In January 2011, I wrote a blog entitled “Two pints of lager and a packet of PRIPS, please”, which was slightly less than confident about the efficacy of the EU’s proposal to introduce more regulations around the sale of PRIPS (Packaged Retail Investment Products). Since then, teams of people in various EU bodies have beavered away at enormous cost and finally, 5 years later, their definitive directive is about to become EU-wide law.
The PRIIPs directive, (note the cunning extra ‘I’ to indicate it has been increased to cover insurance products as well as investment) has now finally been released and, sad to say, it shows that my previous blog was wildly optimistic about the possibility of the emergence of sensible regulation in the interest of the consumer.
The powers that be eschewed the obvious approach of spending three months reviewing national legislation, selecting the one that provides the best consumer protection and mandating it across the remaining 27 countries. This is despite the obvious advantages that this approach would ensure that the legislation had been tried and tested in a real environment. It would also reward the country providing the highest level of consumer protection by giving them no further work to do.
Instead they have taken the approach of building their own regulation from scratch with some rather strange results. The Key Information Document (KID) that now has to be produced has some peculiar features. Based on their somewhat hard to credit assertion that research shows consumers find data easier to understand than graphics, tables are to be used instead of graphics, (no wonder Apple Inc. is struggling – they’ve been on the wrong track for years!). Returns are to be shown based on standard investments rather than the actual investment that the customer will make, leaving the customer to make the actual transposition to their own personal circumstances themselves. And the document must carry warnings that state, where applicable, that the product is not simple and may be difficult to understand.
What other retail item has to be sold like this? Does the purchase of a car entail warning people that they could lose their loved ones in the event of a crash or involve explaining just how much of the cost price is due to the car-seller’s commission or the likely cost of servicing the car over its lifetime? Do those selling buy-to-let investments have to warn people about the possibilities of a financial crash wiping 25% off the market value of the property?
The sad truth is that after all this effort and expense, the EU consumer is going to be not much better off than before. To a large extent the future is unknowable, and therefore the actual outcome of risk-based investments is not quantifiable in any meaningful sense. Life, pension and investment providers are now going to be put to considerable expense to produce documents that will have no more than a trivial effect on the ability of consumers to purchase financial products across borders. Having poor information that is easily comparable to other poor information does not really move the market forward.
And, despite the insistence in the legislation that no charge be levied for the information, ultimately the consumers will have to foot the bill. After all, the only money the companies have is that which they earn from consumers so every cost put onto their shoulders is actually carried by the consumer. The PRIIPs approach shows the working of the EU in a very poor light and is a great example of how a good idea of a single market can get bogged down in ridiculous levels of expensive red tape in the name of consumer protection, whilst the poor consumer is left to struggle on regardless.