Financial Conduct Authority | “Call for Input: PRIIPs Regulation – initial experiences with the new requirements” Response by RW Blears LLP, 27 September 2018
Retail Distribution Policy Strategy & Competition Financial Conduct Authority 12 Endeavour Square London E20 1JN
Financial Conduct Authority | “Call for Input: PRIIPs Regulation – initial experiences with the new requirements” | July 2018
Response by RW Blears LLP in relation specifically to Venture Capital Trusts and Enterprise Investment Scheme Funds:(i) in support of the AIC submission; and (ii) assuming the requirement to prepare KIDs continues, raising the issue of whether upfront income tax reliefs should be taken into account in determining the possible returns stated in the section of a KID entitled ‘What are the risks and what could I get in return?”
I agree with the AIC that KIDS are extremely misleading for investors and support the AIC recommendation that the EU should suspend requirements to prepare these documents.
Additionally, if and for so long as the requirement to publish KIDs is around, I would welcome FCA guidance as to whether the impact of income tax relief on VCT and EIS investments should be factored into the returns. The PRIIPs Rgulation and current FCA guidance are silent on the matter. The following points may be helpful to a consideration of this issue.
Annex II of the Regulatory Technical Standards EU 2017:653 (“RTS”) does not specifically require tax reliefs to be taken into account when calculating performance under the four scenarios. Notwithstanding this I think it is arguably a material omission not to do so when a VCT has an open offer.Where there is an open offer the vast majority of the investors will be acquiring their shares through the open offer and it would fly in the face of the purpose of the legislation to illustrate returns with a calculation that fails to take into account the tax relief. The tax relief is not merely a key determinant of the return but a major reason for the investor acquiring shares through the open offer. A failure by a KID to adequately disclose the impact of investment tax reliefs is misleading.
Article 8.3(d)(v) of the PRIIPs Regulation and the template KID set out in Annex 1 of the RTS both require a KID to disclose:
“a statement that the tax legislation of the retail investor’s home Member State may have an impact on the actual payout”.
If a PRIIP Manufacturer is to provide retail investors with the information necessary for them to make an informed investment decision and compare different PRIIPs, it is not enough, I suggest, to merely state that tax legislation may have an impact when, in fact, it is likely to have a very significant impact.
In the case of VCT and EIS upfront income reliefs their impact on investor returns will be very significant and so this surely must be factored into the performance calculations if a PRIIP manufacturer is to comply with Recital 15 of the PRIIPs Regulation and ensure that retail investors have the information necessary for them to make an informed investment decision about the cost and risk profile of VCT compared with other PRIIPs.
The statement of performance returns on the basis of an after-tax returns calculation is not precluded by the RTS Annex II as point 1 merely defines the VAR as:
“the percentage of the amount invested that is returned to the retail investor”.
This definition does not limit from whom the return must be obtained, like the use of the word ‘payout’ the concept of ‘what I could get in return’is deliberately expressed in the vernacular in order to reach a larger retail audience more familiar with everyday language than with specialist financial terminology. It would be illogical and non-commensurate with the scheme of the PRIIPs regulation to include only a narrative statement about the impact of tax legislation on payouts and possible returns and leave the complicated calculation of its impact, where it is very significant, to be managed by the retail investor. No, the calculation of amounts returned should include the impact of VCT and EIS tax reliefs.
Accordingly I urgethe FCA to confirm that the UK tax legislation relating to VCTs and the EIS scheme is a key point which distinguishes their costs and risk profile from that of other PRIIPs and therefore that the relevant tax reliefs should be factored into the performance calculations in the interests of transparency for consumers. Indeed is difficult to think of any reasoned objection, but an FCA ruling on the matter would provide much needed clarity.