PRIIPs and MiFID II: on returns and costs from the retail investor’s perspective

Retail investors receive different types of information when they want to invest in a financial instrument. Some types of information are mandatory for the investment firm to provide to the investor, while other information is given voluntarily. Although this voluntary disclosure is not prescribed by law, the information must meet certain requirements. However, the requirements regarding the provision of information are scattered across different laws, and these laws are not uniform.

In the article ”PRIIPS and MIFID II: on returns and costs from the retail investor’s perspective”, published in the March issue of ‘Financial Law in Practice’, consultant Esther Mennens, together with Randy Pattiselanno, provides an overview of the various legal requirements that disclosed information must meet. They also take a critical look at the inconsistencies resulting from the fragmented regulatory environment. Below you can find a summary of the article.

Past performance information

For investors, it can be interesting to see the past performance of financial instruments. For investment funds, this information can be found in the Key Investment Information (‘KIID’). The ECI is required to be prepared by an investment fund manager under UCITS. However, investment firms themselves often also provide information on the past performance of an investment fund or other financial instrument. If they do this, they do not have to comply with UCITS, but with the rule from MiFID II. Unfortunately, the way past performance has to be presented under UCITS and MiFID II is not the same. As a result, an investor may be presented with different past results for the same investment fund, without the differences being explained. This can lead to confusion.

Information on future performance

Besides information on past performance, an investor will also be interested in potential future returns. Investors can find this information for all PRIIPs products in the key information document (‘EID’). Developers of PRIIPs are required to prepare this document if the product is sold to retail investors.

The PRIIPS regulation prescribes exactly which scenarios should be included and how the values should be calculated. For most products, figures from the last five years must be considered. Again, investment firms often draw up their own performance scenarios. These must meet the requirements from MiFID II. The requirements give a lot of freedom to determine the number of scenarios and the way the figures are calculated. However, MiFID II does indicate that caution should be exercised when using past figures to calculate future results. The strange thing is that the PRIIPs developer is actually required to use figures from the past. As a result, it is quite possible that the client will be presented with different future potential returns for the same products. This is obviously not desirable.

Information on costs

Finally, a retail investor obviously wants to know what the costs of an investment are. Both MiFID II and the PRIIPs Regulation require the customer to understand the costs. MiFID II involves both the cost of the service and the cost of the investment products, while PRIIPs logically involve only the cost of the product. In theory, this should not pose any problems. Indeed, the product costs reflected in the EID could be taken over one-to-one by the investment firm to show the product costs under MiFID II. However, certain costs that PRIIPs see as product costs are seen as service costs by the AFM. If the costs from the EID are taken over one-to-one, there is a chance that the customer may see certain costs twice, while they are not charged twice. Finally, the presentation of the effect that charges have on returns under PRIIPs and MIFID II is different. This too may raise questions among investors.

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