UK chancellor Jeremy Hunt has set out plans to repeal of the packaged retail and insurance-based investment products (Priips) regulation, which was originally part of an EU-wide push to help retail investors.
But the consultation to scrap the regulation, introduced as part of Hunt’s ‘Edinburgh Reforms’ of the UK financial services, which include 30 regulatory changes – was primarily attributed to the fact that Priips rules did not achieve their objective of helping retail investors “make sense of a complex investment landscape”.
Instead, the chancellor said the regulation created “unnecessarily prescriptive measures that led to information being represented to investors in unhelpful or, worse, misleading ways”, as well as “burdensome requirements” that caused firms to “restrict retail investor access to their products, reducing choice and opportunities rather than enhancing them”.
Other issues included lack of access to products created in jurisdictions outside of the UK due to high compliance costs and risks.
Hunt added that some changes to the Priips regulation had already been introduced in the Financial Services Act 2021, but these “were always only intended to provide time for further, more fundamental reform”.
“Based on the evidence that we have gathered, it is the government’s view that highly prescriptive format requirements in disclosure are not conducive to improving an investor’s understanding of the product that they are purchasing.
“They also increase compliance costs. Prescriptive formats seem to reduce the flexibility for firms to provide information in whichever format works for their clients (for example, by including sustainability information alongside performance data) and do not allow for information to be presented in ways that increase legibility.”
Reform
As a result, HM Treasury is looking to introduce a different regime for retail disclosure.
When drafting the system, HM Treasury said it has followed three principles:
- Ensuring that retail investors have access to clear and useful information to make evidence-based decisions for their prospective investments;
- Ensuring that the disclosure that retail investors receive is proportionate to the risk that they are taking in purchasing an investment product and the complexity of the decision that they are making; and
- Providing additional choice for retail investors, and to reduce burdens for firms.
Under the proposed regime, prescriptive requirements will be mostly scrapped, with the Financial Conduct Authority (FCA) only requiring them in cases were high-risk or complex investments are present.
The UK government also wants to scrap the Priips comparability feature – where different packaged products can be compared via standardised key information documents (Kids) – as they have been criticised for being too broad.
The retail disclosure will, instead, make sure that retail investors understand the nature of the product they are purchasing “to a sufficient degree to enable an informed choice”.
Firms should not provide “all the information necessary for an investor to compare different products and come to a decision, since this information can vary widely between different investors”.
But certain information, such as costs, will need to be standardised “to a significant degree” so that it is understandable for investors, the Treasury added.
Comparison features will be introduced but only among similar products “that are broadly substitutable”, potentially by product classes or grouping, according to whichever direction the FCA will decide to take.
The role of the FCA
The Treasury continued: “The government has already given the FCA powers over some aspects of the Priips regulation. Upon the revocation of the Priips regulation as part of the government’s wider programme to repeal retained EU law and replace it with a regulatory framework tailored to UK, the government is not currently aware of a need for any retail disclosure requirements to be maintained in legislation (as opposed to regulator rules).
“In line with the objectives set out [above], it will be for the FCA to deliver a new retail disclosure regime that upholds investor protection while supporting investment choice for retail investors and reducing burdens for firms.
“As set out previously, prescriptive disclosure formats and comparability are no longer appropriate goals for retail disclosure in the UK, for the reasons outlined. This is based on feedback received since the introduction of the Priips regulation in 2018.
“While this will be a decision for the FCA, it is the government’s expectation that the Priips Kid – or any new comparable prescriptive disclosure document – will no longer be a feature of the UK’s new retail disclosure regime.”
