The Regulation of PRIIPs Great Ambitions, Insurmountable Challenges

Journal of Financial Regulation, 2016, 2, 203224
doi: 10.1093/jfr/fjw009
Advance Access Publication Date: 20 June 2016
Article
The Regulation of PRIIPs: Great Ambitions,

Insurmountable Challenges?
Veerle Colaert*
ABSTRACT
The Regulation on key information documents for packaged retail and insurance-
based investment products (PRIIPs Regulation) purports to deal with two important
concerns in the eld of investor protection: (i) investors do not read, understand, or
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digest extensive and/or technical information; and (ii) they hardly compare the prod-
ucts and services of different nancial institutions.
The rst concern relates to the long-established problems of information overload
and rational ignorance. The PRIIPs Regulation tackles those problems by introducing
a short information document, which uses clear, succinct and understandable language
and visual indicators supporting the content of the document.
The second concern relates to the fact that information documents are often hard
to compare in view of their different formats. Standardization is an obvious answer to
this problem. The use of standardization, however, depends on the question whether
its scope of application is sufciently wide to cover all comparable products. The
PRIIPs Regulation is innovative in this respect, being the rst piece of horizontal or
cross-sectoral legislation in the history of EU nancial regulationcovering banking,
investment, and insurance products, instead of limiting its scope of application to one
of these sectors.
Although the PRIIPs Regulation deals with very concrete investor protection con-
cerns and should therefore be supported as a signicant improvement, it also raises a
number of important concerns, challenges, and criticisms.
This contribution situates the PRIIPs Regulation in its law and economics and
behavioural nance context and offers a critical analysis of its benets, drawbacks,
andseemingly insurmountablechallenges.
K E Y W O R D S PRIIPs Regulation; key information document; EU nancial regulation
I N TRO D UC T IO N
On 26 November 2014, the European Parliament and the Council adopted the so-
called PRIIPs Regulation, or Regulation on key information documents for
packaged retail and insurance-based investment products.1
* Veerle Colaert, Professor of financial law and Co-director of the Jan Ronse Institute for Corporate and
Financial Law, KU Leuven, Email: Veerle.colaert@law.kuleuven.be
1 Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on
key information documents for packaged retail and insurance-based investment products (PRIIPs) [2014]
OJ L 352/1.
C The Author 2016. Published by Oxford University Press. All rights reserved.
V
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203
204 Journal of Financial Regulation
The PRIIPs Regulation indeed introduces a key information document or KID

for a range of products, which share one common feature: they all have a layered, or
packaged, structure. The Regulation aims at enhancing investor protection by: (i)
improving comparability of financial products with similar economic features, even
when they have a different legal qualification;2 and (ii) improving the quality of in-
vestor information in respect of those products.3
The first goal touches upon the regulatory approach of the entire body of
European Union (EU) investor protection regulation. The lack of comparability is
indeed a symptom of the traditional sectoral approach to EU investor protection leg-
islation in which products are regulated differently on the basis of their formal legal
qualification as a banking, investment, or insurance product. With the PRIIPs
Regulation, the EU legislature recognizes that products should be categorized on the
basis of their economic features instead. The resulting cross-sectoral scope of applica-

tion of the PRIIPs Regulation is of particular interest.
The second goal, improving investor information, should be seen against the
background of the long-established law and economics problem of information over-
load. The KID is put forward as an answer to this problem.
Drawing from law and economics, behavioural finance, and the historic genesis
of the PRIIPs Regulation, this contribution offers a critical analysis of: (i) the
scope of application of the PRIIPs Regulation and (ii) its principal instrument of
investor protection, the KID, in view of the Regulations overall goal of investor
protection.
2 See the Explanatory Memorandum to the Proposal COM (2012) 352, for a Regulation of the
European Parliament and of the Council on key information documents for investment products, at 2;
recitals 1, 6, and 17 to the PRIIPs Regulation; Joint Committee of the European Supervisory
Authorities, Final draft regulatory technical standards (JC/2016/21) 6. Also: Consumer Markets
Scoreboard SEC (2010) 1257 of the Commission, Making Markets Work for Consumers (4th edn,
2010). This report shows that the market for investments, pensions and securities performs worst out
of the 50 sectors examined, among other things with respect to comparability of products and services
(15). An earlier Consumer Markets Scoreboard came to the following conclusion: A recent survey
found that . . . information which is presented in too many different ways when comparing between dif-
ferent offerings are . . . important barriers to cross-border shopping of financial services quoted by
European consumers and As evidenced by a series of surveys, a well-drafted set of standardised infor-
mation facilitates clearly the comparability of competing offers, and help ensure that consumers under-
stand and can use information e.g. for switching providers. . . . . In a Eurobarometer survey, 79% of
European citizens thought that it would be useful if all financial services providers used a standardised
information sheet . . . . (Commission, Commission Staff Working Document on the Follow up in
Retail Financial Services to the Consumer Markets Scoreboard (SEC (2009) 1251, 22 September
2009) 6 and 9).
3 See already Commission, Feedback Statement on contributions to the call for evidence on substitute re-
tail investment products (March 2008) 20: A generic and cross-cutting problem, highlighted by all stake-
holders, was that of the danger of overloading consumers with information that is irrelevant, overly
technical or presented inappropriately with some responses advocating simplification of disclosures to re-
tail investors. The issue is not felt to be . . . whether there is enough information but whether the infor-
mation will be read and understood by the consumer. The argument was repeated in the Explanatory
Memorandum to the Proposal COM (2012) 352 (n 2) 89; in recitals 2 and 15 to the PRIIPs Regulation
and in the Final Draft RTS (JC/2016/21) (n 2) 6.
Regulation of PRIIPs 205
I . S C O P E O F A P P L I C A T I O N OF T H E P R I I P S R E G U L A T I O N
1. PRIIPs
It goes without saying that improving comparability involves standardization of infor-
mation documents. An often neglected preceding question is, however, what defines
comparability of products; the answer to this question should determine what prod-
ucts should be covered by the same regulation. This question has become increas-
ingly important in a context of blurred sectors: the banking, investment, and
insurance sectors are no longer clearly delineated.4 One of the main merits of the
PRIIPs Regulation is its innovative approach in this respect. Whereas European (and
in most Member States also national) financial regulation is mainly sectorally
structuredin banking law, securities regulation, and insurance law,5 the PRIIPs
Regulation takes a horizontal,6 cross-sectoral approach. It applies to a range of prod-
ucts with similar features, regardless of their form or construction7 since (t)he level

of protection afforded to the retail investor should not vary according to the legal
form of these products.8
From the outset, the European Commission targeted four product families: in-
vestment (or mutual) funds; investments packaged as life insurance policies; retail
structured securities; and structured term deposits9.10 One of the goals of the legisla-
ture was, however, to transcend the legal qualification of such products and to define
the scope of application of the Regulation on the basis of the economic purpose of
4 On this issue: Veerle Colaert, European Banking, Securities and Insurance Law: Cutting through
Sectoral Lines (2015) 52 Common Market Law Review 1579, 1583: Most traditional retail banks or
banking groups provide banking and investment as well as insurance services. Investment products in
some cases serve saving or even insurance purposes (e.g. credit default swaps). And certain (life) insur-
ance contracts in essence serve little other than investment or saving purposes.
5 ibid 1579ff.
6 Commission, Consultation by Commission Services on legislative steps for the Packaged Retail
Investment Products Initiative (26 November 2010) 2.
7 Recital 6 to the PRIIPs Regulation.
8 Communication of the Commission to the European Parliament and the Council, Packaged Retail
Investment Products (COM (2009) 204, 30 April 2009) 1. See also the Explanatory Memorandum to
the Proposal for a PRIPs Regulation (n 3) 2: Existing disclosures vary according to the legal form a prod-
uct takes, rather than its economic nature or the risks it raises for retail investors. The comparability, com-
prehensibility and presentation of information vary, so the average investor can struggle to make
necessary comparisons between products.
9 According to Commission Communication COM (2009) 204 (n 8) 4, structured term deposits offer a
combination of a term deposit with an embedded option or an interest rate structure. They are designed
to achieve a specific payoff profile, which they achieve through transactions in derivatives such as interest
rate and currency options. Although the PRIIPs Regulation does not feature a definition, MiFID II
2014/65/EU does. Structured deposits are defined in article 4 (1) 43 of MiFID II as deposits in the
meaning of article 2 (1) (c) of Deposit Guarantee Directive 2014/49/EU (i.e., a credit balance which re-
sults from funds left in an account or from temporary situations deriving from normal banking transac-
tions and which a credit institution is required to repay under the legal and contractual conditions
applicable, including a fixed-term deposit and a savings deposit), which are fully repayable at maturity on
terms under which interest or a premium will be paid or is at risk, according to a formula involving cer-
tain underlying financial instruments or indexes.
10 CESR/10-1136, CEBS 2010 196, CEIOPS-3L3-54-10, Report of the 3L3 Task Force on Packaged Retail
Investment Products (PRIPs) (6 October 2010) 3, fn 3. Recital 6 of the PRIIPs Regulation reiterates
those four product families.
the product.11 The PRIIPs Regulation therefore defines a Packaged Retail invest-
ment Product or PRIP as an investment . . . where, regardless of the legal form of
the investment, the amount repayable to the retail investor is subject to fluctuations
because of exposure to reference values or to the performance of one or more assets
which are not directly purchased by the investor.12 Many other products than the
aforementioned product families are therefore covered, including all derivatives.13
The original proposal for a PRIPs Regulation only featured this definition.14 In
the final stage of the legislative process, and without much explanation, the acronym
PRIPs was changed into PRIIPs (Packaged Retail Investment and Insurance-based
Products). A definition of insurance-based investment product was added, as an in-
surance product which offers a maturity or surrender value and where that maturity
or surrender value is wholly or partially exposed, directly or indirectly, to market fluc-
tuations (article 4 (2) PRIIPs Regulation).

