The European Parliament recently voted to reject the delegated Regulatory Technical Standards (RTS) under the PRIIPs Regulation. Charlotte Henry, senior associate, and Emma Coles, government relations manager at Norton Rose Fulbright, consider the implications of the decision.
European Parliament votes to reject the RTS under PRIIPs
The European Parliament’s decision to reject the delegated RTS under the Regulation (EU) 1286/2014 on key information documents for packaged retail and insurance based investment products (the PRIIPs Regulation) was unprecedented. This was the first time either the European Parliament or Council have rejected draft RTS since the instruments were introduced in 2010. There is no precedent for next steps in this situation, which is made more complicated by the Council of the EU’s endorsement of the RTS, albeit by a narrow margin.
The European Commission must now produce a new draft of the RTS which will have to be approved by the Parliament and Council. In order to ensure the re-drafted RTS are not also rejected, the Commission will hold informal meetings with MEPs and Member State representatives to find ways of addressing MEPs’ concerns. The Commission intends to work quickly, in order to ensure the RTS are finalised before PRIIPs applies on 31 December 2016.
The European Parliament resolution sets out a list of required changes to the RTS. The Commission is not obliged to make all of these changes but will be keen to ensure that the RTS are not rejected a second time. This will mean finding an agreement with the Parliament on these points. In the absence of any proposed solutions for the Parliament, the onus is now on the Commission to put forward proposals that meet MEPs’ concerns.
What changes are expected as a result of the objection?
The Parliament’s main concern is with the methodology for calculating performance scenarios. The revised RTS will likely include changes to ensure that investors are provided with scenarios that show that in adverse conditions investors could lose money. The current methodology is thought to create scenarios that are too optimistic.
The Commission will also need to revisit how the risk categorisation of insurance products is calculated. The Parliament has called for credit risk to be included in the calculation, and has previously raised concerns regarding the biometric risk premium. The Commission will need to find a way of addressing these concerns.
Some of the Parliament’s Economic and Monetary Affairs Committee’s concerns may not require any changes to the RTS but could be solved through further guidance from the European Supervisory Authorities and the Commission. The Parliament would like to see further clarification on the treatment of multi-option products, in particular where the underlying fund is an undertaking for collective investment in transferable securities.
MEPs also call for further guidance on the use of the ‘comprehension alert’ to ensure there are not inconsistencies in its use in different EU states. There is currently no mandate for RTS on this issue, but any agreement between the Parliament and Commission is likely to include an agreement that further standards or guidance on this will follow.
It is also worth noting that the Parliament explicitly calls for no changes to be made to the ‘level 1’ regulation. Any changes will be restricted to the RTS. Other issues will need to be dealt with through additional guidance.
How will the Parliament’s objection to the delegated act impact the timeline for the implementation of PRIIPs?
There is no doubt that the rejection of the RTS makes implementation by the industry and national regulators more difficult, under what was already a very tight timeline. Until the RTS are finalised, key details of what must be included in the key information document and how this must be calculated are unclear.
Despite this, to date, the Commission has been resistant to any postponement of the application date of PRIIPs. The Parliament’s resolution rejecting the RTS calls on the Commission to consider adopting a proposal to delay the application date of the Regulation, in order to ensure that the Regulation does not apply before the RTS are finalised. This does not compel the Commission to produce such a proposal and, without a similar request from the Council of the EU, it is unlikely that the Commission will come forward with any amending legislation, preferring instead to find agreement on the RTS before December. So far, there has not been enough support from Member States for the Council to also formally request a new proposal.
If a proposal were produced it would still have to be agreed through the ordinary legislative procedure. Even if expedited, this process takes time. For now, PRIIPs providers, manufacturers and sellers should assume that they will be expected to be compliant from 31 December 2016.
Interviewed by Alex Heshmaty.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.