Shearman & Sterling LLP | FinReg | European Commission Responds to Uncertainty Regarding Scope of PRIIPs Regulation
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  • European Commission Responds to Uncertainty Regarding Scope of PRIIPs Regulation

    The European Commission has issued a response to concerns raised by the European Supervisory Authorities about the market impact of uncertainty around the scope of the Packaged Retail and Insurance-based Investment Products Regulation. In a letter to the Director General of the European Commission dated July 19, 2018, the heads of the ESAs raised the difficulties that manufacturers of financial products face in determining whether their products fall within the requirements of the PRIIPs Regulation. The letter describes the broader market impact that this uncertainty has caused, which includes a reduction in the availability of corporate bonds to retail investors, a reduction in the number and volume of low denomination issuances by non-financial corporates and greater difficulties for retail investors wishing to trade their bonds. In its response, issued on May 14, 2019, the European Commission refused to pass judgement on whether certain categories of products should be deemed to fall within or outside the scope of the PRIIPs Regulation and stressed that the determination of whether an instrument is a packaged retail investment product should be undertaken on a case-by-case basis.

    The PRIIPs Regulation became applicable in Member States on January 1, 2018. It imposes a requirement upon issuers of packaged retail and insurance-based investment products to issue key information documents to retail investors describing key features of their products, in order to enhance transparency and improve investor protection in the PRIIPs market. The ESAs' letter expresses concerns, however, that the recent difficulties faced by retail investors in trading their PRIIPs may in fact lead to a weakening of trust in financial services and ultimately a reduction in liquidity of these markets. In support of the request for Commission guidance, the ESA letter also includes proposals as to which types of bonds may or may not be caught by the Regulation. The ESAs propose that perpetual, subordinated, fixed rate and puttable bonds would be out of scope of PRIIPs, while convertible bonds would be in scope. The ESAs' position was more nuanced in respect of variable and callable bonds. Variable bonds (in which the amount repayable is subject to fluctuations based on the coupon rate) would not always be in scope. ESMA proposed that pre-defined increases in the coupon rate that were not linked to a reference value, as well as coupons linked to an interest rate index, would not render the bond a PRIIP. Bonds that include links to an interest rate index with additional structuring, such as caps or floors, may, on the other hand, fall within the scope of PRIIPs. Callable bonds (in which the issuer may redeem the bond prior to maturity) may also not be PRIIPs in all circumstances. Where the amount repayable by the issuer was not fixed, but subject to fluctuations caused by exposure to a reference value, the instrument may be held to be a PRIIP. Similarly, inclusion of a make whole clause that calculated amounts repayable using a reference rate to determine the net present value of future coupon payments may qualify the bond as a PRIIP. Where the make whole mechanism used to calculate the discount rate was known by the retail investor in advance, on the other hand, this may indicate that the bond does not fall within the PRIIPs regime. The Commission rejected the ESAs' proposals, arguing the particular terms and conditions of the product in question would be determinative of whether the PRIIPs Regulation applied.

    View the ESAs' letter to the European Commission.

    View the European Commission's response to the ESAs

    You may like to view our client note, "PRIIPs and Capital Markets Transaction: A Better Way Forward?".

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