This addition is regrettable, as it undermines the goal of the legislature to aban-
don an approach based on legal form and focus on economic substance instead. The
insurance based investment products are PRIPs as defined in the Regulation, so
that, in our opinion, the addition of a separate definition or insurance based invest-
ment products blurs the scope of what a PRIP is, rather than clarifying the scope of
the PRIIPs Regulation.15
The distinguishing feature of both types of PRIIPs is in any event that they are
packaged or manufactured:16 a firm constructs the PRIP, by packaging or structur-
ing different elements together, for instance by wrapping a financial asset or assets
within another structure, or by providing investment management through a collec-
tive investment scheme, or by devising a financial instrument that creates exposure
to other financial instruments, indices or reference values.17 The PRIIPs Regulation
focusses on those financial products for two reasons. Because of their layered struc-
ture, the European legislature considers them the most difficult to understand for re-
tail investorseven though they are not necessarily the most risky products. The
manufacturing process, moreover, can lead to a fundamentally identical investment
proposition taking different legal forms and being offered across different industry
sectors.18 This situation was seen as a fertile breeding ground for regulatory arbi-
trage: increased offering of the least regulated product or service or, worse, repackag-
ing of products in order to avoid the more burdensome legislation.19 The PRIIPs
11 Commission Communication COM (2009) 204 (n 8) 2; Explanatory Memorandum to Proposal COM

(2012) 352 (n 2) 2.
12 Article 4 (1) PRIIPs Regulation.
13 See for an indicative list of products in scope of the PRIIPs Regulation: Joint Committee of the ESAs,
Discussion Paper: Key Information Documents for Packaged Retail and Insurance-Based Investment
Products (PRIIPs) (JC/DP/2014/02, 17 November 2014) 1214.
14 See the definition of investment product in article 4 (a) of Proposal COM (2012) 352 (n 2).
15 See in this sense, Colaert (n 4) 1599.
17 See Commission, Consultation by Commission Services on legislative steps for the Packaged Retail
18 Explanatory Memorandum to the Proposal for a PRIPs Regulation (n 3) 7
19 There has indeed been some evidence of regulatory arbitrage in the retail investment services sector. See
for concrete examples: Niamh Moloney, EU Securities and Financial Markets Regulation (3rd edition,
OUP 2014) 780, fn 71; Commission, Open Hearing on Retail Investment Products (2008) 11,
Regulation has been explicitly presented as an answer to the problems which regula-
tory arbitrage creates for retail investors.20
2. Products out of scope

Simple products, the value of which does not derive from some underlying product,
are by definition excluded from the scope of application of the Regulation.21 The
choice to limit the scope of the PRIIPs Regulation to packaged products only was
justified by the argument that a regulatory regime designed for all possible assets
would be difficult to develop and hard to effectively target, especially in the area of
product disclosure requirements, as very different measures would be needed for
packaged investment products, compared with the full range of possible investments
that might be made in underlying assets themselves.22 In addition, the additional
complexities that might be triggered by the packaged element were seen as justifying

targeting them with a specific regulatory regime.23
The PRIIPs Regulation further explicitly excludes non-life insurance contracts and
pure protection life insurance contracts,24 a number of securities which are excluded
by the Prospectus Directive (such as securities issued or guaranteed by public author-
ities) and a range of pension products.25
The PRIIPS Regulation further grants a transitional period of five years during
which the PRIIPs Regulation is not applicable to undertakings for collective investment
in transferable securities (UCITS). The reason is that a Key Investor Information
(KII) document very similar to the KID is already in use for UCITS funds since
2011.26 Following the transitional period, UCITS funds will become subject to the
PRIIPs Regulation in the absence of any extension of the transitional period.27
The PRIIPs Regulation does apply to PRIIPs covered by the Prospectus Directive
or the Solvency II Directive. The Commission initially considered that the KID
indicating that in France, sales of unit-linked life insurance have increased following the implementation
of MiFID; see also, at 1617, for several examples of regulatory arbitrage in the Netherlands, and, at 18,
for a quote of Eddy Wymeersch, chairman of CESR at the time, arguing that regulatory arbitrage has
been seen on a massive scale through the growth of the certificate market.
20 Commission Communication COM (2009) 204 (n 8) 2; Commission, Consultation by Commission
Services on legislative steps for the Packaged Retail Investment Products Initiative (26 November 2010)
5. See for a more extensive overview of the genesis of the PRIIPs Regulation: Colaert (n 4) 159497.
21 Article 2 (2) (c) of the PRIIPs Regulation also explicitly excludes simple deposits, although this seems su-
perfluous in view of the definition of a PRIP, which clearly does not cover such deposits.
23 ibid.
24 That is, life insurance contracts where the benefits under the contract are payable only on death or in re-
spect of incapacity due to injury, sickness or infirmity (see article 2 (2) (a) and (b). These products are
not covered by the definition of PRIP or of insurance-based investment product, so an explicit exclusion
seems superfluous.
25 See article 2 (2) PRIIPs Regulation.
26 Article 78 Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the
coordination of laws, regulations, and administrative provisions relating to UCITS (recast) [2009] OJ
L302/32 and Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/
65/EC of the European Parliament and of the Council as regards key investor information and conditions
to be met when providing key investor information or the prospectus in a durable medium other than pa-
per or by means of a website [2010] OJ L176/1.
27 Recital 35, articles 32 (1) and 33 (1) PRIIPs Regulation.
might replace the summary prospectus for PRIIPs covered by the Prospectus
Directive (eg, convertible bonds) and some of the disclosure requirements for
PRIIPs covered by the Solvency II Directive.28,29 Neither of these initial ideas made
it to the final legislative text. It was argued that the information obligations from
both those directives serve additional purposes not covered by the KID, such as mar-
ket transparency or a full picture of all details in relation to a proposed contract. For
this reason, the PRIIPs requirements apply independently from, and in addition to
existing information duties resulting from the Prospectus and Solvency II direc-
tives.30 Meanwhile, the Prospectus Directive is under review, among other things in
order to reassess the format of the summary prospectus in view of the PRIIPs KID.31
3. Evaluation

One of the main reasons for introducing the PRIIPs Regulation was the lack of acces-
sible and harmonized information documents for financial products (except for
UCITS funds), making it very difficult for retail investors to assess and compare the
risks, costs, and other features of products across the different sectors of the financial
industry.
If increasing transparency and comparability of substitute investment products are
indeed the main goals of the PRIIPs Regulation, the European legislatures choice to
only cover packaged products is regrettable. Although the structure of a simple (in
the sense of non-packaged) product may be easier to comprehend, the often lengthy
and technical terms and conditions may make it quite hard to figure out the exact
costs, risks, and other features of those simple products, which for PRIIPs are promi-
nent sections of the KID (see below). A packaged product will, moreover, often be
a substitute for a simple product. By excluding simple products from its scope of ap-
plication, the PRIIPs Regulation does not allow easy comparison between the costs,
risks, and other features of a layered product and its simple counterpart. In our opin-
ion, the limitation of the scope of the PRIIPs Regulation to packaged products is,
therefore, a missed opportunity. Two examples are telling in this regard.32
Only so-called structured deposits33 are covered by the Regulation. Holders of
simple deposits with fixed or floating rates continue to escape from any harmonized
consumer protection. The terms and conditions of even ordinary savings accounts,
however, often feature complicated interest calculations and hidden costs, making
28 Article 185 of Directive 2009/138/EC of the European Parliament and of the Council of 25 November
2009 on the taking up and pursuit of the business of Insurance and Reinsurance (Solvency II) (recast)
[2009] OJ L 335/1.
30 Article 3 of the PRIIPs Regulation. See also Explanatory Memorandum to the Proposal for a PRIPs
Regulation (n 3) 12.
31 Commission, Green Paper - Building a Capital Markets Union (COM (2015) 63 final, 18 February
2015) 10; Commission, Consultation document Review of the Prospectus Directive (18 February
2015) 5 and 1618; article 7 of the Proposal for a Regulation of the European Parliament and of the
Council on the prospectus to be published when securities are offered to the public or admitted to trad-
ing (30 November 2015, COM (2015) 583 final).
32 See Colaert (n 4) 1599600.
33 See n 9.
those products far from transparent and, therefore, hard to comprehend and even
harder to compare.34 Consumers may, moreover, have an interest in comparing
structured deposits with simple deposits.35 Inclusion of simple deposits into the
scope of the PRIIPs Regulation would not only have increased transparency with re-
gard to these products, it would also have facilitated such very relevant comparison.
It should further be noted that today several Member States already impose informa-
tion requirements for deposits (be they simple or structured) at national level. As
simple deposits fall outside the scope of the PRIIPs Regulation, Member States are
not obliged to align their national regime for simple deposits with the PRIIPs infor-
mation regime.36 Having different disclosure regimes in place for products which can
clearly be substitutes from an investors perspective, does not only complicate com-
parability for consumers, it also adds unnecessary costs for financial institutions.
They may have to implement two different information models (one for PRIIPs and

