PRIIPs and the Paradigm Shift on UK Retail Disclosure
It is not a secret that UK authorities never quite liked PRIIPs. That was made sufficiently clear already when the regulation first kicked in and the UK was still part of the European club. One of the most notorious concerns raised over time on PRIIPs regulation was the risk of distortion of bond markets. The lack of liquidity of bond markets in the eyes of UK Authorities was due to the complexity of the PRIIPs disclosure and the ensuing limited number of issuances of certain bonds. The criticism continued in various forms, but in essence revolved around the fact that the regime disclosure introduced by PRIIPs, on top of being overly complicated, was also offering misleading information to retail investors.
The decoupling between PRIIPs regulation and the broader UK Retail Disclosure evolved as the conscience of the UK on its regained sovereignty matured. First there was the decision to grandfather UCITS from the transition to PRIIPs. That reflected in our view a non-disruptive approach of the status quo, which characterised the immediate aftermath of Brexit.
After the shortest government of all times and the issues that came therewith, the UK seems to have gained a new sense of independence so as to commence the process to scrap selected EU onshored rules that it is now free to decide to never use ever again in the future.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with UK Retail Disclosure.
A New Direction for UK Retail Disclosure
Since the financial crisis of 2008, the story of the European rulebook on financial services has been made by very ambitious regulatory projects. The PRIIPs regulation is one of them. The aim underpinning PRIIPs is to create uniform retail disclosure across the entire spectrum of retail investment products, with a view to ensure comparability amongst them. EU Authorities have relied on comparability as the most critical attribute of disclosure, required to support retail investors in choosing the right investment product for their needs.
The consultation launched by HM Treasury on PRIIPs and UK Retail Disclosure represents the first step for the UK Authorities to free themselves from the concept of EU retail disclosure being correct. That comes by questioning the validity of the main axiom of PRIIPs, which is comparability of retail disclosure across the entire – or broadest possible – spectrum of retail investment products. The argument is that a three-pager document cannot contain the information necessary to compare very different type of retail investment products, ranging from ETFs to option contracts. More importantly, this fiction of comparability of investment products, very different in nature, has led to a situation where retail investors are presented with misleading and unhelpful information.
Implying that investment products so different in nature can in some way have similar or comparable outcomes and risks will likely no longer be an option according to UK Authorities. The belief seems to have shifted to one where the main aim of the retail disclosure is to allow investors to understand the nature of the product they are considering to purchase and enable them to make informed choices. Comparability, if at all retained, might be reduced in scope with the creation of groups of retail investment products that can be considered broadly interchangeable or substitutable.
The Principles Governing the New UK Retail Disclosure Regime
The new UK retail disclosure regime takes stock of the shortcomings of the PRIIPs regulation with a view to facilitate retail investors to be as well-informed as possible so as to engage with financial markets in a responsible way. At the same time, the UK retail disclosure regime seeks to strike an acceptable balance also for product manufacturers, where overburdensome and complex disclosure requirements might force them to reduce their participation to financial markets.
The main guiding principles for the UK retail disclosure regime revolve around, clear and useful information to allow retail investors to make evidence-based investment decisions as well as proportionality to the risks involved with the actual investment. And the issue of proportionality should be seen also from another perspective. In the context of the renewed commitment to make their capital markets open and fair post-Brexit, UK Authorities intend to improve the choice of investment products available to UK retail investors. Continuing on the line of overburdensome and disproportionately complex retail disclosure would discourage US managers of ETF strategies, for instance, to engage with the local market.
In line also with the evolution of the regulatory framework on financial services, the establishment of the new UK retail disclosure rules will take place reflecting the new position of the UK outside of the EU. Accordingly, under this new model, it will be on the financial services regulators, the UK FCA in the case of the UK retail disclosure, to lay out the direct requirements applicable to firms via its rulebooks, within a general framework set by the UK government.
Conclusions
The new UK retail disclosure regime will also have a significant flair of digitalisation to it. As it emerged from the related FCA discussion paper on the future of disclosure, so-called paper-based disclosure could well become a thing of the past very soon. Once UK authorities freed themselves from the European model, retail disclosure might as well evolve in line with the progress of digitalisation in the consumption of financial services. On this front, the UK is very well advanced, with a little percentage of the population still consuming financial services in a non-digital fashion.
UK retail disclosure might as well in the near future see a more direct involvement of distributors than it had under the PRIIPs regime, innovating the way it was presented so far to respond more closely to the needs of clarity of retail investors.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with UK Retail Disclosure.