AMAFI - 20-74 - ESAs' amendments to the PRIIPs KID - AMAFI DDV afpdb Common Position Paper

AMAFI / DDV / AFPDB

9 December 2020

AMAFI/DDV/AFPDB POSITION PAPER REGARDING THE

AMENDMENTS TO THE PRIIPS KID AS

PROPOSED BY THE DRAFT FINAL ESA REPORT (AS REJECTED)1

EXECUTIVE SUMMARY

According to the "Draft Final Report following consultation on draft regulatory technical standards to amend the PRIIPs KID", a variety of amendments to the existing PRIIPs RTS ("RTS V1").2 were proposed, but the adoption failed at the level of the ESAs. The report includes the proposed butrejected RTS (the "RTS V2").3

We all share the goal to improve the PRIIPs KID to make it more understandable, comparable and toallow retail investors to make an informed choice between different financial products.

In the following analysis, which is based on our respective members' feedback, AMAFI, DDV andAFPDB wish to highlight the issues that would emerge should these RTS V2 be implemented.

Summary of AMAFI/DDV/AFPDB's main issues identified in RTS V2

The main issues arising from the RTS V2 are leading to a reduced comparability between products under the PRIIPs Regulation4 as well as inconsistent results for autocallables products. Several amendments are not enhancing the KID for retail investors and therefore do not improve, nor do theyadd value by changing the existing regime.

AMAFI/DDV/AFPDB outline the main problematic issues identified in RTS V2 as follows:

1. https://www.esma.europa.eu/sites/default/files/library/jc_2020_66_priips_rts_draft_final_report.pdf(JC 2020 66)
2. Commission Delegated Regulation (EU) 2017/653 of 8 March 2017 on key information documents (KID) for packaged retail and insurance-based investment products (PRIIPs).
3. Draft regulatory technical standards (RTS) of the PRIIPs KID to amend Delegated Regulation (EU) 2017/653
   ("PRIIPs Delegated Regulation") following the ESAs' Consultation launched on 16 October 2019 (contained in the draft Final Report following this public consultation - JC 2020 66, p. 51 to 108).
4. Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) (PRIIPs Regulation).

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9 December 2020

1. Performance scenarios
2. • Discretionary component to the performance scenario calculation
   • Specific performance scenarios for autocallable products leading to inconsistent and confusing results
   • A new performance scenario: the "Minimum scenario"
   • Fundamental flows in changes of the Intermediate Holding Period scenario calculation for Category 3 PRIIPs leading to inconsistent and confusing results
   • Lack of mitigation of pro-cyclicality for Category 3 PRIIPs
   • Information overload under performance scenarios
3. Presentation of costs
4. • Specific costs presentation for autocallable products leading to inconsistent and confusing results
   • Not a full alignment of costs with MiFID II
   • Narratives (without prescriptive wording) for presentation of costs
   • Limitation of characters regarding the presentation of costs (composition and scaling)
5. Summary Risk Indicator
6. • Discretionary increase of risk class and other compensatory measures
7. Further Issues
8. • New narratives to highlight new distribution schemes
   • Lack of a comprehensive consultation with the industry on the proposed changes
   • Lack of a comprehensive consumer testing
   • Uncertainty of scope

However, we welcome some of the changes regarding the presentation of costs, which seem moreunderstandable for end investors, and better aligned with MiFID, except for autocallable products.

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AMAFI / DDV / AFPDB

9 December 2020

Introduction

German and French markets

Many of the proposed changes relate to autocallable products (also referred to as "Autocallables"), which make up for a market volume in Germany of 29 % in Q3 2020 representing in AUM around 17.5 billion euros.5 As a result, any changes which worsen the current status quo should be under particular scrutiny.

For the French Market, structured products represent about 25 up to 40 billion euros of issued notional of products (annual average) where about 80% are autocallables products. It is worth mentioning that autocallable product is the number one asset among structured products packaged in insurance life contracts for retail investors.

