Dear friends, dear interested,
The big clash was avoided only at the last minute: Two days ago, on 3 February 2021, the European Insurance and Occupational Pensions Authority (EIOPA) adopted a long-awaited regulatory text on the so-called PRIIPS Regulation at the second attempt, thus giving in to demands from the European Commission and the European Parliament. Previously, the authority, which yesterday celebrated its tenth anniversary with a conference, had defied the will of European legislators in an unprecedented manner. The incident highlighted once again that the European supervisory model with three separate supervisory authorities for banks, financial markets and insurance companies is inefficient and unpredictable. The European Parliament has been calling for leaner structures for years, but faced severe resistance from the member states.
The controversy emerged around a project dear to the heart of the European Parliament: with the PRIIPs Regulation, uniform “package inserts” were introduced in 2018 across a wide range of financial products – from funds to insurance. These so-called Key Investor Information Documents (KIIDs) are intended to enable investors to compare different products objectively and to create transparency, particularly with regard to potential losses and fees. I was involved in the project from the beginning as a green shadow rapporteur. The three European supervisory authorities for banks (EBA), financial markets (ESMA) and insurance companies (EIOPA), known as the ESAs, were given the, admittedly, not entirely simple task of working out the precise provisions for drawing up the KIIDs for the various products.
A particular point of contention from the beginning was the determination of potential performance scenarios. For us as the European Parliament, it was very important that the KIIDs do not contain the historical performance of the product. Studies show that end consumers tend to expect a similar development in the future without realistically considering the actual risks. Thus, in calm market phases, historical gains are extrapolated uncritically into the future. Instead, forward-looking performance scenarios should adequately illustrate the potential future performance of the product in the KIID. This requirement is explicitly stated in the legal text. Obviously, we had hit a sore spot because right from the start lobby groups, but also some investor associations, massively campaigned against it. However, after some back and forth, KIID provisions were adopted in March 2017 that contained the legally required forward-looking performance scenarios.
About a year ago, the ESAs should have submitted a revised draft of the KIID provisions. The background was the extension of the KIID to the largest class of investment funds, the so-called UCITS. This includes most investment funds that are typically offered to retail bank clients. UCITS were initially exempt from the law for a transitional period, but are supposed to receive a KIID in accordance with PRIIPs as of 1 January 2022. During the review, the old discussion about historical performance popped up again, and at the beginning of 2020, the ESAs actually seemed willing to include it in the KIID, contrary to the letter of the law. Together with my parliamentary colleagues Jonás Fernández of the Social Democrats and Sirpa Pietikäinen of the Christian Democrats, I wrote a letter to the chairs of ESMA and EIOPA reminding them of the legislator’s will on PRIIPs. In subsequent discussions with the ESAs and the Commission, a compromise was worked out: The KIID would continue to contain only forward-looking performance scenarios, but providers would be allowed to publish historical performance on their website and refer to it in the KIID. The dispute thus seemed to be settled and I could have accepted this compromise solution.
But when the final vote in the ESAs was due in July, EIOPA’s highest decision-making body, the Board of Supervisors, refused to give its approval. EBA and ESMA had adopted the text, but all three authorities were needed for a decision. In a remarkable letter to the EU Commission, the ESAs simply stated that they would not be able to submit a revised draft. The ESAs thus de facto blocked the implementation of applicable European law, because without updated KIID provisions, the planned extension to UCITS was on hold. The indifferent tone of the letter was staggering. For several months, it remained unclear how to proceed. Finally, in December, Finance Commissioner Mairead McGuinness sent the ESAs a letter with an ultimatum: if they did not adopt a draft within six weeks, the Commission would submit its own draft to the Parliament and the member states. This blatant threat, garnished with a few gestures of goodwill, had an effect. Despite the continuing reservations of some members, the Board of Supervisors of EIOPA finally voted in favour of the draft by a majority two days ago, shortly before the deadline.
One could say: problem solved. But the damage has already been done. The application of the new KIID to UCITS will likely have to be postponed to give market participants sufficient time for implementation. Moreover, the events again show very clearly how half-baked the model of the three separate supervisory authorities is. Decisions of the so-called Joint Committee of the ESAs, as in the present case, have to be approved by three bodies in which all 27 EU member states are represented. It often happens that the same authority, e.g. the German BaFin, votes differently in the committees. This makes voting time-consuming and often unpredictable. When the ESAs were founded ten years ago, the European Parliament vehemently advocated merging the authorities and streamlining the decision-making processes. Also in the revision of the system of European financial supervisors, the proposals of the European Parliament to make the decision-making structures of the authorities more efficient were strongly weakened by the member states. If Europe wants to be serious about its vision of a Capital Markets Union, it has to achieve improvements in this field. We need a strong joint financial supervisory authority that is oriented towards the interests of investors and consumers.
With green European greetings,
Letter by the ESAs informing the Commission that no draft RTS will be published from July 2020:
My letter to the Chairs of ESMA and EIOPA together with Jonás Fernández (S&D) and Sirpa Pietikäinen (EPP) from April 2020:
Letter by Finance Commissioner Mairead McGuinness to the ESAs from December 2020:
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