While PRIIPs could increase costs for fund managers, the real challenge is ensuring the clients are protected, says Paolo Brignardello of Fundsquare.
There is a risk that the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation could add another layer of cost for funds, regarding the information document required for product distribution. This could come just when the market was beginning to produce economies of scale. There are around 40 Key Investor Information Document (KIID) factories, through which substantial fund document production work is outsourced.
Some funds are moving to provide PRIIPs Key Information Documents (KIDs) as soon as the regulation is implemented. In so doing, linking both asset managers and PRIIPs manufacturers could present them with a competitive advantage in a revamped market.
UCITS IV introduced the KIID, and now the PRIIPs directive is bringing in the KID. These documents will eventually merge in 2020, but in the meantime there will be a lot of work to process the different requirements while keeping costs under control. There is time to adjust, as it seems likely that the implementation of PRIIPs will be delayed by a year from the scheduled date of 31 December 2016.
KID: a question for funds now
The UCITS IV KIID is deemed to be equivalent to the PRIIPs KID for retail funds until 2020. However, funds that are used by life insurance products in unit-linked products will have to communicate a range a data from the PRIIPs implementation date. This is adding effort and cost for those producing KIIDs, whether it is asset managers doing this work in-house, or KIID factory outsourcing partners. There are around 150,000 UCITS fund share classes being distributed cross-border in the EU, with each requiring on average four to seven versions of the KIID in different languages. When you consider that the average price of each document ranges between €50 and €80, the numbers start to add up to a significant cost for the fund industry.
Reversing cost control?
In the five years since UCITS IV was passed, the document-processing industry has worked hard to streamline procedures and standards. Gone are the early days that saw a confusing, costly array of incompatible offerings and service models. The more than 40 KIID factories have created, and are continuing to perfect, more industrialised approaches. With steady competition has come sustained downward pressure on costs, particularly thanks to technology, which has enabled self-servicing solutions and re-insourcing processes.
However, could PRIIPS be a game changer that reverses this process? Will the added complexities lead to a shake up in competition and the current market positioning of KIID factories? Will the new ‘super KIID factories’, which produce documents to satisfy the requirements of both funds and PRIIPs manufacturers, lead to market consolidation? Will they be able to create efficiencies and provide services at lower cost? Or would this reduced competition slow the current ongoing trend towards better-value services?
Diversity and competition
A key cost driver will continue to be the work involved in retrieving data from multiple sources. This will lead to the creation of new connections, as well as industry standards regarding the format of documents and how they are processed. Rethinking the workflows will permit existing actors to challenge competitors’ service propositions. There would also be a path by which incumbent players enjoy first-mover advantage, enabling them to increase market share.
Standardisation of documents, data formats, and procedures is central to the ongoing efforts to improve quality and reduce the cost of fund documentation processing and production. Several industry initiatives are very encouraging, such as the definition of the pan-European data model known as European PRIIPs Template and the Complementary European PRIIPs Template. This will help, but the devil remains in the detail, and how these technicalities are implemented. Performance scenarios and the required holding periods for data are often a concern. In addition, data exchange between parties remains problematic, with the risk of creating costly, time consuming complexity.
In other words, clear efforts to cut costs need to be made, and they must be seen to be made. It is important that the advantages of lower cost and greater data quality that will result from these moves are passed onto the fund and the end investor. A market utility would help.
By replacing a spaghetti plate of point-to-point connections with a hub-and-spoke data collection model, a central utility would cut data collection complexity. It would also be neutral, allowing access to any market participant. The industry has the time to adjust and put in place the systems and tools to produce these detailed documents in a timely, accurate and cost effective fashion. In line with the fund industry’s objective, costs must be driven downwards. Fund industry clients must be the winners from this latest round of regulation.
Asset Servicing Times, issue 151