another for non-PRIIPs subject to a national regime). If financial institutions engage
in cross-border activities, they may even need to produce different information
sheets in different Member States for those non-harmonized products.
Securities are a second example of the (overly) limited scope of application of the
PRIIPs Regulation. Structured securities are subject to the PRIIPs Regulation,
whereas no KID needs to be available for simple securities. Should the investor
wish to compare a structured security (eg, a convertible bond) with a simple security
(eg, a simple bond), there will be no KID for the simple security to facilitate such
comparison. Economically they may however well be regarded as substitutes.37
34 On top of a fixed interest rate, there is often loyalty or other premiums if certain conditions are fulfilled,
or use is made of temporary higher rates, making it hard to compare the conditions of different simple
saving deposits. recital 18 of the PRIIPs Regulation refers to a teaser rate followed by a much higher
floating conditional rate which takes advantage of retail investors behavioural biases and which prompt
a comprehension alert to be inserted in the KID for structured products. Many simple deposits exactly
the same technique, taking advantage of the same behavioural biases, without a KID being available for
the protection of consumers of those simple deposits.
35 A recent FCA study shows the importance of stimulating such a comparison. It found that although all
five structured deposits in the survey would have been unlikely to return more than simple fixed-term
cash deposits, our respondents did not recognize this. Investors required relatively high rates of return on
risk-free cash deposits to value them over and above structured deposits and behavioural biases, com-
bined with features of structured deposits that can exploit these biases, may lead investors to have unreal-
istically high expectations of product returns and impede their ability to evaluate and compare structured
products to each other and against other deposit-based alternatives. The result is that many retail inves-
tors prefer structured deposits to less risky alternatives with higher returns. See Financial Conduct
Authority, Two plus two makes five? Survey evidence that investors overvalue structured deposits
(Occasional Paper No 9, March 2015) 4 and 5. See also at 10: exponential compounding bias may distort
the comparison of structured products, whose returns are often expressed over a five-year period, to cash
term deposits with annual interest rates.
37 The fact that simple securities are not covered by the PRIIPs Regulation, played a role in the discussions
on MiFID II level 2 texts. In a reaction to the consultation on MiFID II level 2 measures, many respon-
dents were of the opinion that the MiFID II product governance rules should not apply to shares and
bonds since they are not manufactured by the issuer and are not issued for a designated target market.
Nevertheless, a few respondents, including consumer and investor associations, noted that including
products such as shares and bonds was crucial from an investor protection standpoint considering that
such products are out of the scope of PRIIPS. ESMA agreed with the latter view (ESMA, Final Report -
It can be argued that, from a retail investors point of view, the need for product
transparency and comparability is not limited to PRIIPs as defined in the PRIIPs
Regulation, but extends to any saving and investment product available to him. The
current limitations in scope seem quite arbitrary in this respect.
There is some hope that the scope of application of the PRIIPs Regulation could
indeed be extended in the future. Recital 8 to the PRIIPs Regulation states that the
European Supervisory Authorities (ESAs) should monitor the products which are ex-
cluded from the scope of the PRIIPs Regulation and, where appropriate, issue guide-
lines to address any problem which is identified. Such guidelines should be taken
into account in the review on the possible extension of the scope and the elimination
of certain exclusions, to be conducted four years after the entry into force of the
PRIIPs Regulation.38
Moreover, as mentioned above, the Prospectus Directive is under review. One of

the most important changes relate to the summary prospectus, which is proposed to
be modelled as much as possible after the PRIIPs KID. For securities falling under
the scope of both the Prospectus Regulation and the PRIIPs Regulation (i.e., most
structured securities), full reuse of the contents of the KID would be permitted in
the prospectus summary in order to minimize compliance costs and administrative
burdens for issuers. The requirement to produce a summary would, however, not be
waived when a PRIIPs KID is required, as the latter does not contain key informa-
tion on the issuer and the offer to the public or the admission to trading of the secu-
rities concerned.39
I I. K EY IN F O R M A T I O N D O C UM E NT
1. Background
The main substantive investor protection feature of the PRIIPs Regulation is an infor-
mation document, the KID. The PRIIPs Regulation can, therefore, be situated in the
traditional law and economics approach, which features information obligations as the
preferred remedy to the market failure labelled information asymmetry. Especially in
consumer and financial law, the provision of information has traditionally been pre-
sented as an important tool to empower retail investors.40 It was considered to take
ESMAs Technical Advice to the Commission on MiFID II and MiFIR (19 December 2014 ESMA/
2014/1569) 5354, para 12).
38 Recital 8 of the PRIIPs Regulation.
39 Recital 25 of the Proposal for a Prospectus Regulation (COM (2015)583) (n 31). The new summary
prospectus would be allowed a length of up to six A4 pages (article 7 (3) of the Proposal).
40 Among many others: Howard Beales, Richard Craswell and Steven C. Salop, The Efficient Regulation of
Consumer Information (1981) 24 Journal of Law & Economics 513; Stefan Grundmann, Wolfgang
Kerber and Stephen Weatherill, Party Autonomy and the Role of Information in the Internal Market
An Overview in Stefan Grundmann, Wolfgang Kerber and Stephen Weatherill (eds), Party Autonomy
and the Role of Information in the Internal Market (de Gruyter 2001) 3: And part of this presumption is,
second, that information rules have to be preferred to mandatory rules prescribing substance whenever
meaningful information of the client is possible. Information rules, even if mandatory, diverge fundamen-
tally form traditional mandatory rules that fix the content of the contract. . . They are designed to enable
party autonomy, they do not restrict the variety of products and contractual conditions that are available;
Gillian Hadfield, Robert Howse and Michael J Trebilcock, Information-Based Principles for Rethinking
Consumer Protection Policy (1998) 21 Journal of Consumer Policy 152. In the context of securities reg-
ulation also: David Llewellyn, The Economic Rationale for Financial Regulation FSA Occasional Paper
away information asymmetry and to enable retail investors to take rational decisions.41
As information requirements expanded, however, they tended to become counterpro-
ductive.42 It has been shown that there is a negative correlation between the quantity
of the information which is provided and the likelihood that a consumer will actually
read it. A pile of technical information has a discouraging effect and may result in con-
sumers not reading anything or only less important parts (information overload). If
processing the information is more costly than the expected benefits of the informa-
tion, ignoring the information may even be the more efficient decision (referred to as
rational ignorance)fitting the traditional law and economics theory.43 It has been
argued that the growth in the market of complex structured securities in the years be-
fore the 2007 crisis, was possible notwithstanding the existence of elaborate disclosure
documents relating to the risks of those products.44

