Complying with investor protection rules, which are at the heart of much regulatory change in recent years, means fund firms are producing documents in ever-greater quantities.
Document production and filing to regulators could be significantly streamlined if fund managers take account of overlaps between directives, and two directives with significant overlap are ‘MiFID II’ and ‘Priips’.
Funds Europe asked Tom Pfister, global head of regulatory reporting solutions at Confluence, and Mario Mantrisi, chief strategy and research officer at Kneip, to explain certain areas where there is overlap between these two directives.
Here are four of them:
Product disclosure
MiFID II and Priips will require fund managers to give retail investors and professional investment advisors suitable information to compare products and understand risks. This aspect of investor protection is key to both directives. Priips requires a ‘key information document’, or KID, which will act as pre-contractual information. MiFID II also emphasises that information is “fair, clear and not misleading” and that marketing is clearly identified as marketing.
Cost disclosure
Both Priips and MiFID II will focus on the completeness and sufficiency of product cost disclosures. The challenge, says Pfister, is to use clear and understandable language that avoids financial jargon, while remaining accurate and not misleading.
Mantrisi adds that MiFID II has a provision that if a financial instrument is already reporting the appropriate information on costs for another directive, it doesn’t have to reproduce it for MiFID II reporting. However, he points out that, unlike the Priips KID, the Ucits equivalent – the ‘key investor information document’ – is not compatible with MiFID II because in its cost section it doesn’t include transaction cost information.
Product complexity
There is a focus on complexity within the broader aim of product disclosure.
MiFID II stipulates that for complex products, advice must be provided prior to sale. Complex products are also within the scope of the Priips KID, which contains a “comprehension alert”, which is used to alert investors of products that might be more difficult to understand. A product is as regarded being difficult to understand if, for example, it invests in underlying assets in which retail investors do not commonly invest.
Timing of product information to investors
Both directives require information to be provided to investors “in good time”.
That these two regulations overlap should be welcomed by fund firms. Apart from the chance to streamline documentation and reporting processes to save money, the directives are also intended to ‘level the playing field’ between different financial products – possibly to the advantage of funds.
Priips aims are consistent with the MiFID II process and this should reduce the opportunity for regulatory arbitrage based on investment classifications.
Funds Europe’s March issue will go into further detail.
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