Impact of PRIIPS Regulation on Adverse Outcomes
The Hedge Funds Guest Article published by The Sortino Group delves into the concerns raised by the Association for Financial Markets in Europe (AFME) and the Financial Conduct Authority (FCA) regarding the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation.
Ten months since its implementation in Europe, the PRIIPs regulation has had a significant impact on bond market liquidity. The stringent requirements for product disclosures can increase costs and complexity for issuers and distributors, potentially leading to a reduction in the availability of non-structured bonds for retail investors.
AFME believes that this limitation in number and type of non-structured bonds could significantly reduce the availability of these investment products for retail investors. The FCA shares this view, expressing concerns that a more conservative approach by product manufacturers due to the mandatory nature of PRIIPs and penalties for non-compliance might have negatively affected bond market liquidity.
The complex disclosure regime can discourage issuers from entering the retail bond market, potentially reducing secondary market liquidity and investor access. There is also worry that overly prescriptive disclosure requirements might distort investor behavior and reduce the appeal of certain fixed income products to retail investors.
Industry observers are concerned that these issues may persist, despite recent regulatory adjustments by the FCA aimed at improving bond market liquidity. The resolution of the issues surrounding PRIIPs can't come quick enough for constituents of the bond market.
The PRIIPs regulation applies to two types of products: Packaged Retail Investment Products and insurance-based investment products. The bond markets require more certainty around the liquidity issue related to PRIIPs. Retail investors could potentially lose the ability to have direct exposure to non-structured bonds and would only be able to invest in either bond funds or structured products.
Initiatives to innovate bond markets via technology, such as the issuance of digital bonds on blockchain platforms, are being explored to enhance liquidity and transparency while potentially reducing compliance costs. This shows the industry’s interest in technological solutions to mitigate regulatory frictions associated with PRIIPs and similar frameworks.
The Economic Committee of the European Parliament rejected the draft version of the PRIIPs regulatory technical standards in 2016. European authorities should address the issue of the scope of the PRIIPs regulation swiftly, considering feedback received after the first year of its implementation. The FCA has requested feedback on the application of the PRIIPs regulation.
Attilio Veneziano, the Managing Director at Veneziano & Partners, adds his voice to the conversation, emphasising the need for a clear and concise resolution to the ongoing concerns surrounding PRIIPs. The views expressed in the article do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group.
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- The debate on the impact of the PRIIPs regulation on the business of retail bond investments continues, with both AFME and the FCA expressing concerns about its potential effect on the availability and complexity of non-structured bonds.
- In the realm of policy-and-legislation and general-news, the call for a concise resolution to the PRIIPs regulatory concerns is growing louder, with industry experts like Attilio Veneziano and European authorities voicing their opinions on the matter.
