Assessing the European Commission's final Prips proposals

It has taken five years for the the European Commission to reach the first major juncture in the development of new rules on packaged retail investment products. As the political battles unfold ahead of a harmonised implementation across Europe, Richard Jory reports on the Commission’s final proposals

Following the publication of the European Commission's final proposals for the forthcoming Packaged Retail Investment Products (Prips) regulation on July 3, Europe now has a single document aimed at protecting retail investors from falling between the cracks in the current patchwork of rules relating to these products, which include any structured investment above and beyond simple equities and bonds. The caveat is that bonds, equities and savings accounts may eventually be brought within the scope of the new legislation as its final form is decided by the Council of Europe and the European Parliament.

Work on the EC's Prips proposals began in 2007 with a frenzy of consultations and workshops that continued into the following year. While the Commission could have produced final proposals in 2009, progress stalled following a change in leadership of the initiative from Charlie McCreevy to Michel Barnier, not to mention the strengthening grip of the financial crisis.

"On product disclosure, the key element of the Prips regulation is that it is horizontal and cross-sectoral," says Tim Shakesby, policy analyst in the asset management unit of the EC's internal market directorate-general in Brussels. "In the past, financial services regulation has been built up in many places in a more sectoral way, the great weakness of which is that you go in different directions in different sectors, creating product comparison problems. The design principle of doing this horizontally is new and helps with comparability."

"We are trying to take on board lessons learnt from communicating with ordinary people: keeping it short and simple; trying to focus only on key information; being as strong as we can on getting rid of jargon; and being as plain as we can," says Shakesby. "To achieve this, we have introduced the concept of an investment manufacturer, which is new in legislative terms and designed to deal with the horizontal approach."

It was only in the final draft of the latest proposal that the EC firmed up the liability of the investment manufacturer, which is now subject to a reverse burden of proof and full responsibility for the creation of the Prips' key information document (Kid), a short-form explanation of the key risks and rewards of an investment.

"If you make an investment product that you are selling to retail investors, you know the product, so you have to produce the Kid," says Shakesby. "The person selling, which could be the manufacturer or someone else, is responsible for providing this information, and they can produce this document on delegation from the manufacturer, but the liability of producing the information remains with the manufacturer."

While enforcing this could prove challenging when the identity of the product manufacturer is unclear, the approach chimes with discussions about the concept of product manufacturing as part of amendments to the Markets in Financial Instruments Directive (Mifid).

"We are not worried about the content of the Kid," says Maylis Nicolas, manager for cross-asset solutions and global markets at Société Générale Corporate & Investment Banking in Paris. "We are more anxious about the capacity of distributors to organise the availability of this document. We will put the Prips documents [including the Kid] on a website and make them available to distributors. It is a good initiative as it will simplify and standardise the documents and allow them to be comparable for asset managers, which will also help them avoid mis-selling and enable them to clearly state what the risks are to the end clients."

 

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Assessing the European Commission's final Prips proposals

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