Considering the typology of their members, the developments formulated below by AMAFI/DDV/AFPDB concern mainly structured products (Category 3 PRIIPs).

General remarks

The main issues arising from the RTS V2 as explained in more detail below are leading to a reduced comparability between products under the PRIIPs Regulation, as well as inconsistent results for autocallables products. Several amendments are not enhancing the KID for retail investors and therefore do not improve, nor do they add value by changing the existing regime. This includes technical processes that are in place, which are well established and understood by distributors, advisors and investors.

RTS V2 proposals provide partial solutions while simultaneously creating new issues by changing specifications that are overall working well at present, but which in turn would need to be addressed again at a later stage. Therefore, the RTS V2 proposals would result in gradual and multiple implementation stages, which should clearly be avoided since it raises regulatory uncertainty and a lack of stability.

AMAFI/DDV/AFPDB wish to outline that most of the changes in the KID implied by RTS V2 have not been accompanied by sufficient consumer testing. This lack of a comprehensive all-encompassingconsumer testing does not lend itself to form the basis of a thorough review and to address all the existing shortcomings in the current regime. Furthermore, most of the changes - and the most problematic ones - have not been genuinely discussed with industry representatives nor presented in the previous consultation papers of the ESAs. Given those very detrimental impacts for our industry, we would like to stress this lack of concertation.

The introduction of a discretionary element in relation to various aspects (e.g. the summary risk indicator) creates a significant source for potential divergences of PRIIPs KIDs due to subjective views and assessments of different manufacturers. It also renders products less comparable and creates an additional source of inconsistency. The use of discretion could also increase the potential liability for the issuer.

https://www.derivateverband.de/DE/MediaLibrary/Document/Statistics/20%2011%2013%20DDV%20Marktvolume

n%20September%202020.pdf

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9 December 2020

Generally, the requirement to provide further information under the performance scenarios with the aim to enhance comprehensibility of KIDs seems counterproductive as more explanation will result in more confusion for retail investors and hence even less transparency. This in turn will have a negative impact on the comprehensibility - a counter effect to the intention - and investors' confidence in these products.

For structured products, technically, the set-ups for KIDs under the RTS V1 are based on very heavy IT workflows due to much larger volumes than in other industries. Many members are issuing up to several hundred thousand of exchange-traded products each year. Changes implied by RTS V2 - as set out in more detail below - will inevitably lead to technical difficulties for market participants as well as implementation issues for issuers/PRIIPs manufacturers and the financial market.

AMAFI/DDV/AFPDB wish to take the opportunity to provide detailed comments on the main topics presented in the last final proposals of RTS V2.

ISSUES RAISED BY THE RTS V2

• Presentation and content of Performance Scenarios

1. Intermediate Holding Period ("IHP") for Category 3

RTS Annex IV, paragraph 37, states that:

"For PRIIPs as referred to in points 15 and 29 of this Annex, Category 3 PRIIPs and Category 4 PRIIPs, unless point 38 of this Annex applies, the scenario values to be shown for the intermediate holding period shall be estimated by the PRIIP manufacturer in a manner consistent with the estimation at the end of the recommended holding period."

As we understand it, this modification means that the scenarios selected for IHPs should be the ones leading to the scenario shown at the recommended holding period (RHP), which would cause highly inconsistent intermediate performance scenarios for all Category 3 PRIIPs. This item is among the most problematic, specifically for Autocallables6.

To illustrate this problem, see the below example of a 5-years EUR denominated Autocallable with annual observations. In case the S&P 500® price index performance is increased at an annual observation date (compared to where it was at the launch of the product) the autocall product matures repaying full capital (100%) plus 7% coupon for each year elapsed since launch. At maturity (i.e. RHP of 5 years), if the product did not autocall early, there are 3 scenarios:

• If the index is equal or above its initial level (where it was at the launch of the product) - it will repay full capital plus 7% coupon for each of the 5 years.

6 The issue is explained in an example in an article written in July 2020 by A. Leibowitz (Performance Scenarios for Autocallables, written by Ayal Leibowitz, LPA - link).

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