PRIIPs in the UK and retail disclosure – HMT’s response to feedback

On 11 July 2023, HM Treasury (HMT) published its response (the Response) to its Consultation Paper, "PRIIPS and UK Retail Disclosure" (the CP), which ran from December 2022 to March 2023.

The CP proposed the repeal of the UK's retained of the EU's PRIIPs Regulation and sought views on a new framework for retail disclosure.Our summary of the CP can be found here.

The Response

• provides a summary of the feedback received to the CP, together with HMT's decisions in light of stakeholders' comments

• confirms the Government's intention to remove all firm-facing retail disclosure requirements currently in the PRIIPs Regulation and

• gives more detail on the Government's plans for a new UK retail disclosure regime and what steps now need to be taken in order to deliver this.

What happens next?

• The Government will publish a draft statutory instrument by 2024 to enable the FCA to deliver the new retail disclosure regime, following the repeal of the UK PRIIPs Regulation (and related secondary legislation).

• The FCA will publish a consultation paper seeking feedback on its draft rules for the new retail disclosure regime, building on the principles discussed in HM Treasury's consultation and the discussion in DP22/6, "Future Disclosure Framework". (Our summary of DP22/6 can be found here.)

• There will be a transitional period before the new FCA retail disclosure rules come into force - the Government and the FCA will ensure there is no gap between the end of the old regime and the start of the new.

• Further information about the transitional period and the intended change in disclosure requirements for UCITS vehicles will be published "in due course".

Background

The Edinburgh Reforms, announced by the Chancellor in December 2022, set out a package of changes, including the repeal of retained EU law (REUL) on financial services and its replacement with rules more tailored to the UK regulatory framework.

As part of this work, the Government consulted on proposals to

• revoke the EU's PRIIPs Regulation and

• establish a framework for a new UK retail disclosure regime.

What does the Response say?

Looking at the different areas on which the CP consulted:

A. UK PRIIPs Regulation

The CP noted that there are "fundamental issues" with the current PRIIPs regime - in particular:

• prescriptive format requirements are overly burdensome for firms to produce and have not led to consumers understanding the product better

• trying to compare such a wide variety of products has led to retail investors being presented with misleading information (for example, on risks and costs)

• the cost of compliance with the PRIIPs Regulation has dissuaded some firms from making their products available to UK retail investors.

The Response, in turn, notes that

• all respondents strongly agreed with this assessment, with particular concerns that some information in the PRIIPs Key Information Document (KID) was misleading

• many respondents wanted reform of the cost and charges disclosure requirements under MiFID, in order to improve the way in which costs are presented to retail investors under the new regime

• some also felt that, not only did the PRIIPs Regulation reduce consumer choice, but that this may contribute to market distortion for some products (notably where cost disclosure methodologies can artificially increase the costs of certain products).

B. Framework for a new UK retail disclosure regime

Most respondents agreed with the government's proposed principles for a new Retail Disclosure Regime, namely:

1. to ensure that retail investors have access to clear and useful information to make evidence-based decisions for their prospective investments

2. to ensure that the disclosure that retail investors receive is proportionate to the risk that they are taking in purchasing an investment product and the complexity of the decision that they are making

3. to provide additional choice for retail investors, and to reduce burdens for firms

Most also supported the view that enabling the investor to make well-informed decisions about specific products is more important than focusing on comparability - although around a third of responses also suggested that the new regime should facilitate comparability across similar investment products.

There was strong agreement from most respondents that disclosure requirements should be flexible, with prescriptive requirements for format and structure only when deemed necessary by the regulator. At the same time, though, a significant proportion of responses felt that the FCA should require some standardisation for key information needed across all products, notably in relation to the methodologies used to calculate costs and risks.

In light of this feedback, the Response confirms that the Government "will ensure the FCA has all the tools it needs to design a new regime" which:

• deals with concerns about

  • what products should be in scope of the new UK disclosure regime and

  • the accuracy of disclosure information and

• balances flexibility with comparability so consumers are provided with the appropriate information to make effective investment choices.

As things stand, UCITS are exempt from having to produce a PRIIPs KID and have their own separate disclosure regime. Given the similarities between products marketed to retail investors under both the PRIIPs and the UCITS regimes, the Response confirms that UCITS will be brought into scope of the new retail disclosure regime. The Government and the FCA will provide clarity on the transition period from current disclosure requirements (for both packaged products and UCITS) as further detail of the new regime is set out.

C. Delivery

The Response confirms the Government's intention to entirely remove all PRIIPs firm-facing retail disclosure requirements from legislation.

The FCA's new retail disclosure regime can then be tailored and proportionate to the UK market - supporting UK businesses, while maintaining the appropriate disclosure so retail investors can make informed decisions.

However, the FCA will require additional tailored powers in order to ensure that the new retail disclosure regime applies obligations to:

• Certain unauthorised firms - these make up "a substantial part of the PRIIPs market" but the directly applicable obligations to which they are subject under the existing PRIIPs regime will fall away when PRIIPs is repealed and

• Overseas Funds - to ensure there is a level playing field for UK funds and appropriate information for UK retail consumers, the Government recognises the importance of requiring overseas funds to provide disclosure to UK retail investors and will ensure the new regime facilitates this.

Further detail on the FCA's powers over certain unauthorised firms and overseas funds for the new regime will be set out in due course.

The Government will "reflect" on feedback regarding MiFID II cost and charges disclosure as it repeals and replaces the remainder of the MiFID II framework in due course.

D. Wider responses

In addition to the above, the CP also sought views on a number of wider issues, including digital disclosure, where HMT noted that a more flexible approach to disclosure could facilitate innovative disclosure formats.

Respondents supported a move to digital disclosure and recognised that it offered opportunities for innovation, including:

• enabling disclosure through novel formats (such as video), which would permit firms to layer data to enhance consumer understanding

• providing opportunities to share disclosure at different points along the consumer journey to improve engagement with disclosure by retail investors

• facilitating the personalisation of disclosure documents to suit an individual consumer's circumstances.

The Government will consider these responses as it develops a new framework for retail disclosure and the FCA will do likewise as it designs new rules on retail disclosure.

The Response notes HMT's expectation that, in light of responses to its DP 22/6, "Future Disclosure Framework" (December 2022), the FCA will deliver policy based on this shared view of good disclosure.