event of the subscriber’s death the amount to be received by the beneficiary will be higher than the initial investment made). Such policies present additional costs depending on client’s age and insurance policy time of maturity). Apart from the insurance of Class I, those of Class III may contain as well a demographic coverage (e.g. a guarantee covering the minimum threshold value of the investment in case of a cashing-in and/or in the event of the investor’s death, independently from the fund shares market quotes).
In similar cases indeed, it would be appropriate to leave out the demographic coverage and disclose them separately instead so that to ensure consistency between costs and returns of the investment.
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.
Willing to give our contribution in identifying appropriate solutions for the setting up of the costs disclosure in the KID, we consider it is of primary importance to outline the following facts:• the list of costs categories indicated in Table 12 (page 58-59) of the DP is overly detailed and of little contribution to retail investors’ level of comprehension of the PRIIPs. Furthermore, quantifying these costs would give rise to a number of practical issues;
• taking in consideration the fact that the KID aims at informing retail clients on costs they will incur to when investing in a PRIIP, contingent costs and charges borne by the manufacturer should remain out of KID’s scope.
20: Do you agree that a RIY or similar calculation method might be used for preparing ‘total aggregate cost’ figures?
In case the RYI method is to be applied, it is necessary to:- avoid the discretional choice by the issuers with regard to the revenues to be adopted in the index calculation ( Please refer to Q22 answer for more details);
- specify the criterions to adopt for the identification of the payments ( and possibly leaving to the issuers the freedom to identify a payment considerate as appropriate due to PRIIPs characteristics), of the duration and possible estimations referring to costs that could not be identified ex ante.
21: Are you aware of any other calculation methodologies for costs that should be considered by the ESAs?
It is of primary importance to ensure full consistency between the assumptions on which a calculation methodology is based and costs representation, and the assumptions on which a calculation methodology is based and a risk/reward representation22: 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?
See answer to Q2123: 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?
In order to provide efficient information, we believe portfolio negotiation costs should be excluded.24: Do you have any views on possible assumptions that should be made, and how these might be calibrated or set?
As already noted under Q16, we reaffirm our opinion that it is difficult to achieve a level of standardization in illustrating the costs of the different PRIIPs taking in consideration costs different structure for all different types of products. Therefore, we believe it is more appropriate to give a preference to the correct identification of costs to be beared by the investor for the different types of PRIIPs so as to better valuate to what extent it is possible to standardize costs disclosure and to what extent, on the contrary, it is necessary to foresee alternative solutions.25: 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?
We consider that the option 2 representation could be easily understood by retail clients.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.
We consider it is necessary to clarify how should exit costs be treated in occasion of a disinvestment. In particular, we ask: i) whether it is possible to insert a warning to retail clients for the cases where such costs don’t impact on the performance as the considered time horizon doesn’t foresee the application of these costs; ii) how would it be possible to represent such costs, based only on estimations, where the scenarios don’t include the application of performance fees.27: 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?
In this line of thoughts, taking in consideration PRIIPs diversity and a quantitative/qualitative risks measurement, we advise against the integration of the three risks for the following reasons:• academically speaking, integrating risks even partially is still considered controversial and implicates a series of difficult choices in terms of methodology to apply as they may lead to significantly different results for identical products;
• over or underestimation is an ever-present risk when informing or providing clients the service of advice, so that introducing an additional risk indicator may imply further assumptions in the attempt to guarantee the achievement of uniform results amongst all different manufacturers;
• benefits in terms of simplification and transparency, on the other hand, may result negligible. Unless the summary indicator is preferred to the separate risks representation, a combination of the two would rather end confusing instead of facilitating clients’ level of comprehension, by multiplying quantitative and qualitative information.
In line with the answers provided so far, to suggest the adoption of a combination of quantitative and qualitative indicators in view of the specific type of risk, we believe that it is preferable to give the three risks a separate representation, leaving at the same time “empty” those risk indicator fields that result irrelevant for the specific type of a PRIIP.
Final considerations. Should the credit spread risk be placed inside the market risk, and by this considered as such ( CDS and Swaps are listed and regularly exchanged on the markets, so that the relative implicit spreads vary on a daily basis and depend on market prices), and should at the same time be applied qualitative measures to the credit (only with reference to the default) and the liquidity risks, the client would find himself in front of only one quantitative type of measure (Market risk could be also presented by means of a qualitative scale. For further details, please refer to the answer to Q7) along with two qualitative ones, in a way that there would be no need for aggregating the three risks.
