Luxembourg, 30th 2016

In short, the PRIIPS RTS have been rejected due to the following supposed flaws:

Credit risk for insurance-based investment products

The credit risk can be fixed quickly because we can suppose that insurance companies can have a Credit Risk Measure of 1 or 2. Apparently and taken into account the states guarantees and Solvency II rules, a Credit Risk Measure of 1 seems to be an accurate indicator. However and if we take into account the maximum guaranteed by the states and the scope of the guarantee, a Credit Risk Measure of 2 seems more appropriate.

Biometric risk premium and investment costs

At least, the biometric risk premium and costs present problems due to the lack of common required holding period and range of ages of the subscribers. To overcome these difficulties, the RTS could drop this risk; alternatively allow either the use of narratives or the personalization of the PRIIP.

Multiple Options Products

Based on the fact that a PRIIP offering Multiple Options Products requires a generic KID and specific information of each investment option, we cannot see the added values of the proposed decomposition because, if we believe that we should apply the building block approach and value the whole PRIIP to capture all risk characteristics and performances. The new RTS should authorize explicitly the use of such approach.

Exclusion of closed business product and annuities

This approach could be a simplification to eliminate the workload of the players and to shorten the time to bring PRIIPS to market. However, the drawback will be the creation of a no man land for the existing clients with long term investments such as insurance-based products.  A pragmatic approach could be the exclusion of the existing business in short term and the coverage of all the sold products by January 1st, 2018.

Performance scenarios and annualized cost

The major the problem that exists with the current RTS is the use of the drift measured over the used historical period. The proposed use of the interest risk free rate of the required holding maturity could leads to misinterpretation and confusion. The quick fix will be the use of zero meaning no drift and all the performances figures will be function of the projected volatilities. The use of past performances is not an option because they cannot capture the likely future picture.

More information coming soon…”

Abder EL ADRAOUI

TALEO Reporting – Technical Director