OP01/1999, 21 <http://www.fsa.gov.uk/pubs/occpapers/OP01.pdf>; Vanessa Mak, The Myth of the
Empowered Consumer - Lessons from Financial Literacy Studies (2012) 1 Journal of European
Consumer and Market Law 254 (further references in the following footnotes).
41 Enriques and Gillotta give an excellent critical overview of the goals of market disclosure in financial regu-
lation. They identify three main goals: (i) investor protection; (ii) addressing agency problems; and (iii)
price-accuracy enhancement. See Luca Enriques and Sergio Gilotta, Disclosure and Financial Market
Regulation in N Moloney, E Ferran and J Payne (eds), The Oxford Handbook of Financial Regulation
(OUP 2015) 511. See in this respect also Emilios Avgouleas, The Global Financial Crisis and the
Disclosure Paradigm (2009) 6 European Company & Financial Law Review 44075.
42 At least for investor protection purposes. It has, however, been argued that, in an efficient stock market,
unsophisticated investors are already protected by market prices, which tend to reflect at any time all rele-
vant information (or at least that portion of relevant information which is publicly available), and thus
make sure that they will generally receive a fair price in whatever transaction they engage in. In an effi-
cient market unsophisticated investors take a free-ride on the efforts of sophisticated ones and thus do
not need, and would not really benefit from, equal access to information. Luca Enriques and Sergio
Gilotta, Disclosure and Financial Market Regulation in N Moloney, E Ferran and J Payne (eds) The
Oxford Handbook of Financial Regulation (OUP 2015) 515. See also the elaborate traditional literature in
this respect, including Eugene Fama, Efficient Capital Markets: A Review of Theory and Empirical
Work, (1970) 25 Journal of Finance 383; Frank Easterbrook and Daniel Fischel, Mandatory Disclosure
and the Protection of Investors (1984) 70 Virginia Law Review 669, 693ff; Merritt Fox, Shelf
Registration, Integrated Disclosure and Underwriter Due Diligence: An Economic Analysis (1984) 70
Virginia Law Review 1005, 1011. Even if the efficient capital market hypothesis (EMCH) would guaran-
tee fair prices, the fact that investors do not read or understand market disclosure nevertheless remains
problematic. Getting a fair price is indeed only one concern. Investors also need to decide whether a cer-
tain investment product fits his or her individual investment preferences. Information overload remains
very problematic in this particular respect.
43 For a critical analysis, see Alan M. Schwartz, David Grether and Louis L. Wilde, The Irrelevance of
Information Overload: An Analysis of Search and Disclosure (1986) 59 Southern California L Rev 277,
278ff , with further references; Hadfield, Howse and Trebilcock (n 40) 145; Robert Prentice, Whither
Securities Regulation? Some Behavioral Observations Regarding Proposals for its Future (2002) 51 Duke L
J 1397, 144849, fn 241, with further references; Troy Paredes, Blinded by the Light: Information Overload
and its Consequences for Securities Regulation (2003) 81 Washington U L Q 417; George Benston,
Consumer Protection as Justification for Regulating Financial-Services Firms and Products (2000) 17
Journal of Financial Services Research 277, 290; Stefan Grundmann and Wolfgang Kerber, Information
Intermediaries and Party Autonomy The Example of Securities and Insurance Markets in Stefan
Grundmann, Wolfgang Kerber and Stephen Weatherill (eds), Party Autonomy and the Role of Information in
the Internal Market (Walter de Gruyter 2001) 264310, 266, with reference to Stigler.
44 See Avgouleas (n 41) 444, with reference to Steven Schwarcz, Disclosures failure in the subprime mort-
gage crisis (2008) 3 Utah L Rev 1109. They argue that market actors did not adequately process available
disclosure documents, not only because of information overload, but also as a consequence of behavioural
biases and heuristics (see on this aspect also fn 104).
Recital 15 of the PRIIPs Regulation states that unless the information is short
and concise there is a risk that [retail investors] will not use it.45 The second main
goal of the PRIIPs Regulation is indeed to avoid information overload and to facili-
tate investors reading and understanding product information.
2. Key information document

The tool introduced by the PRIIPs Regulation to avoid information overload is a
short pre-contractual information document, the KID, which should be provided to
retail investors by persons advising on, or selling, a PRIIP in good time before those
retail investors are bound by any contract or offer relating to that PRIIP.46
The PRIIPs Regulation sets forward the main principles which should guide the
design and content of the KID. The KID has been inspired by the KII that had al-

ready been researched47 and developed for investment funds in scope of the UCITS
IV Directive.48 A new elaborate consumer testing study49 has guided the exact con-
tent and layout of the KID.50 This has resulted in Regulatory Technical Standards,
drafted by the Joint Committee of the ESAs and to be adopted by the European
Commission,51 which further develop the format, presentation, and content of the
KID. The initial idea was that these standards could cater for product-specific charac-
teristics, which might require some differences in standard format for different types
45 See also recital 17: consumer behaviour and capabilities are such that the format, presentation and con-
tent of information must be carefully calibrated to maximise understanding and use of information. See
for a further explicit reference to the problem of information overload during the PRIIPs legislative pro-
cess: Commission Communication COM (2009) 204 (n 8) 7.
46 This means sufficiently early so as to allow retail investors enough time to consider the document before
being bound by any contract or offer relating to that PRIIP, taking account of the knowledge and experi-
ence of the retail investor, the complexity of the PRIIP and, where the advice or sale is at the initiative of
the retail investor, the urgency explicitly expressed by the retail investor. See article 13 PRIIPs Regulation
and 17 of the Final Draft RTS (JC/2016/21) (n 2).
47 IFF Research and YouGov, UCITS Disclosure Testing. Research Report (Study prepared for the
Commission, June 2009).
48 See n 26.
49 London Economics and Ipsos, Consumer testing study of the possible new format and content for retail
disclosures of packaged retail and insurance-based investment products Final Report (MARKT/2014/
060/G for the implementation of the Framework Contract no EAHC-2011-CP-01, November 2015).
50 Recital 17 of the PRIIPS Regulation; Joint Committee of the ESAs, Discussion Paper (JC/DP/2014/02)
(n 13) 10: Given the difficulties retail investors typically face in understanding and comparing disclosure
documents related to financial products, consumer testing of different possible ways of presenting infor-
mation has been identified as an important part of the work to develop level two measures . . . . To this
end, the European Commission has procured the services of a consumer testing contractor to allow differ-
ent presentational options for the KID to be consumer tested. The testing will seek to assess the relative
effectiveness of different options for a sample of consumers that is representative for the EU as a whole,
across different Member States and different demographic groups. The testing will begin in the autumn
of 2014 and continue until August 2015.
51 Article 8 (5) of the PRIIPs Regulation. Those Draft Regulatory Standards were due by March 2015, but
have only been adopted on 31 March 2016 (not yet endorsed by the European Commission): Joint
Committee of the European Supervisory Authorities, Final draft regulatory technical standards with re-
gard to presentation, content, review and provision of the key information document, including the meth-
odologies underpinning the risk, reward and costs information in accordance with Regulation (EU) No
1286/2014 of the European Parliament and of the Council (JC/2016/21).
of KID, to the extent all KIDs would retain the same look and feel.52 The
Regulatory Technical Standards have nevertheless come up with one and the same
KID format for all PRIIPs.53
a. Format
With respect to format, the PRIIPs Regulation requires that the KID should be short
and in a standardized format.
In order to prevent information overload, it is crucial that the KID is drawn up
as a short document, written in a concise manner. The KID should not be loaded
with information which is not necessary for making an informed investment decision.
The PRIIPs Regulation has introduced a formal maximum of three pages of A4-sized
paper when printed.54 Experience with the summary prospectus in the Prospectus

Directive has indeed revealed that it is useful to introduce a legally binding maximum
length, as the maximum length of the summary prospectus (2500 words) was for a
long while only suggested in a recital to the directive55 and more often than not ne-
glected, until a binding maximum length was introduced.56 The requirement that the
characters used should be of readable size,57 however, still leaves room for
interpretation.58
In order to meet the information needs of the retail investor and to allow for easy
comparison of various PRIIPs,59 the document should be drawn up in a standardized
format, ensuring that the items are in the same order and under the same headings
in each document.60
The PRIIPs Regulation also refers to the use of colours in the KID, which is nei-
ther requested nor prohibited. Where colours are used, they should not diminish the
52 Explanatory Memorandum to the Proposal for a PRIPs Regulation (n 3) 89. See also recital 17 of the
PRIIPs Regulation: The same order of items and headings for these items should be followed for each
document.
53 Only for PRIIPs that offer multiple investment options to the retail investor two possible approaches
have been developed. See Final Draft RTS (JC/2016/21) (n 2) 4 and article 10 and following.
54 Article 6 (4) PRIIPs Regulation. It should be noted that the PRIIPs KID is allowed one A4 page more
than the UCITS KID (article 6 of Commission Regulation (EU) No 583/2010).
55 Recital 21 of Prospectus Directive 2003/71/EC.
56 Article 24 and Annex XXII of Regulation (EC) No 809/2004 (as amended by Commission Regulation
(EU) No 486/2012) not only set out detailed content requirements and a mandatory order for the sum-
mary, it also introduced a binding rule with respect to the length of the summary: it should not be longer
than 7 per cent of the full prospectus or 15 pages, whichever is the shorter.
57 Article 6 (4) a) PRIIPs Regulation.
58 This may, however, become the topic of further guidance at level 2 or 3. Level 2 or 3 refers to the
Lamfalussy legislative method, a legislative technique used in European financial law to speed up the legis-
lative process. It is based on the idea that only the principles should be agreed upon in the ordinary legis-
lative procedure, involving a proposal by the European Commission and co-decision by the Council and
the European Parliament (level 1 legislation). The technical details are then delegated to the European
Commission which can adopt level 2 legislation. At level 3 the European Supervisory Authorities
(ESAs), composed of representatives of supervisors of the Member States, develop common implement-
ing standards; and level 4 finally consists of a compliance check by the European Commission. See
Alexandre Lamfalussy and others, Final report of the committee of wise men on the regulation of
European securities markets (15 February 2001).
59 Recital 17 PRIIPs Regulation.
60 Recital 17 and article 8 PRIIPs Regulation.
comprehensibility of the information if the KID is printed or photocopied in black

