by Gerhard Jovy, Founder and CEO at acarda.
The regulatory dynamics on the capital market will remain high over the coming years. In 2022, following approval by the European Commission and the European Parliament, the new Regulatory Technical Standards (RTS) for Key Information Documents (KIDs) of Packaged Retail Investment and Insurance-based Products (PRIIPs) with a revised performance calculation and different methods for calculating transaction costs will come into force. At the same time, the second stage of the Sustainable Finance Disclosure Regulation (SFDR) will become effective with the required provision of pre-contractual and annual ESG documents. In order to meet all requirements and maintain a competitive edge in the dynamic regulatory environment despite increased reporting efforts, it is now time for asset managers and their service providers to holistically reconsider their data management and reporting.
The new regulatory standards present asset managers with a challenge: to adapt their data management, cost structures and distribution channels so that they can adjust, manage, optimise and sell products with as short response times as possible. This involves ensuring consistency between product descriptions of PRIIP KIDs and SFDR templates, as well as aligning PRIIP updates with sustainability indicators in the context of periodic SFDR reporting. Those who succeed can use both the changes to the PRIIPs and the SFDR to expand their client portfolio with sustainable products, make offers more transparent and attractive and thus strengthen client trust.
Comprehensible cost information and realistic performance scenarios
The revisions to the RTS focus on investment products with sustained positive market performance.
“In terms of maximum transparency, the new RTS are intended to prevent retail investors from being misled by overly positive return prospects. They therefore require the disclosure of additional details on the assumptions that lead to the creation of performance scenarios.”
According to the EIOPA report, this should reduce the risk of raising unreasonable expectations about possible future returns. Another pathway to more transparency lies in the adapted presentation of cost information based on the presentations in MiFID II. For packaged investment products that offer a range of investment options, clear cost information (e.g. costs over time, composition of costs) should help to improve retail investors’ understanding of the cost implications of different investment options.
The revised RTS also provide for a change to the method of calculating the performance scenario. Rather than the Cornish Fisher method, a backtesting method will be used which introduces a direct estimate based on PRIIPs prices. As was already the case with the basic information sheets, the primary aim here is to avoid disproportionately positive performance scenarios in investor information. For “non-stress” scenarios in particular, therefore, the new standards provide for an extended data collection period. In future, data dating back up to ten years and unrealised or potential losses will have to be taken into account when calculating historical performance. The results must then be shown in bar charts that are easy for retail investors to understand.
More flexibility in calculating transaction costs
While the procurement of historical data poses new challenges for all asset managers in the context of the performance scenarios, the amended regulatory standards considerably simplify the calculation of transaction costs. When placing orders for investments, the application of the market price (arrival price) – something which has been difficult to determine up to now – can be made more flexible in the future. From 2022 onwards, if the exact arrival price is not available, the last available price will be able to be used to calculate transaction costs or, alternatively, a reasonable independent price calculated via a third party. This is also to be understood as a rejection of a permanent use of the half-spread method, which has so far been the market standard for nationally active asset managers. Postponing the new calculation standards until 2024 is possible, but not necessarily advisable. Asset managers should already start using the arrival price method to calculate the market price in order to build up the three-year data history required from 2024 through continuous recording, to avoid high deviations and abrupt cost jumps at the transition point.
One step ahead of the competition: Asset managers benefit from early adjustments
In aiming at the desired transparency when disclosing key figures to retail investors, there is a risk of annoying customers or losing them to competitors by postponing adjustments for too long and thus triggering sudden cost increases.
“Dealing with both the challenges and opportunities presented by the new RTS at an early stage enables asset managers not only to position themselves in the market with attractive offers, but also to secure the best conditions from providers of market data and analyses.”
Whether PRIIPs KIDs, MFID or SFDR – the best way to manage the ongoing high regulatory dynamics is by using a modular and central reporting platform that provides asset managers with an overview of all necessary parameters, similar to a cockpit in an aircraft, and as a cloud solution enables continuous and individual adjustments to calculations, monitoring and the necessary documents within the scope of compliance.
Despite the letters prepared by industry associations on the extension and withdrawal of the PRIIPs RTS, most notably by EFAMA, BVI, CFA Institute and Better Finance, all financial market participants should prepare for the final approval of the European Commission and Parliament in the coming months. It must therefore be in the interest of every company to start calculating the comparative figures, optimise the cost and quality of their data and build up the necessary history and expertise.