Institute unveils policy format for enhanced investor protection

Amid low levels of trust in the financial industry and concerns over product mis-selling, a new CFA Institute report aims to improve transparency and investor protection by examining disclosures on costs, performance, and risks associated with packaged retail investment products (PRIPs)

Packaged Retail Investment Products: Investor Disclosure Considerations for a Key Information Document, informs the EU policy debate and the draft regulation on PRIPs from the investor perspective by putting forward proposals for the content of a key information document (KID). This document is designed to provide concise and standardised information on the key characteristics of different products to facilitate consumer comprehension and comparability, thereby helping retail investors in the EU to make more informed investment decisions.

Rhodri Preece, CFA, author of the report and director of capital markets policy at CFA Institute, commented:

“Investment professionals have raised concerns about sales practices associated with investment products, a problem that has been exacerbated by poor disclosures. Currently, the disclosures provided to investors in PRIPs are often complex, lengthy, incomparable, and inconsistent among EU member states. Improving product transparency, when combined with other measures addressing sales practices, can help mitigate the risk of investors purchasing unsuitable products.

“The content and design of the Key Information Document (KID) is therefore fundamental in helping to shape the finance industry in Europe because it will enable European citizens to allocate their savings in an informed and efficient manner. Our recommendations for the PRIPs KID seek to provide clarity over what information is relevant to investors at the point of sale, particularly in the often-overlooked area of costs.”

Based on the conclusions in the report, CFA Institute is calling for the following policy recommendations to be considered for the development of the PRIPs KID document:

Scope:

The initial scope of the PRIPs regulation should be packaged products that provide for exposure to the performance of an underlying investment portfolio or other assets. If, after review, the initial PRIPs KID is successful with consumers, the scope could be extended beyond packaged products.

Costs

Costs should be disclosed under a standard label and location within the KID, but the content of cost disclosures could embody a small degree of flexibility beyond common components such as entry fees, exit fees, ongoing charges, performance fees, transfer fees and any penalties, or other administrative charges.

Costs disclosures should include a statement, where relevant, specifying the total amount in percentage terms the product manufacturer or sponsor receives from distribution arrangements (inducements).

For life insurance products, a table illustrating the effect of costs in monetary terms over predefined time horizons should be provided. Cost disclosures for structured products should include a narrative explanation of the total costs included within the amount paid for the product

Risks

The risk of the product, as reflected in the risk indicator, should be based upon its volatility, such as the standard deviation of returns. Where such calculations are not possible the KID should provide for adequate explanations and disclosures of risks.

In the case of products with set maturities and predefined payoffs (such as structured products), risk should be measured with regard to the variability or range of possible outcomes at maturity, with appropriate disclosure of how this risk may vary during the life of the product.

Narrative disclosures should also include details of significant risks arising from the investment strategy of the product, details of any national financial compensation scheme protecting investors in the event of default or failure of the product manufacturer, and details of the creditworthiness of the issuer where appropriate.

Performance

Data should be presented in the form of a bar chart that shows yearly net performance in percentage terms, alongside relevant narrative disclosures. For structured or guaranteed products and funds, which have predefined payoffs, a tabular presentation of performance scenarios would be appropriate in place of past performance data.