and white (article 6 (5)).
b. Quality of the information

The KID should present accurate, fair, clear, and non-misleading information, consis-
tent with any binding contractual documents, with the relevant parts of the offer doc-
uments and with the terms and conditions of the PRIIP.61
It should use clear, succinct, and understandable language, which is easily accessi-
ble for the retail investor. Financial jargon, as well as terminology, which is not im-
mediately clear to the retail investor should be avoided.62
The PRIIPs Regulation further provides that the KID should be a neutral stand-
alone document, clearly separate from marketing materials. It should not contain

cross-references to marketing material.63 To further stress the neutrality of the KID,
it should contain the following explanatory statement directly under the title of the
KID: This document provides you with key information about this investment prod-
uct. It is not marketing material. The information is required by law to help you un-
derstand the nature, risks, costs, potential gains and losses of this product and to
help you compare it with other products.64
The PRIIP manufacturer should reviewand if necessary revisethe KID infor-
mation every time there is a change that (is likely to) significantly affect(s) the infor-
mation in the KID and, at least, every 12 months following the date of initial
publication.65
c. Content
Overview. The KID should clearly mention the words Key Information Document.
Next to the explanatory statement (see section Quality of the Information),
where applicable a comprehension alert should be inserted stating: you are about
to purchase a product that is not simple and may be difficult to understand.66
Recital 18 features some examples of situations in which the obligation to insert such
a statement would in particular be applicable: in case the PRIIP is derived from un-
derlying assets in which retail investors do not commonly invest, if it uses a number
of different mechanisms to calculate the final return of the investment, creating a
greater risk of misunderstanding on the part of the retail investor or if the invest-
ments pay off takes advantage of retail investors behavioural biases, such as a teaser
rate followed by a much higher floating conditional rate, or an iterative formula.67
61 Article 6 (1) PRIIPs Regulation and recitals 15 and 17.

62 Recital 14 and article 6 (4) (c) PRIIPs Regulation.
63 Article 6 (2) PRIIPs Regulation. The KID may contain cross-references to other documents, such as a
prospectus where applicable, but only where the cross-reference is related to the information required to
be included in the KID.
65 Article 10 PRIIPs Regulation and articles 15and 16 of the Final Draft RTS (JC/2016/21) (n 2).
66 Article 8 (3) (b) PRIIPs Regulation.
67 For other examples of how behavioural biases may lead retail investors to draw incorrect decisions with
respect to structured products, see: Financial Conduct Authority, Occasional Paper No 9 (n 35) 10.
The ESAs consider developing guidelines to further clarify the criteria regarding the
use of the comprehension alert.68
The KID should obviously also mention a number of identification details, such
as the name of the PRIIP, the identity, and contact details of the PRIIP manufac-
turer, the competent authority, and the date of the KID.69
The next sections of the KID are labelled with questions: What is this product?;
What are the risks and what could I get in return?; What happens if the PRIIPs
manufacturer is unable to pay out?; What are the costs?; How long should I hold it
and can I take money out early?; and How can I complain?70
The last section of the KID, Other relevant information, should give a brief indi-
cation of any additional information documents to be provided to the retail investor
at the pre-contractual and/or the post-contractual stage, excluding any marketing
material.71

The Regulatory Technical Standards specify: (i) the details of the presentation
and the content of each of these elements of information; (ii) the methodology un-
derpinning the presentation of risk and reward; and (iii) the methodology for the
calculation of costs, including the specification of summary indicators.72
Risk and return, and costs. Predominant in retail investor decision-making is the an-
swer to the question What are the risks and what could I get in return?. Retail inves-
tors on the other hand often underestimate the influence of the cost structure of the
product on net return. For both of these sections risk and return, and coststhe
PRIIPs Regulation sets forth the use of visual indicators and tables to facilitate com-
prehension of the information provided in those sections.73
The Joint Committee of the ESAs has explored different options for the design of
those indicators74 and an elaborate consumer testing study, has examined the opti-
mal design of those indicators specifically and of the KID in general.75 The format
and methodology for the assignment of each PRIIP to one of the indicators has fi-
nally been adopted in Regulatory Technical Standards drafted by the Joint
Committee of the ESAs.76
3. Evaluation
The basic principles behind the KID can only be supported. The KID purports to
deal with the problems of information overload and rational ignorance by introduc-
ing very short and easy to understand information documents. It pays much
68 See Final Draft RTS (JC/2016/21) (n 2) 149: Most respondents would see merit in the ESAs clarifying
the criteria for the use of a comprehension alert, but also acknowledge that there is no specific mandate
to do so in the RTS. A common approach would be welcome though, as the current criteria in the
PRIIPs regulation are regarded as not very helpful. Guidelines are seen as the most obvious tool for this.
69 Article 8 (3) (a) PRIIPs Regulation.
70 Article 8 (3) (c)(h) PRIIPs Regulation.
71 Article 8 (3) (i) PRIIPs Regulation.
72 See Final Draft RTS (JC/2016/21) (n 2).
73 Article 8 (3) (d) (i) and (f) PRIIPs Regulation.
74 Joint Committee of the ESAs, Discussion Paper (JC/DP/2014/02) (n 13) 3639.
75 See n 49.
76 Final Draft RTS (JC/2016/21) (n 2) articles 3 and 5 and Annexes III-VII.
attention to the presentation of information and makes use of visual indicators,

which should facilitate the absorption of information by retail investors.77
The KID may, therefore, also prove an efficient tool against strategic complexity,
used by certain financial intermediaries to make it harder for consumers to identify
the best deals in the market. Strategic complexity involves complicated charging
structures, insufficient or ineffective disclosure, extensive use of financial jargon, and
unnecessarily complicated terms and conditions.78
Nevertheless, the KID concept also raises fundamental questions, difficulties, and
challenges.
a. Who is the retail investor

The PRIIPs Regulation explicitly aims at protecting the retail investor.79 The retail

investor is defined in the PRIIPs Regulation, with reference to the MiFID and the
Insurance Mediation Directive,80 as any investor or customer that is not considered
professional.81 As the category of professional investors consists of an exhaustive list
of financial institutions, very large undertakings, governments, international and su-
pranational public financial institutions, and institutional investors,82 the category of
retail investors is a large and very diverse rest category, including all private individ-
uals, SMEs, and even large undertakings.83
The Regulation does, however, not provide for a reference investor that could
serve as a benchmark in determining whether the KID is accessible and understand-
able to this very diverse category of retail investors. Should the KID be understood
by any retail investor? In other words, should the least informed retail investor be
taken as a benchmark when drafting the PRIIPs KID? Most probably not. More in
line with pre-existing legislation and case law would be to interpret the retail inves-
tor in accordance with the MiFID and consumer law directives as the average re-
tail investor.84 The Unfair Commercial Practices Directive 2005/29/EC takes as a
77 It has been shown that the visual presentation of information indeed facilitates absorption of information.
See for instance: Annamaria Lusardi and others, Visual Tools and Narratives: New Ways to Improve
Financial Literacy NBER Working Paper No 20229/2014, http://www.nber.org/papers/w20229.pdf,
who found that the use of videos was more effective at improving financial literacy scores than a written
narrative.
78 Financial Conduct Authority, Occasional Paper No 9 (n 35) 6.
79 Whether the PRIIPs obligations apply, can, however, only be determined at the end of the distribution
chain, when it has been established whether the distributor of the product is in fact facing a retail client
(Explanatory Memorandum to the Proposal for a PRIPs Regulation (n 3) 9). Inevitably, the manufacturer
will need to comply with the PRIIPs Regulation and create a Key Information Document for products in
scope if there is a chance that the product could be sold to a retail investor, even if in fact such retail sale
may never arise.
81 Article 4 (1) 11 MiFID 2014/65/EU.
82 Annex II to MiFID 2014/65/EU.
83 Studies have shown that, within the category of private individuals, a set of personal and socio-economic
factors, including age, gender, socio-economic class, and ethnicity, influence financial literacy. Mak (n 40)
259, with further references. Lin makes a typology of investors, distinguishing between the reasonable in-
vestor, the irrational investor, the active investor, the sophisticated investor, and the entity investor (Tom
CW Lin, Reasonable Investor(s) (2015) 95 Boston University L Rev 461).
84 See article 5(2) (b) of the Unfair Commercial Practices Directive 2005/29/EC and article 27 (2), MiFID
Implementing Directive 2006/73/EC, para 3 referring to the average investor. The Explanatory
benchmark the average consumer, who is reasonably well-informed and reasonably

observant and circumspect, taking into account social, cultural and linguistic
factors . . . . The average consumer test is not a statistical test. National courts and
authorities will have to exercise their own faculty of judgement, having regard to the
case-law of the Court of Justice, to determine the typical reaction of the average
consumer in a given case.85
Drafting a PRIIPs KID which is understandable for this average retail investor,
will, however, necessarily mean that a whole range of retail investors with less than
average skills will not (fully) understand it, whereas the KID may be perceived as
providing overly simplified information by investors with more than average skills.86
b. What does understandable mean?

