Industry frets over Priips cost disclosures

Dealers and industry groups have hit out at new mandatory cost disclosures for structured products, arguing they make "absolutely no sense to investors" and inflate the true cost of the investment.

Draft European regulatory technical standards (RTS) setting out the requirements for so-called key information documents (KIDs) for packaged retail and insurance-based investment products (Priips) were published on November 11.

The RTS introduces proposals for a summary cost indicator and summary risk indicator that must be included in the KID for every financial instrument captured by the Priips regulation. The cost indicator aggregates elements such as hedging costs, entry and exit costs, recurring costs, incidental costs and performance-related fees, and presents these as a deduction from the gross yield of the product. But some believe the costs captured by the indicator are excessive and will inflate the perceived expense of certain products to end-investors.

"It has ended up in a bad way for the structured products industry because the manner in which costs will be disclosed and the number of components are not comparable across markets. Therefore disclosing all these components is something that makes absolutely no sense for investors, and will be a big number," says a senior structured products pricing engineer at a European dealer.

Thomas Wulf (pictured), secretary-general of the European Structured Investment Products Association, speaking at the Structured Products Europe conference in London earlier today (November 19), said the inclusion of hedging costs in the disclosure methodology has generated substantial feedback from member institutions.

The manner in which costs will be disclosed and the number of components are not comparable across markets

"To what extent do they need to be figured in? How do you calculate the fair value component [of that]? We need to come up with something that is comparable on the European Union scale," he said.

Others argue the inclusion of hedging costs could place European issuers at a competitive disadvantage to those based in other markets. US issuers, for example, exclude hedging costs in their calculation of estimated value.

"They [the regulators] are mixing up things that go into the pocket of the issuer and things that don't go in the pocket of the issuer. That is the main point," says the senior pricing engineer.

Tim Shakesby, principal expert at the European Insurance and Occupational Pensions Authority (Eiopa), speaking on the same panel as Wulf, said the terms of reference for the RTS were firmly set out in the level 1 text of the Priips regulation, which was published in November 2014.

"On the cost side we needed to find technically a methodology that we could apply across very different cost structures and sectors. As level 2 guys working on the details, this was a political choice at level 1 as to the scope we must address in terms of the cost disclosure. We have tried to be as practical as far as we could on this," he said.

Wulf questioned whether end-clients really distinguished between products according to cost: "The ultimate question for us is that we are not sure how much the end-client really makes their decision dependent on the final cost figure. Of course, you can have endless discussion about it but you need to test it at one point. We've found it depends on the product," he said.

The consultation on the draft RTS closes on January 29, 2016. The final RTS is scheduled to be published two months later. The Priips regulation enters into force on December 31, 2016.