CFA Institute surveyed European members on product governance practices over time and the specific effects major regulatory developments like MiFID II and PRIIPs have had in this respect.
In this work, we have explored how product governance has changed since the early 2010s in the EU asset management industry and the ways in which these changes have been nduced by significant regulatory developments such as MiFID II and PRIIPs.
Methodology
CFA Institute conducted a survey of its European members between in December 2019. The survey was sent to a sample of members in the European Union, the United Kingdom and Switzerland. In total, 527 responses were received, for a response rate of 5% and a margin of error of ±4.18%.
Conclusion and key takeaways
- In general, the quality of the relationship between manufacturers and distributors of investment products in the EU appears to have improved since the introduction of MiFID II and PRIIPs, as perceived by surveyed practitioners. This reflects positively on the underlying objectives of regulators to improve investor protection. This is a positive development for investor protection, as it means products are designed with the end-investor in mind and distributors are better able to explain their characteristics before investors make their choices.
- Consistency in applying directives across EU Member States and between investment firms on suitability assessment and investor information remains a problem. This may result in inefficient processes and is perceived to negatively affect investor protection.
- Respondents support the intended purpose of investor information documents such as UCITS KIID and PRIIPs KID, its practitioners approving of the idea that prospective clients should be able to receive standardised information to enable comparability. Yet, this purpose may be harmed by a glut of information subject to interpretation and a high level of complexity, such that investors may lose sight of what is really important for their individual decision making.
- Passporting features of EU regulation provide a clear structural advantage for investment firms; yet, again cross-border marketing suffers from significantly complex matrices of regional versus local application of directives and marketing rules (e.g., on the definition of retail versus professional, marketing versus premarketing or suitability assessment). Clearly, here respondents seem to be requesting further harmonisation, clarification, and guidance.
- In relation to the preceding point on passports and cross-border marketing, respondents favour further centralisation of oversight and regulatory monitoring of marketing practices with ESMA, as opposed to leaving the oversight to local regulators and localized rules.
- Respondents are particularly critical of the PRIIPs KID choice of showing performance through ex ante modelled scenarios only, which are suffering from a high degree of complexity. In this regard, a majority agree that past performance is missing and should also be presented. The presentation of costs is also suffering from excessive complexity, in particular the concept of Reduction-in-Yield, which remains difficult to comprehend, according to respondents.
- The industry is apparently not yet making large-scale use of outsourced service providers for the production of the KID, a majority of respondents claiming that both formatting and calculations are kept in-house. This could be a result of the complex nature of the rules, which requires deeper operational ties to administration agents to make outsourcing worthwhile from an efficiency and a cost perspective.
- The industry at large remains unclear on the treatment of implicit transaction costs in general and slippage in particular. Just under half of respondents think slippage is market risk (i.e., market uncertainty) rather than an actual cost to investors. Given the high level of unsure or neutral responses, it is fair to say further research and analysis should be initiated in this area to provide investors with more meaningful information