Saturday, 3 February 2018

The Financial Conduct Authority comes in for Criticism: What Does PRIIPS Regulation Tell Us about the FCA’s Focus on Consumer Protection?

In today’s post we will be looking at some stinging criticism that was aimed at the Financial Conduct Authority recently, specifically in relation to its regulation of Packaged Retail and Insurance-Based Investment Products, or PRIIPs. In assessing the context behind the criticism, there exists an opportunity to examine the focus of the FCA in relation to its stated mandate of aiming to ‘make financial markets work well do that consumers get a fair deal’.

A PRIIP is essentially a packaged investment product, and it is a common investment product provided by banks within the E.U. as it offers retail investors an alternative to traditional savings accounts; however, the determination of what constitutes a PRIIP has been intentionally left broad to allow for a range of products to be traded, but for our purposes it is enough to say that the products are publicly marketed, have exposure to underlying assets like stocks and bonds etc., provide a return over time, and have an element of risk contained within them. This umbrella term, designed by the European Commission to make clear that the products caught within it are different to products like investments within pension schemes, direct investments (in companies or sovereign bonds etc.), and investment products for professional (sophisticated) investors, was recently backed-up by a specific set of regulations that was adopted by member states on the 1st of January 2018; it is this regulation, and its implementation, that has proved to be contentious.

When a PRIIP manufacturer develops and promotes its product, it must accompany the product with certain pieces of information, according to the regulations, so that investors have the right amount of knowledge with which to make their decision; this information is included in the ‘key information document’, or ‘KID’. The KID, which can be no longer than 3 pages, has a number of legislatively enforced aims including the requirement to detail risks, performance scenarios, costs, and ultimately must be ‘accurate, fair, clear and not misleading’. However, a number of industry participants raised strong objections to some of the performance scenarios contained within certain PRIIPs manufacturer’s KIDs, with the argument being that they appear far too optimistic and, as such, are misleading to retail investors; some PRIIPs have been quoted as containing the possibility of returns of more than one million per cent. In response to these concerns, the FCA published a statement on the 24th of January declaring its acknowledgement of these concerns and that, as a resolution, ‘where a PRIIP manufacturer is concerned that performance scenarios in their KID are too optimistic, such that they may mislead investors, we are comfortable with them providing explanatory materials to put the calculation in context and to set out their concerns for investors to consider’. The FCA go on to discuss that there may be a number of reasons for this optimistic calculation, like too strong a focus on past performance etc., but that has resulted in an incredible backlash. Philip Warland, a former senior policy advisor, was vociferous in his condemnation of these developments, stating that European Regulators and the FCA are guilty of an ‘absolute dereliction of the duty of care’ to consumers, and that ‘heads should roll’ on the back of what is, according to Warland, ‘the worst piece of financial regulation ever in Europe’. The reason for Warland’s disdain is rather obvious and, as head of asset management regulatory change for KPMG Julie Patterson noted, investors could still be confused as accompanying data may be misunderstood, if noticed at all; what then is the effect of these developments?

The obvious effect is that retail investors who, by their very theoretical nature do not have the retail experience that professional investors have, are being allowed to enter a marketplace within which regulations have been set for a purpose and spirit which is not being experienced in reality; if the PRIIPs regulations were designed to enforce clarity within the marketplace, allowing PRIIPs manufacturers to maintain claims of 1m% returns but with some attached clarification does not meet that stated aim and, in fact, does precisely the opposite. The FCA, for its part, has removed itself from a position of responsibility by declaring that the PRIIPs regulations are ‘directly applicable’ and, as such, leave the FCA with no room for manoeuvre, although industry participants (and influential ones at that) have gone as far to advise people not to rely on the documentation which, when considered in the context of the push by the EU and relevant national authorities to bring these regulations into force so recently, is a remarkable piece of advice to receive.

Ultimately, the effect of this is that one can, potentially, obtain one of two pieces of information from these developments. Either, the regulation is so new that issues like this were to be expected and should be ironed out fairly soon, or rather that the legislative and regulatory framework is designed to facilitate business more than it is designed to protect consumers, even in a field where the only consumers are known to need more protection than usual; where one sits on that spectrum will usually dictate one’s view on the performance of regulators like the FCA, but hamstrung or not, retail investors are in particular danger within this current framework.

Keywords – Financial Conduct Authority, finance, investing, PRIIPs, EU, Business, @finregmatters

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