28: How do you think contingent costs should be addressed when showing total aggregated costs?
See answer to Q2829: How do you think should cumulative costs be shown?
See answer to Q1830: Do you have any views on the identity information that should be included?
In our view it is important to include the following information:• ISIN code of financial instruments where available;
• The alphanumeric code (for the insurance policies);
• PRIIPs manufacturer’s internet site;
• Indication of the distribution period (window) or in case of a distribution on a continued basis, the date of its start.
31: Do you consider that the criteria set out in recital 18 are sufficiently clear, or would you see some merit in ESAs clarifying them further?
Despite the information provided to clients with the KID, PRIIPs Regulation allows neither to identify with certainty all the products that fall within its scope nor those PRIIPs that fit the definition of “difficult to understand” for retail investors. Said that, and in order to ensure uniform application at EU level, it is important that the ESAs provide in the draft RTS some clarifications on the correct interpretation of Recital 18 of the PRIIPs Regulation, taking in due consideration the instructions provided by ESMA in its Opinion on “MiFID practices for firms selling complex products”, where such instructions must be rectified from one side, by excluding from the list complex products not falling within the definition of a PRIIP and on the other hand, by including considerations regarding the insurance products.On the contrary we do not agree that it would be appropriate to take the list of assets in Article 50 of UCITS Directive as a proxy for assets in which retail investors commonly invest.
32: Do you agree that principles on how a PRIIP might be assigned a ‘type’ will be needed, and do you have views on how these might be set?
In order to ensure uniform application of the Regulation at EU level with regard to this “crucial piece of information”, ABI considers it is indispensable that the ESAs provide in the draft RTS useful clarifications such that would allow a better identification of the specific products and types of products to fall within the definition of a PRIIP.Generally speaking, in our opinion it is preferable to identify the different types of PRIIPs in reference to the legal type the belong to ( e.g. security, structured deposit, funds). In this regard, it is necessary to clarify the category under which the derivatives should be inserted.
33: Are you aware of classifications other than by legal type that you think should be considered?
See answer to Q3234: Do you agree that general principles and as necessary prescribed statements might be needed for completing this section of the KID?
In order to ensure uniform application of the Regulation at EU level with regard to another “crucial piece of information” of the KID in need of further specification, ABI considers it is indispensable that the ESAs provide in the context of the draft RTS clarifications aimed at homogenizing the criteria that illustrate the investment objective of each PRIIP and the specific measures adopted in order to achieve them.In view of the above, we agree that the summary information on the pay-off structure in the KID might be supported by a cross-reference to where more detailed information is provided (eg the Prospectus documentation or the contractual document).
35: Are you aware of other measures that might be taken to improve the quality of the section from the perspective of the retail investor?
See answer to Q3436: Do you have views on the information PRIIPs manufacturers should provide on consumer types?
We recall the attention on the sensitive nature of the act of defining a client’s pertinence to one or another customer type and the importance of finding the right balance between the relevant allocation given by the PRIIP’s manufacturer and the MiFID obligations all investment intermediaries must comply with when performing clients’ profiling or the suitability assessment.In this regard and as indicated to ESMA in our reply to the Consultation Paper on the Technical Advice on MiFID II, focused on the target market identified by the manufacturer, we strongly highlight that in order to avoid confusion with the more detailed information to be given by distributors it is essential to recognize that the consumer type defined by the PRIIP manufacturer must be high level (based on a qualitative and generic description, not too detailed).
37: What is the key information that needs to be given to the retail investor on insurance benefits, and how should this be presented?
We believe it is appropriate to give a brief qualitative representation of insurance benefits: e.g. description of the guarantee with a cross-reference to the relevant sections of the contract documentation, making sure at the same time that such a description is complete, simple and easy to understand. In this regard, it may be useful that the draft RTS provide some clarifications on the criteria to be applied when drawing up such information, including examples, especially for the most common features.38: Are you aware of PRIIPs where the term may not be readily described, or where there are other issues?
In ABI’s view the types of PRIIPs to present difficulties in readily describing the term are the following:• insurance policies of Class I and Class III linked to term life expectancy (i.e. whole life insurances);
• certain types of mutual funds, typically open-ended funds which can issue and redeem shares/units at any time depending on clients’ request.);
• open-end certificates.
