The PRIIPs Regulation sets out a broad definition of what kind of investment is a PRIIP at article 4. In summary, article 4 of the PRIIPs regulation defines a PRIIP as one or both of a packaged retail investment product (PRIP) or an insurance-based investment product (IBIP), as follows:

• a PRIP is an investment where, regardless of its legal form, the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets that are not directly purchased by the retail investor (art. 4(1))
• an IBIP is an insurance product which offers a maturity or surrender value which is wholly or partially exposed, directly or indirectly, to market fluctuations (art. 4(2))

As mentioned above, there are concerns around the scope of the PRIIPs Regulation, notably for certain retail corporate bonds. Respondents to the call for input expressed particular confusion regarding which corporate bonds are in or out of the scope of the regulation and as a result reported.

The PRIIPs Summary Risk Indicator (SRI) presents the risk of a product on a scale of 1-7. The methodology underpinning this score is primarily driven by historic price volatility and, where relevant, credit risk.

During the FCA’s call for input in 2018 they received feedback that the SRI appeared to deliver lower risk ratings than expected where the underlying or reference asset is illiquid.

The KID performance scenarios display in monetary terms the amount that an investor could expect from a product if they were to invest and hold for the recommended holding period. They are calculated using historic data to present potential rewards that an investor may receive under different market conditions: stress, unfavourable, moderate and favourable.

The main concern flagged regarding performance scenarios was that current methodology for presentation of performance scenarios produces misleading illustrations across almost all asset classes.

In terms of transaction costs, respondents to the call for input flagged the slippage methodology used to calculate transaction costs as a main concern. It is believed that this methodology is inappropriate as it can lead to disclosure of negative transaction costs that are liable to confuse or mislead consumers.

However, the FCA have maintained with the consultation that the slippage methodology is working as intended and is the best way to calculate transaction costs for most products.

In the consultation, the FCA have made proposals to clarify through rules the scope of the PRIIPs regime in relation to corporate bonds, confirming which features do not turn a debt security into a PRIIP as well as looking to clarify the type of corporate bond that would normally be a PRIIP. The proposed rules look to distinguish between:

• Corporate bonds which contain features that introduce a degree of variability or uncertainty to the overall return to investors, but which are properly viewed as nonpackaged, direct investment in the business of the issuer, and
• Corporate bonds where the overall return to investors is substantially determined by the performance of investment assets the investor does not purchase, or which are better regarded as a packaged investment due to their complex features.

Specifically, the proposed rules clarify that:

• To be a PRIP, a debt security must come between the retail investor and an ultimate investment asset which is not purchased by the investor.
• Debt securities with fixed coupons are not PRIPs, even if the coupons are subject to pre-defined changes.
• Incorporation of a put option that gives the investor a discretion to demand early repayment of the debt security or to convert it into one or more shares of the same issuer, in each case under pre-agreed terms, does not make the debt security into a PRIP.
• A debt security will not be a PRIP simply by virtue of having a perpetual or indefinite term, or because of its subordination in the creditor hierarchy in the event of the issuer’s insolvency.
• A debt security or indeed any other financial instrument issued or sold before 1 January 2018 is not a PRIIP.

The FCA have proposed amending the onshored PRIIPs RTS to require firms to upgrade their risk rating in the KID if use of the current methodology results in a rating that does not accurately reflect the risk profile of the product.

The FCA are also proposing introducing a requirement that PRIIPs issued by VCTs must be assigned an SRI score no lower than 6.
Additionally, in order to improve supervision by the FCA, they have put forward a proposal that would require PRIIPs manufacturers to notify the FCA by email if they have upgraded their products’ SRI score.

Finally, where the SRI display does not fully reflect the complete risk profile of a PRIIP, the RTS already requires manufacturers to include relevant narrative. To help make this narrative more meaningful, the FCA have proposed extending the 200-character limit to 400-characters.

In terms of performance information, the FCA are proposing the removal from the onshored RTS the requirement for firms to display performance scenarios. Instead, the FCA are proposing to add a requirement for firms to display a narrative display of performance in the appropriate performance information section of the KID.

Once again through an amendment to the onshored RTS, the FCA have made a proposal to introduce technical amendments for transaction costs and derogations to the slippage methodology. The FCA have put forward proposals to improve the accuracy of transaction cost reporting in the following areas:

• Treatment of anti-dilution
• Calculation of costs of over-the-counter (OTC) transactions in bonds
• Calculation of costs of index tracking funds