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Update on the PRIPs initiative

Update on the PRIPs initiative. Claude Kremer President of EFAMA. Overview 2011. Four types of pressures : Political and economic trends leading to uncertainty in financial markets; Decreasing investor confidence;

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Update on the PRIPs initiative

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  1. Update on the PRIPs initiative Claude Kremer President of EFAMA

  2. Overview 2011 • Four types of pressures: • Political and economic trends leading to uncertainty in financial markets; • Decreasing investor confidence; • An unprecedented wave of new regulatory policies, which represent the public authorities’ reaction to the crisis; • New corporate strategies, shift of money from funds into bank accounts. • As a result of which:  In 2011 AuM in Europe decreased from €8.1 to €7.7 trillion. This erased the gains made in 2010;  In 2011 UCITS experienced net outflows of €90 billion;  30 regulatory initiatives that have a direct or indirect impact on the asset management industry;  Restructuring, recruitment freezes and job cuts and consolidation. Milan, 19 April 2012

  3. Outlook for 2012 and beyond • Cautiously optimistic outlook: • End 2011 the Asset Management industry in Europe was managing €1.7 trillion more in assets than in March 2009, which is: • 70% more than a decade ago (from €4,560 billion at end 2000 to €8,142 billion at end 2010); • 23% increase over the last 5 years (end 2005 – end 2010); • Strong net inflows in January and February 2012 (UCITS € 25 and 19 billion respectively, non-UCITS € 7 and 16 billion respectively). • Worldwide investment fund assets were growing over the past months: • 7.5% increase in Q4 2011. • The Asset Management industry undeniably creates value for individual investors, as well as the economy and society as a whole. • As a group, if we accept that we are in a consumer market, we can use our collective intelligence to explain our value to all stakeholders. • That is the purpose of EFAMA! Milan, 19 April 2012

  4. « EFAMA land » 27 Countries: • 23 EU Members, as well as • Liechtenstein • Norway • Switzerland • Turkey 58 Corporate Members 20 Associate Members Investment Management: EUR 14 trillion of which EUR 8 trillion are managed through over 54,000 investment funds (end December 2011) 4 Milan, 19 April 2012

  5. Why does EFAMA care about PRIPs? • Initiative is in line with EFAMA’s strategy “Investor at heart”. • Long battle by EFAMA for recognition of an uneven playing field for funds vis-à-vis other financial products: • Gaps/inconsistencies in rules applying to financial products across different sectors (investment, banking and insurance products); • No level playing field between product manufacturers facing different levels of regulation  higher compliance costs that negatively affect both the cost of the product offered to the investor and product innovation in that sector; • Lack of comparability between products for retail investors  risk of mis-understanding by the investor / mis-selling. • Pre-crisis initiative. • Commission work on PRIPs initiative started in 2007. • Initially, discussion on « substitute » retail investment products. Later, scope limited to « packaged » retail investment products (« PRIPs »). • EFAMA’s goal: • Same or equivalent rules for products in different wrappers but satisfying the same investment needs. Milan, 19 April 2012

  6. PRIPs: Why an initiative on PRIPs? • Main objective: eliminate regulatory patchwork, close gaps and create consistent rules applying to all PRIPs: • Restoring retail investors’ confidence in financial markets by enhanced investor protection; • Regulation of asymmetries of information offered to investors both at product creator level as well as at investor level. • PRIPs initiative covers two main aspects: • Transparency and disclosure to investors • Standardised pre-contractual information to investors (marketing documents) • Enabling them to make informed investment decisions and comparisons between different products. • Selling practices • Avoidance of conflicts of interest at the sales points through transparent sales process. • Harmonisation of marketing rules across sectors (investment, banking and insurance products). Milan, 19 April 2012

