November 26, 2019 – On 16 October 2019, European Supervisory Authorities (ESAs) released a consultation paper on the potential amendments to the PRIIPs Delegated Regulation. The goal of the proposed changes is to address the concerns raised by stakeholders after the first version of PRIIPS was released in March 2017. Main issues that have been identified are, among others, unrealistic future performance scenarios based on the historical growth returns that are prone to pro-cyclicity, misleading presentation of costs and computation of the transaction costs. The Consultation Paper presents possible changes of the methodologies for disclosing this information. Agreed amendments could be applied in 2021, which is the last year before UCITS Investment Funds will be no longer granted with exemption from PRIIPs Regulation.

For “Future Performance Calculation”, the ESAs propose to estimate the growth rate of a PRIIP with the use of a dividend yield methodology as well as a new approach to derive quantiles for different scenarios, based on log-normal distribution and Monte Carlo simulation. Along with the changes, the ESAs consider removing the stress performance scenario and intermediate period scenario,  including the information on past performance for Category 2 and 4 and adding the illustrative scenarios for Category 3.

Transaction Cost changes are mostly linked to the concerns in the market with the “Slippage Approach” or the “Arrival Price/Full PRIIPs Method” of the PRIIPs Regulation. The ESAs are of the opinion that the current methodology should be kept with some amendments. However, they have proposed one new alternative approach:

  • Introduction of a proportionality threshold to the current Full PRIIPs methodology that exempts PRIIPs with a small number of transactions or low portfolio turnover
  • A new “principles-based” approach that is less prescriptive for the arrival price method by using a justified “reference” price and provides more derogation to alternative approaches for a higher number of situations.

The ESAs are of the opinion that as with the new options some discretion is provided to the PRIIP manufactures it might lead to inconsistencies in how different PRIIP manufacturers report the costs.

Acarda, as a leading full-service provider in the regulatory domain, is actively analyzing market practices and will propose practical rules to be applied for reference prices. We are attending on 29th of November the ESAs public hearing with asset managers and consumer representatives. The PRIIPs module arep currently uses a hybrid approach that incorporates both market practices, the Basis Points and the Arrival Price method, and will adopt the proposed methodologies once they are finalized.

For the UK and pension fund market acarda calculates the Full PRIIPs based transaction costs with a detailed asset class breakdown. More about UK pension scheme and new CTI standard find here.