The PRIIPs Composition of Costs Calculation Discrepancies

There is a discrepancy in how the industry calculates the cost composition required as part of the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation, FE fundinfo’s calculations subject matter expert, Dr Matthias Breier, has discovered.

Our spot checks suggest that as many as 90% of EU PRIIPs absolute cost figures are calculated using incorrect methodology, highlighting a problem that impacts the asset management industry in terms of comprehending and following regulatory requirements.

Below, Dr Breier, Head of Product - ESG and Regulatory Calculations, outlines the background of this miscalculation and what impact it could have on the industry and investors.

Q: What is the cost composition calculation?

A: The cost composition calculation in a PRIIPs Key Information Document (KID) is designed to ensure transparency and clarity for retail investors regarding the expenses associated with their investment products. It involves breaking down the total costs associated with an investment into various components, providing a clear picture of what investors are paying for. These components typically include:

• Ongoing Costs: Regular costs such as management fees and administrative expenses.
• Transaction Costs: Costs incurred from buying and selling underlying investments.
• Incidental Costs: Irregular costs such as performance fees.
• One-off Costs: entry and exit fees associated with the investment.

These costs are then aggregated to give the Total Cost Figure (TCF), which is presented to investors. The aim is to offer transparency and allow investors to make informed decisions by understanding the true cost of their investments. The discrepancy affects all of the above types of costs, more specifically, the absolute output of them all. 

Q: What is the source of this error?

A: This discrepancy arose due to changes in logic between PRIIPs guidance 2017/653 and 2021/2268. The latter highlighted the requirement for assuming net performance of 0% in the calculation, which has impact on the end figures in the calculation. However, it appears that this detail was largely missed and likely not fully understood by several market players.

We have discovered up to five distinct methodologies used in calculations for these absolute costs, whereas there can only be one accurate calculation method. The required data is visualised only in the EU PRIIPs and not in the UK PRIIPs, leading to it often being overlooked by calculation providers. Consequently, a significant number of EU PRIIPs KIDs in the market were found to be incorrect due to this requirement.

Q. How was this error discovered?

A: The financial services industry continually strives for transparency and accuracy, particularly when it comes to cost disclosures in investment products. Knowing this and that regulation is ever-evolving, our regulatory experts conduct comprehensive regulatory horizon scanning which revealed this discrepancy in the PRIIPs cost composition calculation. 

Q. How to spot if your PRIIPs KID is impacted?

A: PRIIPs 2021/2268 guidance defines that the absolute costs are to be calculated on the basis of an assumption of a 0% net performance after the first year. This requires an assumed hypothetical positive performance that, after year one and deduction of costs, equals to a net performance of 0%. As an example, if you invest 10.000 at the beginning of the year, to have 10.000 at the end of the year, a cost and performance calculation needs to be considered. If this isn’t the basis of your calculation then it should raise a red flag.

Any discrepancy in this calculation can be identified by following the below steps:

1. Access your EU PRIIPs KID using its ISIN number at www.fundinfo.com
2. Navigate to the composition of costs table within the document
3. Within the table, compare the % exposure in the text with the absolute values
4. If the absolute values are the percentage of an 10.000 investment then the calculation does not consider a 0% net performance
5. Use the FE fundinfo cost composition calculator to calculate the correct numbers.

Request access to the Composition of Costs Calculator

Q: What are the implications of the error for FE fundinfo’s clients?

A: There is no impact on retail or institutional investors since the end cost figure remains unaffected. The miscalculation was identified and corrected as soon as feasibly possible. Our clients can rest assured that the correct calculation has been promptly applied across any impacted documents. This situation however highlights the need for clearer guidance and also expert regulatory capabilities.

Q: What steps is FE fundinfo taking to ensure future accuracy in PRIIPs calculations?

A: FE fundinfo is committed to refining its methodologies and leveraging advanced technology to ensure that cost disclosures remain transparent, accurate and reliable. Through continued collaborative efforts and expert regulatory oversight, we aim to uphold our commitment to investor protection and trust.

Q: Where can clients access more information about regulatory documents and templates offered by FE fundinfo where calculations expertise is required?

A: Discover more about the wide range of regulatory documents and templates that we offer here. 

Q: What could be the implications of this error and how should the industry respond?

A: It’s important to emphasise that regulatory frameworks with their related guidance and Q&As are not without limitations. It is challenging to understand and interpret them and their associated calculations, due to their complex nature and inability to consult, which can lead to misinterpretation. This could generate errors across hundreds or thousands of document copies shared with regulators and across markets.

Accurate cost disclosures are crucial for maintaining investor trust and ensuring compliance with regulatory standards - therefore the situation highlighted the need for, on the regulatory bodies side, improvement of (two-way) communication and, on the industry side, need for stronger regulatory scanning and calculation capabilities. By improving the accuracy of regulatory calculations, the industry can better serve investors and uphold the principles of transparency and fairness.

In conclusion

The cost composition discrepancies uncovered by FE fundinfo in PRIIPs calculations serves as a reminder of the importance of accuracy and consistency in financial reporting. Understanding the true costs associated with investment products is essential for investors to make informed decisions.

As the industry moves forward, it must continue to refine its methodologies and leverage technology to ensure that cost disclosures remain transparent, accurate and reliable. Through collaborative efforts and regulatory oversight, the financial services industry can uphold its commitment to investor protection and trust.