Key takeaways
- By the end of March 2020, the first consultation launched by the UK FCA on the Consumer Composite Investments will come to an end. A new standard for retail investor product disclosure that promises to make headlines in Europe for a few reasons.
- The shift of the UK government to replace the PRIIPs Regulation with a new UK retail investor product disclosure framework follows extensive consultations under the so-called Edinburgh Reforms. The UK government confirmed its commitment to reforming the existing PRIIPs regime in an official response published at Mansion House 2023.
- Manufacturing, advising and offering of Consumer Composite Investments as designated activities under the Designated Activities Regime, thus making them subject to FCA disclosure rules. The same Statutory Instrument also provides the FCA with rule-making, supervisory and enforcement powers over said designated activities.
Why Europe Is Watching Closely the Consumer Composite Investments Rules
By the end of March 2020, the first consultation launched by the UK FCA on the Consumer Composite Investments will come to an end. A new standard for retail investor product disclosure that promises to make headlines in Europe for a few reasons.
From a technical standpoint, the new rules mark more distinctively the departure from the European model of the UK legislative and supervisory framework on retail product disclosure. Highly prescriptive requirements and steep compliance costs – resulting nevertheless in misleading information for retail investors – are amongst the main reasons for UK authorities to have called for a reform of the regime.
But the Consumer Composite Investments and related rules are of interest also for something else. And they already made Europe envious.
Consumer Composite Investments and the Designated Activities Regime
The shift of the UK government to replace the PRIIPs Regulation with a new UK retail investor product disclosure framework follows extensive consultations under the so-called Edinburgh Reforms. The UK government confirmed its commitment to reforming the existing PRIIPs regime, technically considered as Retained EU Law after Brexit, in an official response published at Mansion House 2023.
The Consumer Composite Investments rules are delivered through the new Designated Activities Regime, introduced by the Financial Services and Markets Act 2023. The new legislative process employed for the issuance of these rules is an example of world first regulatory agility. This new regime allows the UK Treasury to fill in gaps in the current rule making, supervisory and enforcement powers of the UK FCA in relation to certain Designated Activities, ensuring a much faster regulatory response to market changes. For these Designated Activities, where the UK FCA lacked before a specific rule-making power, it is now granted with the power to replace with FCA handbook rules the existing ones contained under retained EU law.
More namely, the consultation on the Consumer Composite Investments run by the FCA comes after an initial Statutory Instrument issued by the HM Treasury which establishes the scope of the Consumer Composite Investments rules. It defines the manufacturing, advising and offering of Consumer Composite Investments as designated activities under the Designated Activities Regime, thus making them subject to FCA disclosure rules. The same instrument also provides the FCA with rule-making, supervisory and enforcement powers over said designated activities, including those conducted by firms that are not FCA authorized. Lastly, the instrument clarifies that firms providing misleading or inaccurate disclosures will face civil liability where retail investors incur losses.
Consumer Composite Investments vs PRIIPs1
The table below offers a practical overview of the changes to be expected by the Consumer Composite Investments rules vis-à-vis the existing PRIIPs rules.
| UK PRIIPs KID | Overview of what we
are changing |
|
| Document & Format | Key information Document (KID) is a standalone document with specified format/template. Provided at point of sale.
|
Firms have freedom to design product information without format and template constraints. Provided early in the consumer journey.
If a sale is made, firms provide a record in a durable medium which could take various forms. |
| Cost information | Any direct and indirect costs associated with an investment in the PRIIP, including one-off costs, recurring costs and incidental costs.
A reduction in yield table showing the total impact of costs over time. It must be presented over 3 different holding periods as a single number in percentage and monetary terms. |
Performance fees and carried interest explained using narrative and examples.
Changing reduction in yield to summary costs over a 12-month period. Flexibility for firms to describe what costs mean and their impact on returns. |
| Risk information
|
1-7 risk metric based on credit and market risk, defined by the Cornish Fischer expansion.
Risk information that is separated from information on performance. |
1-10 risk metric based on product volatility.
Flexibility to change risk indicator based on key risks or product features such as capital guarantee. Combined risk-reward information to help consumers understand the features of products. |
| Performance information
|
Descriptions of the factors that are likely to affect the performance of a product both positively and negatively, and the impact they may have on its returns. | A past performance graph covering a 10-year period (where this is available), to visually help consumer understanding and to provide more contextual information to consumers. |
The Bigger Picture and Impacts on Europe
The Consumer Composite Investments rules will also apply to UCITS and OFR funds. Whilst these funds are currently grandfathered until December 31st 2026, as of January 2027 they will fall under the new product disclosure regime.
The Statutory Instrument takes care also of this other aspect of the product disclosure, one that will have clearly an impact also outside of UK borders. Not with a small element of uncertainty for the time being in our view, that we hope will be clarified going forward. The FCA consultation proposes that products falling under the Consumer Composite Investments will produce disclosures under the new regime at anytime that these can be distributed to retail investors. At the same time, the FCA consultation extends the new rules to both UCITS and OFR funds, with the latter being exclusively UCITS for the time being. The separate reference to UCITS is interesting because it might include also those UCITS that are currently operating under the local national private placement regime, albeit not being able as such to be offered to retail investors in the UK for them not being OFR UCITS.
Conclusions
The Consumer Composite Investments rules mark a pivotal moment of evolution in the UK regulation on product disclosure and financial services alike. By prioritizing investor protection and the provision of transparent and useful disclosures, the UK shifts away completely from the legacy European model. One that championed comparability in principle across all financial products, to the apparent detriment of the usability of the product disclosure.
The new product disclosure regime also confirms the approach of the UK to the main principles applicable in global finance. Consumer Composite Investments rules emphasize investor protection, remaining in line with the main principles and overall aims in global finance, in a way that is more suited to the market and the practices of the UK market.
And Europe, on various fronts, may follow suit with similar measures sooner than we expect.
About Veneziano and Partners
Veneziano and Partners is an international consulting boutique specialised in the European regulation of cross-border fund distribution. In catering to a selected group of investment managers, hedge fund managers and financial institution worldwide, the firm offers a custom-made service that is unique and allows its clients to gain competitive advantage in an ever increasingly regulated environment for global registration of UCITS and AIFMD funds.