If the average retail investor benchmark is to be upheld for purposes of the PRIIPs
Regulation, the next question arises, whether it is indeed possible to create a KID
which is understandable for the average retail investor, in a society where the finan-
cial literacy of retail investors is remarkably low.87
The KID is supposed to not use any jargon and terminology which is not immedi-
ately clear to the retail investor. This seems a near impossible requirement. The
products for which a KID should be produced, are complex by nature, since the risk
and return of the product derive from some underlying assets or benchmark. Many
retail investors are not familiar with typical risk or cost terminology, cannot readily
explain the difference between a share and a bond, or are unaware of how an invest-
ment fund functions.88 If such concepts cannot be considered immediately clear, it
Memorandum to the Proposal for a PRIPs Regulation also explicitly refers to the average investor (see
quote in n 8).
85 See recital 18 of Unfair Commercial Practices Directive 2005/29/EC.
86 Compare to Lin (n 83) 47677 stating that designing regulations for a homogeneous population of rea-
sonable investors, and then applying them to a diverse population of investors, has limited the effective-
ness of financial regulation, aimed at investor protection. See also Avgouleas (n 41) 470, who suggests
two options to improve the effectiveness of disclosure, including the creation of a more pluralistic inves-
tor protection regime than that mandated by MiFID, the Prospectus II and UCITS Directives. He, how-
ever, admits that [i]t may be plausibly assumed that tailor made disclosure regimes for various sub-
classes in the retail investor class may prove unfeasible or very expensive (472).
87 See already a 2005 OECD Report on the basis of surveys of OECD Members: all of the surveys conclude
that the financial literacy level of consumers is very low. Respondents, moreover, often felt they knew
more about financial matters than was actually the case (OECD, Improving Financial Literacy: Analysis
of Issues and Policies (2005) 42 and 46. A recent European Parliament Report confirmed that a growing
body of academic literature has pointed out that many consumers lack basic financial literacy skills, even
in industrialised countries. See European Parliament, Consumer Protection Aspects of Financial
Services (IP/A/IMCO/ST/2013-07, February 2014) 95, with further references. See also Leora Klapper,
Annamaria Lusardi and Peter van Oudheusden, Financial Literacy Around the World: Insights from the
Standard & Poors Ratings Services Global Financial Literacy Survey (2015) 21 http://media.mhfi.com/
documents/2015-Finlit_paper_17_F3_SINGLES.pdf; See also Mak (note 40) at 259, with further refer-
ences to national financial literacy studies, showing that most consumers have difficulty in answering fi-
nancial questions, especially more sophisticated questions relating to stock market behaviour and safe
investment or saving strategies.
88 See n 87 for studies regarding consumer financial literacy. In German literature, a comparable discussion
relates to the question whether the average retail investor can be considered capable of understanding the
annual accounts of a company. See eg Thomas Mollers and Eva Kernchen, Information Overload am
Kapitalmarkt, (2011) 40 Zeitschrift fur Unternehmens- und Gesellschaftsrecht 1, 56.
will be very difficult to elaborate an understandable three-paged KID for many

PRIIPs.
The merits of standardized risk and return, and costs indicators seem straightfor-
ward in such a situation. The risk/performance/cost of a product is visualized in an
easy to read scale or table, indicating the riskiness/performance/costs of each prod-
uct on the basis of the same methodology. This should greatly facilitate retail inves-
tors comprehension and comparison of the riskiness/performance/costs of
products.
However, the results of the consumer testing study are disenchanting in this re-
gard. The main aim of the study was to establish the best format for the KID in order
to be truly helpful for consumers in comparing and selecting the best products for
their investment needs.89 The study put a range of multiple choice questions to a
large sample of consumers in order to test their actual understanding of a product on

the basis of different test formats of the indicators and the full KID. The study
showed that test participants scores for most of the questions varied significantly
although not tremendouslyin function of the different formats which were put to
the test. The more striking result was that, in general, the number of respondents an-
swering correctly on the basis of even the best performing indicators and format of
the KID, was rather low. Especially the interpretation of cost indicators was very
poor, with less than one-third of the respondents answering basic and essential ques-
tions correctlysuch as Would you say that the product has high/medium/low
overall costs?; or Which types of costs (entry/yearly/exit costs) do you think you
will need to pay if you wanted to end your investment before the full recommended
holding period?.90 The results with respect to risk questions were relatively better,
with for most questions about two-thirds of respondents answering questions cor-
rectly if the best performing format was used,91 although for some questions the re-
sults were much worse.92 The closely related questions with respect to return on
investment and performance scenarios, however, again scored much lower, with for a
majority of questions less than half of the respondents answering questions correctly
(even if the best performing format was used).93
The main conclusion which can be drawn from this study, is, therefore, that even
if information is presented in a format and using terminology and visual indicators as
simple as the European Commission and the ESAs could think of, a large group of
retail investors (and arguably also the average retail investor94) are still not able to
89 2015 Consumer Testing Study (n 49) x.

90 ibid 35ff; see also 11113 and 13437.
91 ibid 2431; 10708 and 13132.
92 For instance the question relating to the risk of additional losses if the investor would sell before the rec-
ommended holding period was answered correctly by less than half of the respondents (ibid 28); the
question asking to compare two products in order to determine which product produces the higher risk
of not being able to end an investment early in order to get money back, was answered correctly by less
than 40 per cent of respondents (ibid 29).
93 ibid 3135. See also 10910 and 13233.
94 Even though the average consumer test is not to be considered a statistical test according to recital 18 to
the Unfair Commercial Practices Directive 2005/29/EC, if a majority of investors is not able to draw cor-
rect conclusions from the KID, it seems reasonable to state that the average retail investor is not able to
do so either.
draw correct conclusions from this information. The executive summary of the study
recognizes this with respect to the most problematic issues, albeit in a rather euphe-
mistic manner, by stating that Between the quantitative and qualitative research, it
was possible to identify a number of specific areas of continued confusion among
participants.95
The study thus confirms previous consumer testing and behavioural finance stud-
ies, which conclude that information and education not always yield large changes in
behaviour96 and raise questions as to whether they are even worth the expense.97
c. Understandable versus accurate

In view of the difficulties encountered by retail investors in understanding different
formats of the KID, the consumer testing study concludes that the KID should use

the simplest indicators, leaving out multidimensional indicators which were consid-
ered more difficult to understand. A multidimensional risk indicator which not only
mentions the overall risk level, but also distinguishes between market risk, credit risk,
and liquidity risk, was indeed misinterpreted by more retail investors than its uni-
dimensional counterpart.98 By simplifying the indicator in this manner, a lot of infor-
mation is obviously left out. For certain retail investors (with more than average
skills) such information may, however, be very useful,99 among other things to make
a more refined comparison of the specific risks of two products with the same overall
risk-scale. It could be argued that such information can be found in other, more
95 These issues are: understanding capital guarantees, the likeliness of performance scenarios and cost fig-
ures in general (next to the lack of understanding that cost figures given in the KID are not exact). See
2015 Consumer Testing Study (n 49) xiv.
96 See the recent FCA study on the difficulty for consumers to understand structured deposits, which con-
cludes: While bearing in mind that the disclosure came at the end of a long survey when respondents
might have felt tired, the relatively minor adjustment of valuations by investors shows that we should be
cautious about what can be achieved through providing information and Those investors who had over-
estimated return and underestimated risk adjusted more after disclosure, consistent with the initial valua-
tions being biased. Our findings suggest, however, that disclosure only had limited effect in correcting the
misestimation. (Financial Conduct Authority, Occasional Paper No 9 (n 35) 5 and 23, see also 2628).
For an overview of studies on the achievements of financial education programmes: Margaret Miller and
others, Can You Help Someone Become Financially Capable? A Meta-Analysis of the Literature Policy
Research Working Paper 674/2014). Also: James J Choi, David Laibson and Brigitte C Madrian, Are
Empowerment and Education Enough? Underdiversification in 401(k) Plans Brookings Papers on
Economic Activity, 2:2005, 193.
97 Eg Mak (n 40) 259; Miller and others (n 96) 3. The expense of the education or information effort is of-
ten however not measured: ibid 27: a surprising and yet common omission among virtually all studies is
the analysis of costs and benefits of financial literacy intervention.
98 2015 Consumer Testing Study (n 49) xii: an alternative presentation of the risk information, which in-
cluded a multi-dimensional indicator, was found helpful to consumers in Phase I when considering details
on different types of risk, such as market risk, credit risk and liquidity risk, though the consumers found
these specific forms of risk nonetheless difficult to understand and combine and Generally, the results of
the quantitative research showed that simpler approaches were associated with better comprehension of
key information than more complex approaches. Although a first reaction of the organizers of the testing
was to improve the multidimensional risk indicator, their final conclusion was the use of a simple one-
dimensional risk indicator.
99 ibid: There was support for more detailed information in the qualitative study among some participants.
However, increased detail often meant poorer performance on the objective questions within the quanti-
tative testing.
elaborate information documents, but those are not available for all PRIIPs and may,
moreover, be so much more complex and technical that they are in practice not
helpful.
In the quest for an understandable KID, another challenge is, therefore, to find,
for each indicator, the delicate balance between sufficient sophistication to be infor-
mative and accurate and, at the same time, the necessary simplicity to be readily un-
derstandable to the average retail investor.
d. Systemic risk of standardized indicators

