MEPs' revolt threatens structured products reforms

Parliamentarians' rejection of new standards at the heart of the European Union's Packaged Retail and Insurance-based Investment Products (Priips) regulation has set the clock ticking on crunch talks to save the reforms from being postponed beyond their end-of-year start date.

Members of the European Parliament's Economic and Monetary Affairs committee (Econ) voted against the European Commission's proposed Priips regulatory technical standards (RTS) on September 1. Parliamentarians supported the resolution for changes to the standards by 55 voters to 0, with three abstentions.

The resolution will next be taken to a full plenary vote of the parliament later this month, meaning law-makers have just weeks to cobble together a compromise. If parliament rejects the RTS, also known as the level 2 text, the regulation may be implemented regardless, plunging the market into confusion. Alternatively, it could be delayed.

Industry stakeholders are divided on whether an accord can be reached in time.

"They are going to fight it out for two weeks and [will] find a compromise so everyone can save face. I think the commission is prepared. They have been working on the level 3 [texts], and if there are elements that can be introduced into level 2 then you could see a solution in parliament," says Andreas Widegren, head of the Swedish Structured Investment Products Association in Stockholm.

Level 3 items include question-and-answer sheets and other documents intended to ensure co-operation among supervisory authorities in implementing the regulation.

Others are less optimistic: "The commission is saying you have either to approve or to reject [the RTS]," says a regulatory strategist at a European bank. "At this stage, [procedure] does not provide for a restart of negotiations on every single point. [Also] the concern is that parliament did not really set out a clear list of requirements," he adds.

Zak de Mariveles (pictured), London-based chairman of the UK Structured Products Association, says there has been "some talk" about a fast-paced revision of the RTS but that his personal view is a compromise would be "unlikely".

If the RTS are rejected, procedure dictates that they would have to be amended by the European Supervisory Authorities before being resubmitted to parliament, which could choose to object a second time.

Parliamentarians from all parties aired their grievances with the RTS and set out their intention to reject the standards in a series of letters and emails to Priips rapporteur Pervenche Berès, a member of the European Parliament (MEP) for the Socialists and Democrats group in July. Their concerns ranged from flaws in the methodology for the performance scenarios embedded in new key information documents (Kids), to the treatment of multi-option products.

Tempers flared during the Econ meeting as MEPs blasted the commission for allegedly ignoring these concerns. At one point, Sven Giegold, a Green/European Free Alliance MEP, accused the commission of acting like the central committee of the East German Communist Party for failing to respond to the substance of parliament's questions, and insisted on a take-it-or-leave-it approach to the RTS.

Giegold tells Risk.net that he has not yet heard how all the problems raised by parliament can be solved without changing the RTS itself.

Two-stage launch

Without a speedy compromise, the status of the Priips regulation is uncertain. At the meeting, John Berrigan, representing the commission, said it was prepared to introduce the level 1 legislative act without the technical standards that dictate what is required to comply with it. MEPs were hostile to this suggestion.

It is also understood that the European Council would be opposed to such a two-stage launch. Earlier this year, the heads of 12 finance ministries from across the EU wrote a letter to the commission insisting Priips be delayed until nine months after the RTS come into force.

"Parliament either wants the level 1 text with the RTS, or everything to be postponed. The commission proposed the level 1 without the RTS as an alternative, and this was not an alternative for the parliament," says Widegren.

The entire reform package could be delayed beyond the December 31 start date to give rule-makers time to tweak the RTS. But Giegold says the timing is not really the issue. "To me the date is not the question; the substance is the question. If the problems can be solved quickly the date doesn't necessarily need to be changed [but] it seems likely to me that a change in the application date is unavoidable."

The industry itself is keen on a delay. "Fingers crossed", was how one legal expert at a large European issuer reacted to the possibility.

The regulatory strategist says a postponement of one year would allow for necessary refinements to the RTS to take place on "practical issues", such as how transmission of a Kid to distributors should take place.

Others would welcome a more extensive redrafting. David Stuff, London-based chief executive at Cube Investing, is pushing for policy-makers to dump the current value-at-risk methodology for generating a product's risk rating in favour of an expected shortfall measure.

"The RTS are not 'wrong'. It's just they [the commission] have picked the wrong [data] points out of it. They are doing the right analysis but picking the wrong numbers. The other thing that is really strange is the measure of expected return. If I was a parliamentarian, I would be absolutely worried that people will buy these products and have no idea what risk they are running," he says.