The UK will exit the transition arrangements it has with the EU at the end of 2020. As has been covered extensively on a daily basis by the mainstream media the fate of the future relationship between UK and EU remains very unclear with daily changes as we approach that hard deadline. Inevitably, this process has been disrupted by the unprecedented global situation of this year.
During the referendum debates over the last few years much was made over the ability for the UK to set its own laws once fully exited from the EU. The idea of “sovereignty” was a big supposed selling point of the Leave campaign. However, this doesn’t mean that all EU laws cease to apply immediately, since nearly 50 years of membership of Europe has meant that the UK’s legal system is completely bound up with that of the EU and this cannot be replaced overnight.
Direction for UK law
The simplest way to think of this is that on 1st January 2021, the entire EU law rulebook is “adopted” by the UK in its own right but with the freedom to make future changes of its own determination. The next couple of years will see an extraordinary volume of legislation as this process starts to gain momentum.
The introduction of the Financial Services bill a few days ago provided the first major roadmap of the direction of financial legislation. This Bill covered a number of important areas which gives an interesting insight as to what the Treasury sees as priorities. The purpose of this legislation is to target governance of the financial markets but also undoubtedly has an eye on the position of the UK as a key global financial centre.
Areas under focus
Two of the areas to get a lot of focus are benchmarks and access to markets.
The Benchmark regulation (BMR) has been an important development that affects the governance of all indices, many of which are used to link structured products to. However, the main motivation for this initiative was the Libor scandal of eight years ago. This current bill concentrates on the treatment of critical benchmarks such as Libor (and its imminent replacements). This is natural because of the importance of such benchmarks but also because the City sees itself an important home to such influential indicators and wishes to maintain that in the future.
Attention to access of markets is also an immediate priority as the UK government seeks to minimise disruption and disadvantage for UK firms and UK domiciled funds. However, such intervention can only be viewed as provisional at this stage because of the lack of clarity of the situation post year end.
What next for PRIIPs?
A substantial part of the Bill considers the UKs treatment of the PRIIPs regime after leaving the EU, and the rest of this article will examine this. Interestingly, MiFID II, the sister regulation to PRIIPs was not mentioned at all in the bill. International regulatory difference and convergence is a subject considered particularly by those that operate in or follow different markets worldwide. The approach of the EU towards investor protection and investment disclosure is substantially different to that of the US and the markets of Asia for a variety of reasons and is fully to be expected.
What makes this position unique is that the UK now finds itself in possession of a comprehensive set of regulations from its time in the EU. Indeed, the FCA was a key player in the development of MiFID II and PRIIPs. There will now be a period of divergence and there will soon be an “EU PRIIPs” and a “UK PRIIPs”. It remains to be seen how much difference will be created, at what speed and whether the two entities have any appetite to keep the regimes aligned in any way.
UK Treasury assessing its options
The bill puts down various markers, such as the right to reclassify different investments into or outside the PRIIPs regime and also revisits the troubled attempts to unify the PRIIPs and UCITS regulation so that UCITS funds produce the same Key Investor documentation (KID) as under PRIIPs.
The EU currently has a date of January 2022 for mandatory adoption of the PRIIPs KID by UCITS funds, but it is very possible that this will be delayed by a year because of the disruption to markets and economies in 2020. The UK bill now gives the Treasury the right to set a date not later than January 2027 for this adoption. This likely gives an extra four years over the EU timetable even if the latter is pushed by a year. The resistance of the fund industry to PRIIPs in its current form is well known and given the UK’s high usage of funds both as manufacturer and investor we can conclude that the FCA is determined to allow plenty of time even by regulatory standards for this transition to occur. It also therefore allows significant modification to be made to PRIIPs before adoption by UCITS funds is required, which will be a motivating factor to such a timescale.
Performance scenarios - again
The bill also pointedly singles out the use of performance scenarios as under review on a fundamental level by using the phrase “information on performance” instead of “performance scenarios”.
The current performance scenarios have been repeatedly criticised since the adoption of PRIIPs a little under three years ago, including publicly by the FCA in the first few months of the regulation and is also a key objection of the influential fund lobby.
The change in terminology paves the way for alternatives to the detailed performance scenario calculations at intermediate and final points in an investment that must currently be shown. Past performance or even illustrations could reasonably fit this new terminology. It may also be the intention to allow some discretion by manufacturers, or variation between different investment classes such as funds, structured products and insurance, the three pillars of the current regulation.
More changes to come
The next year or two may therefore see significant changes in the scope and application of PRIIPs as well as the metrics that need to appear on the KID. Investment banks and others that are involved in product manufacture in the UK and the remaining countries in the EU will therefore have to accommodate such differences and apply both sets of rules, as well as being aware of the implication for cross-border selling. This situation is further complicated by the forthcoming review of the EU PRIIPs rules which has not yet been agreed after reaching stalemate earlier this year.
Vendors and consultants active in the PRIIPs area will need to stay abreast of the new rules and nuances in order to provide a complete service.
Under its Ascend partnership with Vox Financial Partners, who created the Opal documentation platform, FVC will assist its clients in managing change and divergence and being fully prepared for the future direction of PRIIPs. Please contact us if you would like to discuss any aspects of these issues.
A version of this article has also appeared on www.structuredretailproducts.com
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