Beyond the presentation of and the number of dimensions represented in the risk/
performance/cost indicators, further challenges arise in developing an accurate un-
derlying calculation method. Such calculation method should obviously capture a

very large number of elements in order to accurately define the overall risk/perfor-
mance/cost of each product type in scope. Difficult choices are to be made with re-
gard to what elements to include and how to include them in the calculation
method.100 As there are structural differences between, for example, a term deposit
and an investment fund, an indicator which needs to accurately represent the risk/
performance/costs of those different products, would need to take into account a
very wide variety of risk/performance/cost factors in order to be truthful.101
Experience with national risk indicators illustrates the challenge: if the number of risk
factors which is taken into account to determine the risk category is too limited, the risk
indicator may in some instances result in surprising risk classifications which fail to suffi-
ciently inform the retail investor.102 It raises the question whether, and under what
100 See ESMA, EBA and EIOPA, Technical Discussion Paper Risk, Performance Scenarios and Cost
Disclosures in Key Information Documents for Packaged Retail and Insurance-based Investment
Products (PRIIPs) (JC DP 2015 01, 23 June 2015) 8ff, see also 93: The goal is to develop presenta-
tional forms that are suitable and applicable to all different types of products that fall into the scope of
the PRIIPs Regulation. Given the heterogeneity of PRIIPs in scope, this will be an important challenge.
101 ibid 93: The measurements should be applicable to all types of PRIIPs. Where a measurement (eg of
historic volatility) is available for some PRIIPs but not available for those without a track record, or
might be a misleading measure for some, effective methodologies for combining or synthesizing differ-
ent measures in an objective way may be necessary. For some elements of the KID, it has proven impos-
sible to use one standardized methodology for all types of PRIIPs. See with respect to performance
scenarios: Joint Committee of the European Supervisory Authorities, Joint Consultation paper. PRIIPs
Key Information Documents Draft Regulatory Technical Standards (11 November 2015 JC 2015
073) 90: Predefined scenarios may limit manufacturers discretion and enhance comparability.
However, at the same time, they may be difficult and too complex to standardize across the scope of all
PRIIPs. See also the Final Draft RTS (JC/2016/21) (n 2) eg Annex IV, 48-48 paragraphs 14ff. And
with respect to market risk at 102: Given the different products in scope, it is not likely that there will
be a one size fits all methodology to determine the market risk, a fact already dealt with in the context
of the UCITS SRRI methodology, where, for structured UCITS, a different approach is applied.
Depending on the methodology selected, there may be room for more or less standardization. See Final
Draft RTS (JC/2016/21) (n 2) Annex II, pt I (market risk assessment) eg p 29, paras 14 and 29.
102 In Belgium, for example, the royal decree of 25 April 2014 introduced an obligation to classify products into
risk categories that correspond to a standardized risk label, categorizing each product in risk classes from A
(less risky) to E (more risky) (article 4, ss 2, 8 of the so-called transversal Royal Decree of 25 April 2014, and
the FSMA Regulation of 3 April 2014 concerning the technical requirements of the risk label). The system
was however heavily criticized. See for example the advice of the Consumer Council (Raad voor het
Verbruik) of 20 March 2014, RVV 471, 50: The subdivision . . . is disadvantageous for funds vis-a-vis indi-
vidual bonds, although funds involve less risk because they diversify risk. The use of derivatives is also heavily
conditions, product manufacturers should be given the option to deviate from the prod-
uct risk classification resulting from the mandatory methodology if they believe such risk
class does not accurately reflect reality. It should be noted that the ESAs have consulted
on the possibility for manufacturers to assign a higher risk class to their PRIIP than
would result from the standardized PRIIPs methodology.103 The final draft regulatory
technical standards, however, do not seem to feature such a possibility.
In view of the difficulty of producing an informative and non-misleading risk indi-
cator, the risk of standardization clearly emerges: it cannot be ruled out that the risk
classification methodology, which is proclaimed as the standard, is flawed. The man-
datory use of uniform indicators, therefore, implies a systemic risk. When the meth-
odology underlying an indicator contains errors or functions in a suboptimal
manner, this will affect the entire retail investment products market in the EU.
More generally, just as any risk assessment is by nature an approximate exercise

and should be relied upon with caution, investors should remain sufficiently sceptical
towards risk, performance, and cost indicators and standardized product documenta-
tion that is only three pages in length.
e. Behavioural biases
Recital 16 to the PRIIPs Regulation confidently states that (k)ey information docu-
ments are the foundation for investment decisions by retail investors. It, however, re-
mains to be seen whether the average investor will indeed read the KID and base his
or her investment decisions on the KID. Behavioural finance studies have provided
abundant evidence that all kinds of biases and heuristics result in investors not acting
on the basis of rational processing of available information and systematically taking
irrational decisions.104 The PRIIPs Regulation has taken into account those behav-
ioural studies to a certain extent and tries to remedy some of those biases by adapt-
ing the presentation of the information105 and adding additional warnings.106
discouraged. One single government bond with a rating up to A would receive an A label. A fund that exclu-
sively invests in AAA government bonds receives label C. If a fund invests 50% or more in derivatives, the
fund is classified in the lowest category E. In this manner, many capital guaranteed funds would end up in
this lowest category. (free translation from Dutch). In view of the PRIIPs Regulation which will introduce an
EU risk indicator, the entry into force of this part of the Royal Decree was postponed sine die.
103 See Joint Committee of the European Supervisory Authorities (JC/2015/073) (n 101) 8.
104 See the seminal work of Christine Jolls, Cass R Sunstein and Richard Thaler, A Behavioral Approach to
Law and Economics (1998) 52 Stanford L Rev 1471. With respect to financial services specifically, see
(among others) Prentice (n 43) 1397; Decision Technology Ltd, Consumer Decision-Making in Retail
Investment Services: A Behavioural Economics Perspective - Final Report (November 2010) <http://
ec.europa.eu/consumers/strategy/docs/final_report_en.pdf>, with many further references in pt I,
23ff; Financial Conduct Authority, Occasional Paper No 9 (n 35).
105 Joint Committee of the ESAs, Discussion Paper (JC/DP/2014/02) (n 13) 17: Research into consumer be-
haviour in investment decision making has also shown the detrimental effects of behavioural biases. For in-
stance, retail investors often tend to focus more on the reward or performance scenarios of an investment
product than the effect of costs, or to overvalue immediate rewards or risks, over long term rewards or risks.
Given this, a traditional approach to disclosures focused solely on information and with little regard to its pre-
sentation, is being superseded in policy making by an approach that is more informed by insights into con-
sumer behaviours. . . . consumer testing . . . will be used to select options on the basis of how consumers
react in terms of comprehension, comparability and engagement (salience).
106 See the comprehension alert of article 8 (3) which should be inserted in the KID and recital 18 of the PRIIPs
Regulation, referring explicitly to retail investors behavioural biases (see in more detail section Overview above).
It can, however, not deal with other biases, such as for instance overconfidence or
herd behaviour. Such biases undermine the utility of disclosure and education: they
have as an effect that even if consumers are well-informed, financial literacy does not
always translate into good financial behavior.107 Drivers other than independent
printed material influence retail investors decision-making to a much higher extent.
Advisors and the opinion of family and friends have been shown to be key influenc-
ing factors in investor decision-making.108
f. Link with other investor protection measures

