Dealers decry wrangling over EU structured product reforms

Parliamentarians' revolt against regulatory technical standards tests issuers' readiness for new regime

Priips split: EU dispute over RTS is threatening to disrupt dealer preparations

A soft launch of the Packaged Retail and Insurance-based Investment Products (Priips) regime looks ever more likely, with European lawmakers threatening to vote down proposed rules that would put flesh on the bones of the new regime. Dealers have responded by reiterating calls for formal exemptive relief from the rules, saying the political wrangling is wrecking their preparations to comply with an aggressive December 31 deadline.

Regulatory technical standards (RTS) detailing how issuers must produce new key information documents, or Kids, for retail investors were approved by the European Commission on June 30. However, members of the European Parliament from both sides of the political divide say they plan to object to the rules and force the EC back to the drawing board, with barely five months to go until the regime goes live.

Without finalised rules, issuers may face the farcical situation of the act coming into force without the technical standards that dictate what is required to comply with it – something the secretary-general of the European Structured Investment Products Association, Thomas Wulf, describes as a "nightmarish scenario".

"Banks have more than a million listed structured products out there in the European markets and need to know what to do," Wulf adds.

The December effective date is hard-baked into the level 1 legislative act and can only be amended by the EC; representatives of which made clear on July 11 that this was not something up for discussion.

If I were a retail client and I have not been provided with the Kid, I can claim damages
Detmar Loff, Ashurst

Parliament's move to block the RTS means a formal reprieve is even more urgently needed, say issuers: "In the absence of certainty with regard to the applicable level 2 requirements, the issue of obtaining relief or deferral with regard to the timetable becomes of singular importance to issuers, distributors and investors," says a regulatory strategist at a European bank.

If parliament rejects the RTS, says Detmar Loff, partner at law firm Ashurst in Frankfurt, the standards will be booted back to the European Supervisory Authorities, who will have to amend them. There would then be a delay before the rules could be shown to parliament again for approval – who would still be free to object a second time.

"The difficulty for market participants is if the RTS are not finalised in September or October at the latest, they really will get into trouble while finalising their projects, because the regulation itself comes into force in January irrespective of whether there are RTS or not," says Loff.

Relief effort

With a formal postponement unlikely, policy-makers are scrambling to find ways to relieve the pressure on firms in other ways. On July 21, Timothy Shakesby, principal expert at the EU's insurance and pensions supervisor, Eiopa, said regulators were "looking to see if there is any comfort we can give in terms of what happens when people don't hit this deadline".

Regulators, at their discretion, could allow issuers to sell products without Kids past the Priips implementation date without penalty. However, the level 1 text also states an investor may claim damages from a Priips manufacturer who demonstrates losses resulting from reliance on a Kid that is "misleading, inaccurate or inconsistent" with the regulation. This liability cannot be waived by national authorities.

"If I were a retail client and I have not been provided with the Kid, I can claim damages," says Loff. The only way around this would be for a manufacturer to ask every investor to waive their rights – "and that's just not practical", he adds.

At least three European parties have stated they are considering objecting to the RTS: the European People's Party (EPP), the Greens/EFA group, and the Alliance of Liberals and Democrats for Europe (ALDE). Politico first reported the news.

The parliament's Economic and Monetary Affairs committee is scheduled to meet on August 31 and September 1, with a vote accepting or rejecting the RTS to follow in a plenary session of parliament in September. Sven Giegold, a Green/EFA MEP, told Risk.net there is a clear majority at present to reject the RTS.

Sirpa Pietikäinen MEP, the EPP's shadow rapporteur on Priips, stated in a July 15 email to the Economic and Monetary Affairs committee that her party would object "due to the fact that the Commission has not, in our opinion, provided an exhaustive response to the problems raised by the negotiating team in the letter sent on 30 June".

Multiple methodologies

One problem cited by the EPP is the use of different methodologies to generate the cost indicator for different types of Priips. Another is the treatment of multi-option products – so-called Mops – which still needs "clarifying", according to the email.

"Left unchanged, we find that there's a risk that level 2 rules go against the spirit and aim of the legislation, which is to provide clear, understandable and non-misleading information on these products to the retail customers," it reads.

It is understood that Petr Ježek MEP, the ALDE party's own shadow rapporteur, supports the EPP's approach.

In a separate email, the Greens' Giegold wrote that his party's reason for planning to object is that the RTS "contains serious flaws in the methodology for the calculation of future performance scenarios" as these do not show "for many Priips even in the adverse scenario that investors could lose money even with products which have regularly led to losses over the recommended minimum holding period".

The email added that the EC had ignored parliament's concerns and that this "lack of sincere cooperation" was "not acceptable".

The current RTS require firms to produce three performance scenarios as part of each Kid – showing the likely returns of a product in favourable, neutral, and unfavourable market conditions.

Mathias Strasser, London-based chief executive of vendor WallStreetDocs, has some sympathy with the Greens' complaint: "The scenarios are constructed based on the historical performance of the underlying. If you have an underlying that has gone up for five years, even the worst scenario may not show the worst possible outcome for the investor. Imagine a product with a knock-in barrier past where you can lose a lot of money. That may not be visible in the worst scenario under the RTS if the underlying has gone up over the last five years," he says.

The RTS do, however, contain a clause stating that Priip manufacturers may include an additional performance scenario to illustrate significant risks of loss not covered by the standard three.

"You could use the fourth scenario to show a really bad outcome. And I think that's where I think the industry is headed," says Strasser.

Priips rapporteur Pervenche Berès MEP, of the Socialists and Democrats Party, emailed the various parties suggesting the planned objections be raised at the next Economic and Monetary Affairs committee meeting and the commission be invited to respond to members' concerns before deciding next steps.