Retail structured products developments

Manufacturers of retail structured products will be keeping a close eye on a wave of regulatory developments in 2022, including the publication of the EU’s Retail Investment Strategy, diverging amendments to the PRIIPS regimes in the UK and the EU and the introduction of a new Consumer Duty by the UK FCA.

EU Retail Investment Strategy

The European Commission is expected to publish its proposal for an EU Retail Investment Strategy in the first half of 2022, which will take into account feedback received from consumer testing, its wide-ranging Consultation in May 2021 and ESMA’s Call for Evidence in October 2021. The initiative, which was originally proposed in the Commission’s second CMU Action Plan in September 2020, aims to encourage retail participation in EU capital markets through, among other things, strengthening investor protection and ensuring that product information is transparent, comparable and understandable.

For structured products manufacturers, there will be particular interest in the focus on harmonising general and product-level disclosure requirements, which are currently set out in a patchwork of regulations (including MiFID II, PRIIPs and the Prospectus Regulation) with little or no guidance as to how they should interact. Disclosure of costs and charges is just one area where additional consistency would be welcomed.

Other areas flagged for review by the Consultation include the MiFID II rules on suitability and appropriateness, target market identification and investor categorisation. Feedback was also requested on the increased use of standardised and machine-readable digital disclosures.

The Commission plans to adopt the Retail Investment Strategy by the end of 2022.

PRIIPS

In 2022 we expect to start seeing a marked divergence between the EU and UK PRIIPs regimes, as changes to each set of rules begin to apply.

In the EU, the Commission is due to publish the results of its PRIIPs level 1 review in the first half of 2022 as part of the Retail Investment Strategy proposal mentioned above. This follows publication of amendments to the PRIIPs KID Delegated Regulation in December 2021, which will apply from 1 July 2022 and (among other things) make a number of changes to the calculation and presentation of performance scenarios and costs information in the key information document (KID). With the level 1 review covering broader but overlapping ground, including costs disclosure and a general assessment of sufficiency of the information required by the KID, yet more changes are likely to be on the way.

The UK is also in the process of revising its PRIIPs regime, with the FCA due to publish a Policy Statement in Q1 2022 setting out the package of changes and confirming when they are due to come into effect (this is was originally due to be on 1 January 2022 but was postponed). In its July 2021 Consultation, the FCA set out the draft additions to its Handbook and changes to the onshored PRIIPs technical standards that it proposes to make – these include:

• guidance to clarify what it means for a PRIIP to be ‘made available’ to retail investors;
• more flexibility to ensure that PRIIPs are not assigned an inappropriately low summary risk indicator;
• amending the slippage methodology to avoid negative transaction costs; and
• replacing the requirement to include performance scenarios with a requirement to include narrative information on performance, which will be less prescriptive for manufacturers and (it is hoped) less misleading for investors, but could result in inconsistencies between KIDs for different products/issuers and a more manual drafting process.

These changes diverge significantly from those under the EU regime and so firms will be faced with the additional compliance burden of having to prepare and maintain separate KIDs when offering or selling structured products to retail investors in the EU and UK.

UK Consumer Duty

Draft rules for a proposed Consumer Duty were published by the FCA at the end of 2021, with final rules due to come into force in July 2022. It will apply to all UK-supervised firms involved in the manufacture, distribution or sale of products to retail consumers, whether or not they have a direct relationship with the end consumer, and so will impact a number of retail structured products issuers and distributors, including non-UK firms dealing with in-scope entities in the distribution chain.

The new Duty will require firms to act to deliver “good outcomes” for retail clients. The FCA has stressed that is a “higher and more exacting” standard of conduct that is currently required under existing Handbook Principles 6 and 7, which cover treating customers fairly and client communications. Detailed cross-cutting rules and outcomes then underpin the Duty.

For structured products issuers, one of the main challenges will be in reconciling the Duty with existing investor protection and disclosure obligations, which primarily include the MiFID product governance regime but also extend to aspects of PRIIPs and the Prospectus Regulation. With the FCA indicating that it will take an assertive approach to supervisory and enforcement action when policing the Duty, firms will need to ensure that they can demonstrate that their product governance policies and processes (including, for example, testing and data gathering exercises) comply with the Duty once it comes into effect.

For more information on the Consumer Duty, see our campaign page and blog post.

Other developments

For information on other capital markets regulatory developments that will be relevant to retail structured products in 2022, including proposed reforms to the UK and EU prospectus and listing regimes, LIBOR reform in the bond market and changes to the ICSDs’ syndicated closings model, see our client alert: Mainstream debt issuance from January 2022: Themes for the year ahead.

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.