39: Are you aware of specific challenges arising for specific PRIIPs in completing this section?
In order to be able to render the information pertaining to this section of the KID concise, clear and at the same time sufficiently detailed, it is indispensable that:• the draft RTS contain specific clarifications, including examples;
• it is possible to integrate the information inserted in the KID with a cross-reference to the relevant section of the offering and/or contract documentation;
• it is further clarified whether it is possible to eliminate from the KID the information included in the Bail-in Regulations;
• specific indications are provided with relation to the case of the regulated derivative instruments.
On the contrary, it should be considered that similar “question” is irrelevant in the case of the asset management products (e.g. collective funds and unit-linked policies).
40: Are you aware of specific challenges arising for specific PRIIPs in completing this section?
In ABI’s view it is indispensable that the draft RTS clarify the range of the information to be provided under this section of the KID and ensure at the same time the provision of uniform criteria aimed at defining the respective content of such information.In this regard, it is necessary to outline that:
• “cooling-off/cancellation period” it should be intended as the period, defined by the PRIIP’s manufacturer, when the client has the right to disinvest without having to pay any penalties for redeeming a PRIIP and may refer to: i) an early exit (e.g. before the insurance policy maturity date); ii) contract termination in case of whole life insurances; iii) cancellation of mutual fund units on maturity of a scheme;
• providing information on the cooling-off period as may be agreed between parties goes beyond the purpose of the KID as it rather relates to the specific offer and distribution modalities (such as for example the cancellation rights in the door-to-door selling service) than to the product itself.
• the right of cancellation refers to only few types of PRIIPs.
These rights may be exercised - in compliance with the offering or contractual documentation - preliminary to the entry into force of the contract with the manufacturer and take in consideration the different national provisions of the countries where the product is marketed.
The information on the right of withdrawal, however, may be disclosed only where such a right is provided in the contract and represents a feature of the product itself ( as the case of the insurance products, for example);
• the definition of a minimum holding period is crucial and requires uniform regulation approach with regard to the assumptions build on the performed estimations and the assumptions pertaining to the performance scenarios and to the summary cost indicators.
41: Are you aware of specific challenges arising for specific PRIIPs in completing this section?
In our view it is of primary importance that this section of the KID preliminary specifies that complaints regarding products features or the KID content must address the manufacturer while complaints on selling the distributor.In view of the above, it may be appropriate to include: i) a cross-reference to the offer and/or the contract documentation containing further details on the complaints procedure set up by the manufacturer; ii) the description of the procedure on the handling of complaints by intermediaries can be found in the contract stipulated between investor and distributor.
42: Do you agree that this section should link to a webpage of the manufacturer?
In our view beside a link to the PRIIP manufacturer’s website, this section should also contain a list of the documents not subject to a compulsory publication on the internet site, but which the investor is entitled to request free of charge.43: Do you agree with the assessment of when PRIIPs might be concerned by article 6(3)?
In the Italian market, the products subject to Art. 6 (3) are unit-linked contracts and the so called hybrid life-insurance contracts (life insurance policies based both on Class I and on Class III). These are in fact the products offering different investment options which choice is left at clients’ discretion.Such policies may present different structures and therefore a large scale of possible investment choices, to give some examples: i) policies that offer to investors several preset investment combinations in internal funds and/or matching with investments in internal separate asset managed by same insurance company; policies that offer to investors the faculty to select one or more internal collective funds managed by the same insurance company; iii) policies that offer to investors the faculty to select one or more collective funds established by third to the insurance companies entities (e.g. Asset Management Companies, SICAV).
Said that, we consider that the options offered by the insurance policies not with a view to the investment but to the final performance should fall out of the scope of application of Art. 6 (3). More in detail, reference is made to the faculty left at investors’ discretion at maturity date, to opt for a unique performance in capital account or in life annuity.
44: In your market, taking into account the list of criteria in the above section, what products would be concerned by article 6(2a)? What market share do these represent?
See answer to Q4345: Please provide sufficient information about these products to illustrate why they would be concerned?
See answer to Q4346: Do you have views on how you think the KID should be adapted for article 6(3) products, taking into account the options outlined by the ESAs?
