PRIIPS – the challenges for adviser firms
Ulf Herbig, product owner at KNEIP looks at what advisers need to understand about PRIIPs and the challenges posed by the regulation which came in earlier this year.
The new Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation has brought into focus, amongst others, the issue of transaction cost calculation. The regulation aims to provide transparency where historically there has been no separate disclosure of these costs directly to investors.
With this, advisers will now need to have a better understanding of the different calculation methods and how they can affect the actual result reported by fund managers.
Comparing transaction costs can quickly become challenging, especially when only scarce information is available for fund managers to use for the PRIIPs compliant calculation method.
On top of that, it becomes especially complex as funds under three years of age calculate using the New PRIIPs estimated cost method while funds over three years of age use the Arrival price method or the New PRIIPs method for all of their transaction costs under MiFID II.
For now fund managers may apply the new PRIIPs method to their full scope of funds under MiFID II, knowing that it’s not 100% PRIIPs compliant, because this would disregard the fund’s age. That means over the next two years they will use the new PRIIP method that is considered as less complex and communicate a certain result to the market.
By the end of the PRIIPs grandfathering period, 2020 at the latest, they will need to switch their transaction cost calculations to the fully compliant method with PRIIPs by including the arrival price.
This can be done in two ways; they can either allocate a separate budget for the in-house creation of the additional PRIIPs arrival price calculation method, considering the actual trades of the fund. Otherwise they can invest in an external tool which will provide the fully PRIIPs compliant calculation.
In both cases they need to be ready for the two different transaction cost numbers being published for the same period and for the same funds. This would solely be due to when the migration from MIFID II estimated cost to PRIIPs calculations takes place. It will only be the outcome if fund managers do not align PRIIPs and MiFID transaction cost calculation methods now.
Negative percentage figures
In some cases, transaction costs may appear as a negative percentage under the PRIIPs arrival price method which at first glance may look suspicious. It is actually a possible result when following the methodology prescribed in the technical standards of PRIIPs.
Advisers need to pay close attention to the transaction cost values used for the funds in scope of distribution, but should avoid disclosing such costs as ‘zero transaction costs’ and verify the accuracy of data with the fund manager first.
In the PRIIPs Level III Q&A, it is noted as required to be presented as a negative value. If this is the case, the adviser or their technical team should ensure that the overall ‘Ongoing costs’ are not negative for the relevant fund, otherwise investors could potentially ask the distributor for money in return. Plausibility controls and monitoring rules on cost disclosure are therefore highly recommended.
Although it may seem like a mountain to climb, there are a number of options to deal with the issues mentioned above. KNEIP has 25 years of experience dealing with regulatory and market demands. It can all be managed in a single place using our digital platform which encompasses a transaction cost calculation engine. If you need any more information, feel free to get in touch with one of our experts.
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