The PRIIPs Regulation was developed to increase the confidence of retail investors in financial markets and enhance investor protection standards.
Advisers who produce, advise on or sell PRIIPs, such as shares in VCTs, are required to provide retail investors with a KID prior to the investor acquiring the product.
The KID is intended to provide retail investors with a uniformed document to allow them to compare a wide range of products quickly and easily. As such the PRIIPs Regulation lays down uniform rules on the format and content of the KID and the provision of the KID to retail investors.
Following BREXIT, the FCA has been granted greater powers to amend the content requirements of the KID. Following a consultation process the FCA has now published its amendments to the rules on the information that must be included in the KID. In particular, the amendments:
- replace the requirement and methodologies for presentation of performance scenarios in the KID with a requirement for narrative information on performance and factors that may impact performance; and
- create a new requirement, that VCTs must be assigned a summary risk indicator score of no less than 6 regardless of what score is calculated under the PRIIPs calculation methodology, the nature of investments made by the VCT and the past performance of the vehicle.
The new rules came into force on 25 March 2022 and PRIIPs manufacturers have until 31 December 2022 to make the appropriate changes to their KIDs.
What are the consequences for VCTs?
Proposals to remove performance scenarios from KIDs
The FCA have acknowledged that the performance scenarios as prescribed under the old rules pose a risk to consumers.
The new rules replace the requirement to provide prescriptive performance scenarios with the requirement to provide a narrative on expected performance and the factors that could impact this.
This narrative is required to include information on the main factors upon which returns depend, the underlying or reference values and how the return is determined.
The narrative must also include a favourable, negative and worst-case scenario in relation to how the investment could perform. These amendments give far greater freedom to PRIIPs manufacturers to decide on the key risks that investors should consider when making an investment decision.
Proposals to require VCTs to be assigned a summary risk indicator score of no less than 6 in KIDs
The FCA has chosen to single out VCTs specifically in relation to the summary risk indicator score.
Stating in the consultation that due to the methodology used to calculate the score and the frequency at which assets are valued, VCTs are generally being given a summary risk indicator score that does not truly reflect the risks involved with the investment.
The new rules provide that VCTs must be assigned a summary risk indicator score of no less than 6 regardless of what score is calculated under the PRIIPs calculation methodology, the nature of investments made by the VCT and the past performance of the vehicle.
This will be a significant change for the VCT industry with only a handful of VCTs currently including a summary risk indicator score of 6 in their KIDs and the majority being assigned a score of 3.
What impact will this have on VCT investors?
Questions have long been raised as to how much significance investors place on the information in the KID when making an investment decision. The proposals to remove the performance scenarios have generally been welcomed as they make the KID easier for retail investors to understand.
While it is generally accepted that the PRIIPS methodology for calculating the summary risk indicator score led to VCTs being given erroneously low scores, questions have been raised as to how helpful it is to investors for all VCTs to be given a prescribed summary risk indicator score.
A single score that applies to the whole industry does not reflect the different risk profiles associated with different types of VCTs.
The FCA is encouraging PRIIPs manufacturers to increase their summary risk indicator score where they believe that it does not accurately reflect the risks involved with the investment.
However, it seems unlikely that manufacturers will choose to increase the summary risk indicator score above the score that the FCA have specifically prescribed, particularly if the score calculated under the prescribed methodology is significantly lower.
If all VCTs adopt the same risk indicator score it would seem to defeat one of the key purposes of the KID, to allow investors to quickly and easily compare a large number of products.
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