  7. PRIPs: current situation • 2 parallel legislative streams: • Transparency and disclosure to investors Horizontal approach with UCITS KIID as a benchmark; • Selling practices Sectoral approach with MiFID rules (for investment and banking products) and serving as a blueprint for IMD review (for insurance products). • Timeline: • 20 October 2011: MiFID II proposal released by the European Commission, creating new selling rules for investment and banking PRIPs. • In the hands of the EP: draft Report of MEP Ferber of 16 March 2012; • 24 – 25 April: European Parliament ECON Committee; • 10 May: Deadline for amendments; • July ECON vote probably moved to September. • April/May 2012 (expected): legislative proposal on product disclosure for all PRIPs (Investment, banking and insurance products). • April/May 2012 (expected): legislative proposal on IMD revision, introducing MiFID-type rules for insurance products. Milan, 19 April 2012

  8. PRIPs: Scope of PRIPS • PRIPs are defined as capital accumulation products creating exposure to investment risk for investors: “A PRIP is a product where the amount payable to the investor is exposed to fluctuations in the market value of assets or other reference values, or fluctuations in payouts of assets, or other mechanisms than a direct holding”. Milan, 19 April 2012

  9. PRIPs: Transparency and Disclosure • Single common framework based on KIID; • KIID: fair, clear, not misleading information for investors allowing comparison of PRIPs; • Standardized summary information document in the language of the investor: • Includes objectives, risks, performance and costs (maximum two A4 pages); • Gives the risk profile on a scale from 1 to 7 for the understanding of the nature of the risks; • Provides a table of the costs incurred by the fund in the past year; • Presents a historical performance over 10 years. • At a later stage, detailed implementing measures allowing tailoring for different products. Milan, 19 April 2012

  10. PRIPs: Selling practices in MIFID II proposal • Investment advice (Partial Ban): • Commission’s Proposal: • Advisers providing advice «on an independent basis » may not receivemonetaryinducements (art. 24 parag. 5 MIFID). • EFAMA keyconcerns: • Riskthat a number of small providers will exit the market; • Reducecompetitionamong distribution channels as well as severalproductsoffered by distributors; • Cross subsidization: direct payment for advice is an alien concept for many clients unwilling or unable to pay for advice. • Threat to « open architecture ». • Draft report of Mr Ferber (Rapporteur): • The art. 24 parag. 5 on partial ban of inducement has been deleted; • Proposes that clients should be informed in advance if there have been third-party payments and if advice is given on a limited number of instruments. Milan, 19 April 2012

  11. PRIPs: Selling practices in MIFID II proposal (ii) Portfolio management (Total Ban): • Commission Proposal: • Investment decision-making using other people’s money: • Ban on fees, monetary inducements and Commissions received from third party. • Non-monetary inducements allowed provided that they do not impair the ability of the firm to act in the best interest of the client. • EFAMA key concerns: • Such ban would result in an increase of fees charged to the end investor. Thus: • Monetary inducements should either be rebated to clients or the client could consent to them being kept by portfolio manager. • Non-monetary inducements should expressly be allowed, as they help reduce fees charged to investors and assist investment managers in providing better service to their clients. • Mr. Ferber’s draft report substitutes total bans on monetary inducement for portfolio management with transparency. Milan, 19 April 2012

  12. PRIPs: Conditions for the success of the initiative • PRIPs must be applicable across the range of all retail investment, banking and insurance products. • The Commission must resist attempts to unduly narrow the scope of PRIPs. • The more products it covers, the more beneficial the initiative will be to the end investor. • Level-playing field among retail products is key to secure fair outcomes for investors and promote unbiased capital allocation, higher long-term savings, thus: • Harmonised approach to disclosures must ensure interaction between PRIPs, IMD Review and Prospectus Directive on Level 2. • Selling practices in MiFID and IMD must also be harmonised not only at Level 1 but also at Level 2. Milan, 19 April 2012

  13. Contact EFAMA Rue Montoyer, 47 B-1000 Brussels, Belgium Tel. +32 (2) 513 3969 Fax + 32 (2) 513 2643 E-mail: info@efama.org www.efama.org

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