The PRIIPs Regulation and the KID can obviously not be seen in isolation from
other investor protection legislation. The MiFID II and Insurance Distribution
Directives conduct of business rules should ensure that financial institutions assist
investors in making suitable or appropriate investment decisions.109 Moreover, after

several Member States had already introduced product bansthe prohibition to sell
certain very complex and risky products to retail investorsthe ESAs have recently
also been given such product intervention powers, that is, the power, upon certain
conditions, to temporarily prohibit or restrict in the EU: (i) the marketing, distribu-
tion, or sale of financial products or (ii) a type of financial activity or practice.110
Those measures attenuate many of the issues raised above.111
107 Sandro Ambuehl, B Douglas Bernheim and Annamaria Lusardi, The Effect of Financial Education on
the Quality of Decision Making NBER Working Paper 20618/2014; European Parliament, Consumer
Protection Aspects of Financial Services (IP/A/IMCO/ST/2013-07, February 2014) 95, with further
references. O Ben-Shahar and CE Schneider, The Failure of Mandated Disclosure (2010)
159 University of Pennsylvania L Rev 647, 70428. In particular, those individuals who have the highest
propensity to instantaneous gratification are likely to benefit the least from education or disclosure of in-
formation, as they will be least capable of investing the necessary time (see John Armour and others,
Principles of Financial Regulation (forthcoming, OUP 2016) ch 10). Also Avgouleas (n 41) 457.
108 Eg Investor Education Fund, Investor Behaviour and Beliefs: Advisor Relationships and Investor Decision-
making Study (The Brondesbury Group 2012) 21. This study found the second source of information
for decisions to be the opinion of selected family and friends. Independent printed material was only
the third source of information for decisions. See also Decision Technology Ltd (n 104) 41: Further, a
large cross-country survey in Europe showed that close to 90 percent of respondents in several countries
specifically expect financial institutions to provide advice, and the vast majority of customers say that
they trust the advice they receive.
109 See recital 5 PRIIPs Regulation; article 25 MiFID II and, for insurance-based investment products, arti-
cle 30 Insurance Distribution Directive (EU) 2016/97. On the interpretation difficulties resulting from
the interplay between the PRIIPs Regulation on the one hand and MiFID II and the Insurance
Distribution Directive on the other hand: Veerle Colaert, MiFID II and Investor Protection: Picking
Up the Crumbs of a Piecemeal Approach in Danny Busch and Guido Ferrarini (eds), Regulation of EU
Financial Markets: MiFID II (OUP 2017, forthcoming).
110 ESMA has such power with respect to financial instruments; EBA with respect to structured deposits
and EIOPA with respect to insurance based investment products. See articles 4041 of Markets in
Financial Instruments Regulation (EU) No 600/2014 (MiFIR); article 16 of the PRIIPs Regulation.
Long before this legislation was introduced, Avgouleas had advocated the creation of a more refined EU
Financial Products Agency, an independent pan-European agency that would advise, scrutinize and rec-
ommend options for financial products, rather than regulate them or prohibit them from entering the
market. See Avgouleas (n 41) 47274.
111 On the relationship between the PRIIPs Regulation, MiFID II and the Insurance Distribution Directive,
see Veerle Colaert, Building blocks of investor protection Working Paper.
g. Costbenefit analysis
A last question, with very high relevance in view of the above evaluation, is whether
the PRIIPs Regulation would successfully withstand a costbenefit analysis. The pro-
duction and update of KIDs for a very wide range of products represents an immense
cost, roughly estimated by the European Commission at a one-off cost of EUR 171
million, and incremental ongoing costs (per year) of EUR 14 million.112 These costs
will in the endat least in partbe borne by retail investors. They are economically
justified, however, if the benefits in terms of increased investor protection outweigh
these costs. The European Commission is of the opinion that these costs are
dwarfed by the scale of potential misselling or buying in the retail investment market.
. . . even if disclosure failings were seen as only contributing 1% to such problems,
our analysis still suggests potentially 8 billion EUR of misplaced investments attribut-
able to such failings.113 The European Commission thus assumes that the KID will

be read and understood by at least part of the investors and that this information
will, moreover, enable them to see through the mis-selling propositions of malicious
advisors.114 The above analysis115 casts doubts on those assumptions.
I I I. C O N C LU S IO N
The PRIIPs Regulation introduces a short and standardized Key Investor
Document for all PRIIPs, purporting to deal with different investor protection
concerns.
A first concern of the PRIIPs Regulation is to improve comparability between dif-
ferent products. The PRIIPs Regulation is innovative in that it not just standardizes
information documents for a particular product type, but applies to a range of eco-
nomically equivalent products. It is thus the first cross-sectoral piece of EU financial
legislation, applying to banking, investment, and insurance products alike. Hard to
reconcile with its goal of improving comparability of products, is, however, the limi-
tation of the scope of application of the PRIIPs Regulation to packaged products. It
112 See Commission, Impact Assessment accompanying the Proposal for a Regulation of the European
Parliament and of the Council on key information documents for investment products (SWD (2012)
187, 3 July 2012) 51 and 9697. The Impact Assessment made in the context of the Final Draft RTS
did not come up with more precise numbers, claiming that both one-off and ongoing costs are entailed
by the introduction of the KID . . . to a large degree both of these types of costs are entailed by the re-
quirements already set at level one. See Final Draft RTS (JC/2016/21) (n 2), Impact Assessments at
78ff and at 11718 in particular.
113 Impact Assessement (SWD (2012) 187) (n 112) 97. The Commission however also recognizes that
Looking across the EU market as a whole to assess a possible scale for mis-selling is complicated by the
fact that mis-sales are not necessarily recognised as such at the time (or indeed later), so that possible ef-
fects on competition, pricing and opportunity costs are difficult to untangle. Issues typically arise where
market movements expose a practice that had hitherto gone unnoticed.
114 The Impact Assessment further mentions that Improved transparency can also be beneficial indirectly
through its impact on other market players than the retail investor themselves. For instance, greater clar-
ity on costs, risks and performance is likely to aid advisors and distributors when considering which in-
vestment proposition to recommend to a customer. However, no quantification is made of this
potential effect. See Final Draft RTS (JC/2016/21) (n 2), Impact Assessments at 118.
115 See in particular the analysis relating to the generally low level of financial literacy in the EU, which was
confirmed by the Consumer Testing Study (n 49) (2.3.2) and the analysis with respect to the impact of
behavioural biases and heuristics on investor decision-making (2.3.5).
will often be equally useful for retail investors to compare a packaged product with
its simple variant. Moreover, also for simple products, increased transparency on
costs and net return would be beneficial for retail investors. Product transparency
and comparability could, therefore, be further improved if the same standardized
Key Investor Document would be used for all savings and investment products.
That is to say, if it is even feasible to craft a truthful KID that is actually read and un-
derstood by retail investors.
A second concern of the PRIIPs Regulation is exactly to raise the quality of prod-
uct transparency and investor information to that end. While building on a long tra-
dition of product information as a means of empowering retail investors, the PRIIPs
Regulation takes into account finding from the law and economicsand to a limited
extent behavioural financeliterature in an attempt to increase chances that inves-
tors would read and understand the information provided to them. Positive in this

regard is that the European legislature tries to respond to the long-established prob-
lems of information overload and rational ignorance. Not only is the PRIIPs KID
standardized and short (maximum three A4 pages), great attention is also paid to op-
timizing the design of the KID, including visual indicators, which should facilitate
easy absorption of information on risk and return, and costs.
The KID concept, however, also raises a number of challenges. Developing visual
indicators that give a truthful reflection of the risk and return of a very wide array of
different products, is a first difficulty. In view of the mandatory use of the same meth-
odology throughout the EU, a mistake in the underlying calculation method would
have very wide-ranging and arguably systemic effects. Secondly, the retail investors
category covers a very heterogenic public. We have argued that the benchmark to de-
termine who should understand the KID is the average retail investor, a concept
well known in EU consumer law and also used in the MiFID Implementing
Directive. Producing an information document that is understandable and immedi-
ately clear to the average retail investor is, however, a seemingly insurmountable
challenge in a society with remarkably low levels of financial literacy. The large
Consumer Testing Study, set up to determine the optimal format of the KID, first
and foremost evidenced that even when the best performing design of indicators and
KID is used, a large group of retail investors still does not succeed in drawing correct
conclusions from the information provided. The KID can indeed not deal with many
of the problems brought to light in behavioural finance studies: (i) all kinds of psy-
chological biases lead investors to take irrational decisions, irrespective of informa-
tion provided; and (ii) even if retail investors would read and understand the
information provided, they do not necessarily draw correct conclusions. These chal-
lenges put into question the very idea of the KID as an instrument of investor pro-
tection for a large group of retail investors.
In reality, the PRIIPs Regulation is obviously part of a much larger body of EU in-
vestor protection regulation. Other indispensable pieces, such as the MiFID, the
MiFIR, and the Insurance Distribution Directive, may remedy some of the shortcom-
ings mentioned, by means of extensive conduct of business rules and even product
banning competences.

The Regulation of PRIIPs Great Ambitions, Insurmountable Challenges

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Journal of Financial Regulation, 2016, 2, 203224

The Regulation of PRIIPs: Great Ambitions,

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The PRIIPs Regulation indeed introduces a key information document or KID

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11 Commission Communication COM (2009) 204 (n 8) 2; Explanatory Memorandum to Proposal COM

2. Products out of scope

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2. Key information document

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comprehensibility of the information if the KID is printed or photocopied in black

b. Quality of the information

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61 Article 6 (1) PRIIPs Regulation and recitals 15 and 17.

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attention to the presentation of information and makes use of visual indicators,

a. Who is the retail investor

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benchmark the average consumer, who is reasonably well-informed and reasonably

b. What does understandable mean?

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will be very difficult to elaborate an understandable three-paged KID for many

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89 2015 Consumer Testing Study (n 49) x.

c. Understandable versus accurate

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d. Systemic risk of standardized indicators

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f. Link with other investor protection measures

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