Capital Markets Recovery Package and PRIIPs

With the EU set to introduce a number of “quick fix” reforms to various parts of capital markets regulation and the UK already having announced plans to improve the functioning of its PRIIPs regime, manufacturers and users of structured products should begin to see regulatory divergence in these areas sooner rather than later.

Capital Markets Recovery Package

In July 2020, the European Commission introduced a set of “quick fix” proposals to support market recovery following Covid-19. This included targeted amendments to the MiFID investor protection and commodity position limits regimes, the securitisation framework and the EU Prospectus Regulation.

Political agreement was reached between the co-legislators in December and the recovery package proposals are expected to be adopted in February 2021. However, in the case of the MiFID proposals, they will not become applicable until early 2022.

The following changes will be of particular interest to the structured products and structured finance markets:

• Including a carve-out from the MiFID product governance regime for financial instruments distributed exclusively to eligible counterparties (and, of less relevance to structured products, bonds with no other embedded derivative than a make-whole clause).

• Exempting financial instruments sold to eligible counterparties and professional clients (except where investment advice or portfolio management services are provided) from the MiFID costs and charges disclosure requirements.

• Recalibrating the commodity position limits regime, including excluding certain securitised derivatives from its requirements.

• Extending the existing framework for simple, transparent and standardised (STS) securitisations to cover balance sheet (synthetic) securitisations.

The timing of the application of the proposals means that they have not been automatically incorporated into UK domestic law. During 2021, we expect the FCA to start a holistic review of the UK MiFID regime, which could also have implications for structured products.

PRIIPs

With HM Treasury already having signalled its intention to depart from the EU PRIIPs Regulation in its July 2020 policy statement and the draft Financial Services Bill 2019-21, firms will soon be faced with complying with divergent regimes (including, potentially, preparing and maintaining separate key information documents (KIDs)) when offering or selling structured products to retail investors in the EU and UK.

Of the changes proposed by HMT, the most significant for retail structured products is the amendment replacing the requirement to include performance scenarios in the KID with a requirement to include ‘appropriate information on performance’. This is intended to fix the much-criticised methodology that relies on past performance to project future performance. The FCA will be able to amend the onshored PRIIPS regulatory technical standards to specify what information on performance should be provided in the KID.

The other changes proposed by HMT, which are less relevant to retail structured products, are:

• Giving the FCA the power to clarify the product scope of PRIIPs through their rules. The HMT policy statement cites corporate bonds as an area where there is currently significant uncertainty as to the scope of the regime.

• Enabling HMT to further extend the exemption currently in place for UCITS funds until 31 December 2026.

See our client note, The Financial Services Bill 2019-21: What you need to know, for more information.

In the EU, the Joint Committee of the ESAs failed to agree the comprehensive package of proposed PRIIPs amendments tabled last year and the Commission has still not completed its wider PRIIPs review, meaning that the timing and extent of the anticipated amendments to the EU PRIIPs Regulation are currently unclear.

This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors.