Impact of PRIIPs Regulation: Unintended Drawbacks Examined
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The implementation of the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation in Europe has brought about significant changes in the bond market landscape, particularly for retail investors.
The European Commission's guidelines on PRIIPs implementation refer to very general parameters for assessing in-scope products. Despite this, the regulation has contributed to a reduction in liquidity in the corporate bond market, impacting retail investors' access to corporate bonds.
Association for Financial Markets in Europe (AFME) and observations from the Euronext White Paper suggest that the requirement for Key Information Documents (KIDs) under PRIIPs has led to a narrowing of investment opportunities for retail investors and a reduction in portfolio diversification options. This is due to increased regulatory burdens and compliance costs that have made corporate bonds less accessible and less actively traded by retail investors.
The Financial Conduct Authority (FCA) recognises the improvements in investor protection through PRIIPs, requiring standardised, easy-to-understand product information (KIDs). However, these safeguards have inadvertently posed challenges for market makers and trading liquidity in bonds sold to retail investors by increasing complexity and compliance costs.
The PRIIPs regulation, while designed to enhance investor protection, has indirectly dampened liquidity in European bond markets, particularly on the retail side. Retail investors may only be able to invest in non-structured bonds if PRIIPs compliant documentation is produced. Issuers of non-structured bonds could face difficulties in tapping retail markets due to PRIIPs implementation.
Both AFME and the FCA share the view that the PRIIPs regulation is vague in defining in-scope products. Concerns have been expressed by both organisations regarding the scope of the PRIIPs regulation. The FCA argues that a conservative approach by product manufacturers due to the mandatory nature of PRIIPs and penalties for non-compliance may have negatively affected bond market liquidity.
The FCA call for input on PRIIPs was closed at the end of September 2018. The draft version of the regulatory technical standards for PRIIPs was rejected by the Economic Committee of the European Parliament in 2016. The FCA has requested feedback on the application of the PRIIPs regulation from market participants and consumers.
In summary:
| Aspect | Effect of PRIIPs Regulation | |-----------------------------|---------------------------------------------------| | Retail access to bonds | Reduced due to complexity and documentation burdens[1] | | Corporate bond market liquidity | Declined as retail participation decreased[1] | | Investor protection | Improved via mandatory KIDs enhancing product transparency and comparability[3][5] |
The article is a guest article for Hedge Funds published by The Sortino Group. All Rights Reserved for the publication, with no part of it allowed to be reproduced without written permission from the publisher.
[1] Association for Financial Markets in Europe (AFME) and Euronext White Paper [3] Financial Conduct Authority (FCA) [5] European Commission's guidelines on PRIIPs implementation
- The PRIIPs regulation, while intended to enhance investor protection, has resulted in a decrease in retail access to bonds due to increased complexity and documentation burdens imposed by the regulation.
- The implementation of the PRIIPs regulation has led to a decline in corporate bond market liquidity as a result of reduced retail participation, which is often a significant factor in the overall liquidity of the market.
