As Hargreaves Lansdown and other platforms suspend hundreds of investment trusts, are the PRIIPs regulations doomed already?
The new PRIIPs (Packaged retail investment and insurance-based products) Guidelines claimed their first casualties when UK investment advisors moved to suspend some funds for failing to comply with new EU rules. As other funds struggle to fulfil their obligations the early life of PRIIPs is proving to be anything but plain sailing.
Hargreaves Lansdown was first out of the block removing almost 300 investment trusts and 1200 ETFs from their books for failing to comply with the new rules. It’s a startlingly high figure and equates to a third of their ETFs and almost half of their investment funds.
Bestinvest has followed suit and temporarily suspended International Biotechnology Trust, Sanditon Investment Trust and Baring Emerging Europe after they all failed to provide the required documentation outlining potential risks. AJ Bell, meanwhile, is reviewing its product portfolio, while others such as Standard Life Aberdeen said all products on its platform had been seen to be compliant.
The aim of PRIIPS was to make it easier for retail investors to compare products by requiring funds to provide a readily available document outlining the potential investment risks. This Key Information Document (KIDS) can be up to three A4 pages long, must be available in the investor’s local language and available for download online. It was supposed to add transparency and make it easier for retail investors to compare multiple products side by side.
The aim might be laudable, but the immediate impact has been to restrict the market for investors rather than enhance it. The problem was that a number of investment trusts – for one reason or another – did not provide the required KIDs information by the deadline.
The question now is: are these problems temporary, who is to blame and can they be overcome? Will this follow in another long line of regulations – intended to make life easier – which have actually done the opposite?
Dishing out blame
Both Hargreaves Lansdown and Bestinvest have been quick to downplay the impact on their funds.
Hargreaves Lansdown told the website Portfolio Adviser:
“US domicile funds which don’t comply with the PRIIPs rules have been removed from our website. Very few people invest in these funds, most people invest in European domicile ETFs, so it has had little investor impact.
As with any other investment on the platform, we ensure that all the relevant documentation is available to investors and if it is not, we withdraw the investment from our website.”
Best Invest, meanwhile, pointed out that they had run a review of their platform and had found only a few which were non-compliant.
Jason Hollands, Managing Director of Tilney Group said:
“Many platforms, including Bestinvest, use the services of third-party data providers, including for links to Kids – that makes sense given the thousands of options available.
We identified a handful of trusts last week where there did not appear to be Kids in place, but this was quickly resolved in most cases as Kids were being put in place during the week. There were no issues where clients wanted to deal on any of these but couldn’t. Bestinvest doesn’t offer access to US domiciled trusts or ETFs, so this wasn’t a big deal for us.”
The impact, they argue has been relatively small and some of the funds which were suspended have since been reinstated. The optimists’ viewpoint, therefore, is that this only represents a temporary glitch and those funds which are lagging behind will catch up before long.
Even so, as often happens at times like these, the critics have been quick to line up their attacks. Funds, they claimed, had been given insufficient preparation time and even if they do become compliant, the rules do little to improve choice for retail investors.
Time was certainly short. The rules had only been finalised in September 2017 giving funds just a few short months to become compliant. According to Ian Sayers, Chief Executive of the Association of Investment Companies (AIC), that was always likely to create problems. He told Reuters.
“Something that should have had 12 months as a transitional period ended up with a matter of weeks”
Of more importance, though, he argued, was the question of whether the new information would truly be useful to retail investors. Projections for future risks could be coloured by recent strong performance thanks to central bank liquidity.
Questions also arise about why some of these funds appeared to have stalled over adding the required documentation. Are they simply lagging behind with their obligations, in which case we can expect them to become compliant before long or are they unlikely to comply at all? In the case of US investment trusts which do little business in Europe, they might not see the value of complying rigidly with European regulation.
The impact could also be lessened because UCIT (Undertakings for Collective Investment in Transferable Securities) are still exempt from these rules. These are already required to publish a KID but its format differs from that required under PRIIPs. This will be aligned but not until the end of 2019. As such, retail investors will find it difficult to achieve a true like for like comparison for the next couple of years.
At the very least, the critics argue, funds should have been given a transitional period to become compliant. Instead, this hurried implementation period has left many struggling to keep up and has, temporarily at least, restricted rather than enhanced the trading landscape for investors.
PRIIPs comes at a time when financial institutions are already struggling under the weight of multiple regulations. 2018 dawned with a packed regulatory schedule including MiFiDII as well as PRIIPs. Later in the year banks will have to prepare for the arrival of GDPR.
Compared to PRIIPs the arrival of MiFiDII passed by relatively without a hitch despite warnings in December that up to a third of companies were not prepared for MiFiDII. Even so, the task of managing compliance across so many different regulations is a significant challenge for companies and problems are almost inevitable.
Given the relatively short timeframe between the finalisation of the rules and implementation, it was always likely that PRIIPs would run into some problems. The question that remains to be answered is how lasting these will be and if, once it’s fully up and running, PRIIPs can actually deliver on its promises.