The key information documents (Kids) associated with packaged retail and insurance-based investment products (Priips) look set to end up on the scrapheap following concerns they are misleading.
HM Treasury’s Priips and UK Retail Disclosure Consultation said the Kids that must accompany the products were “unnecessarily prescriptive measures that led to information being presented to investors in unhelpful or, worse, misleading ways”.
The Priips legislation, which was transposed into UK law after Brexit, mandates that a Kid must contain specified information, such as the contents of the Priip, its potential risks and returns, the length of time for which it should be held, and more.
The regulation was also criticised for the “highly problematic” production and presentation of performance scenarios and summary risk indicators. The government’s review suggested, in the case of some products, this was actively misleading to prospective investors.
The Kids were designed to provide information in a concise and uniform manner, but the recent government review has found that their prescriptive format can restrict firms’ ability to tailor disclosure to their clients.
The review added: “There was a clear risk of harm to investors due to overly optimistic or otherwise biased performance scenarios. Generic indications of risk also suggested that some products were lower risk than they should reasonably be considered to be. In this particular case, because of the high potential for harm, urgent action was needed.”
Ucits are also required to produce their own form of informative document, called a key investor information document (Kiid). They are distinct, but not dissimilar, to a Priips Kid. Ucits were supposed to transition to providing the same disclosure methods as Priips, but were exempted from doing so until 31 December 2021. This was extended to the same date in 2026.
The Treasury report stated that Ucits and Priips rules can apply to very similar products in the retail investment market, therefore it would not be appropriate for different disclosure regimes to govern the two vehicles in the long term.
It added: “While the Ucits Kiid has been less widely criticised than the Priips Kid, it remains a prescriptive format that can restrict firms’ ability to tailor disclosure to their clients.”
Consequently, the Financial Conduct Authority has been tasked with integrating Ucits and Priips disclosure into a coherent UK retail disclosure framework before the 2026 exemption end date.
Priips regulation will be revoked once the Financial Services and Markets Bill, which is currently in the House of Lords, gains royal assent.
The move has been well received.
Richard Stone, CEO of the Association of Investment Companies (AIC), said that the investment company industry “breathed a collective sigh of relief” upon seeing the proposed abolition of the regulation.
“We have lobbied long and hard for the abolition of Kids, which dangerously mislead investment company investors. We applaud the abolition of Priips and will be arguing for a disclosure regime which helps investors make better investment decisions and puts investment companies and open-ended funds on a level playing field. The FCA should act swiftly to sweep away the confusing mishmash of disclosures and put in place a fair and transparent framework.”
Anne Fairweather, head of government affairs and public policy at Hargreaves Lansdown, agreed the review of Priips and retail disclosures was welcome: “The Treasury is looking to take a more proportional approach which should be linked to the FCA’s new consumer duty. The future regime should challenge firms to improve clients’ decision making and drive better outcomes rather than swamping them with paper.
“Retail investors are significant shareholders in UK listed companies yet consistently get frozen out when companies raise more capital or when new companies list. Changes to the prospectus regime should focus on levelling the playing field for retail investors and remove unnecessary hurdles from their participation in these investment opportunities.”
Steven Cameron, pensions director at Aegon, concurred, adding that the Priips disclosures are not fit for purpose. “We agree that it should be for the FCA to determine an appropriate disclosure regime, tailored to help UK retail investors understand and pick between retail investment funds. The FCA already sets out many detailed disclosure requirements for other products such as pensions. In addition, from next July, the new consumer duty will require firms to focus on delivering good outcomes to retail customers, with the ‘consumer understanding’ outcome covering all forms of communication.
“While the Treasury consultation surprisingly doesn’t mention the new consumer duty, the FCA will no doubt wish to design the replacement for Priips disclosures in a manner consistent with this.”
See Also: Ben Goss: The call of (consumer) duty