In order to properly address the subject matter, it is necessary at the same time to remain fully aware of the difficulty in identifying a solution that is able to reconcile KID’s typical features (i.e. clear, simple, concise and at the same time sufficiently exhaustive in representing the essential elements of a certain product) with the unit-linked multiple option policies’ characteristics, taking in consideration that the choice left to the investor’s discretion is to be made amongst as many different products as are the options envisaged by the insurance policy which features don’t consist of those of the fund separately considered, but of its entry into the fund through the policy.In view of the above, it is worth noting that it is not possible to cover in detail with just one KID all the information requested for each of the investment options envisaged in the unit-linked policy (or hybrid when referring to the life insurance contracts linked to investment funds and indices) and offered to clients and that is therefore necessary to search for possible alternative solutions.
At the present stage of considerations, we believe it is reasonable to limit the unit-linked KID to a general description of all considered options offered to the investor and to further to cross-refer to the offer and/or contractual documentation in order to represent in detail single options’ features. By choosing this setting for the KID, the attention will be transferred to the policy itself, considering that obtaining a detailed information on the underlying asset is only possible via the analytical documentation of the policy.
47: How do you consider that the product manufacturer should meet the requirements to describe and detail the investment options available?
See answer to Q4648: Are you aware of further challenges that should be taken into account?
See answer to Q4649: Do you agree with the measures outlined for periodic review, revision and republication of the KID where ‘material’ changes are found?
Rules on keeping the KID up-to-date should be differenciated taking in consideration some significant divergencies between the PRIIP types. In particular, for PRIIPs:• offered on a continued basis, it is appropriate to foresee a periodical review of the information covered by the KID, as well as at event;
• characterized by a limited offer time, and in particular bonds and certificates, they are being concieved to maintain stable the contractual terms for the whole period of the contract. In view of the above: i) it seems appropriate to foresee the obligation of review at event only in the presence of a significant raise in the risk levels to be defined in accordance with the risk management measures as set out in the draft RTS and taking into account as well the information in the prospectus supplements and the information to be provided to the trading venues; ii) it is sufficient to give a proper evidence of the limited duration of the placement period and of the fact that the costs indicated in the KID are applicable only during this period.
Nevertheless, we consider essential that all events to trigger the review/revision/update of a KID must be codified. In order to be able to draft in detail such a regulation it is necessary to align the process of update with the one concerning the offering documentation.
50: Where a PRIIP is being sold or traded on a secondary market, do you foresee particular challenges in keeping the KID up-to-date?
With a view to the pre-contractual nature of the KID, we retain that the update of such a document when referring to PRIIPs negotiated on the secondary market should be regulated in a way that parts that are subject to update when the product is placed on the secondary market have been taken in due consideration in the initial phase of drafting of the KID ( i.e. intended to be offered on the primary market). Therefore, we would like to repropose our considerations under Q49 with regard to the PRIIPs with a limited offer period and further specifying that:i) where products costs variation occurs only after the placement period comes to an end and therefore such placement costs shall no longer be applicable, the KID should not be subject to an update. Negotiation costs indeed do not pertain to the product as such, but rather to the investment service performed by the investment firm in charge of the clients relationship and, therefore, such costs are irrelevant for the purposes of the KID;
ii) significant variations of the product riskiness should trigger the necessity of the KID’s update;
iii) variations in the daily market valuation fall out of the KID’s informative scope. They are reflected in the negotiations price trends rendered public by the single trading venues.
51: Where a PRIIP is offering a wide range of investment options, do you foresee any particular challenges in keeping the KID up-to-date?
As anticipated in the answers under Q46-Q48, keeping up-to-date a KID of PRIIPs that offer a wide range of investment options presents major or minor difficulties depending on the legislative approach to be adopted.52: Are there circumstances where an active communication model should be provided?
Being the KID a pre-contractual document, its review will concern investors that may acquire the product in the course of the product lifecycle. We consider that PRIIPs manufacturer’s obligation to publish on its website an up-to-date version of the document:• provides an adequate level of investor protection, as the KID contains a clear indication of such a website and with this allows investors to follow any change in the document autonomously;
• necessitates some further arrangements aimed at ensure that: i)investment firms are immediately informed of any updates of the document performed by the PRIIPs manufacturers. In view of the above, specific arrangements may be needed within the placement agreements; ii) trading venues may themselves provide immediate updates of the KID for those PRIIPs negotiated on their own venues so as to facilitate investment firm in finding the most up-to-date version of the document, especially in cases firms are about to execute buying orders of PRIIPs not part of their own products catalogue.