PRIIP regulations - a threat to bondholders?

Hi everyone,

I got a secure email today from my broker advising me that, as of 1 Jan 2018, they would no longer permit me to purchase certain retail bonds due to some new rules about "Packaged Retail and Insurance-based Investment Products (PRIIPs)". Apparently certain types of investments are now off limits unless the issuer has published some kind of information document in a prescribed format (a "key information document" or KID).

Anyways, I did a bit of googling and it turned out these new regulations are from the EU and it isn't completely clear what they cover. The only bonds mentioned in the note were a couple of RPI linkers - I'm wondering if the variable nature of the coupons was what brought them into scope.

Does anyone know anything more about this? Is this part of a wider regulatory attack on the retail bond market or just something that happens to have caught a couple of retail bond issues by accident?


  • edited December 2017
    Yes one large broker sent an email out today saying from 1st Jan they will accept selling orders only for certain bonds without a KID. Purchase orders would be accepted if the issuer provides a Key Information Document. But the EU regs on the subject originally said explicitly that inflation linked bonds are sufficiently well understood by Retail Investors and the products are NOT complex instruments. This view seems to be supported by the same broker continuing to support dealings in Inflation Linked Gilts for retail.

    There appears to be a lot of confusion around KIDS, Complex, and PRIIPS generally and, right now, no one will stand up and say definitively if RPI and a number of other bonds, are in or out, but the brokers have taken the view they should err on the side of caution for the start of Mifid II.

    A number of market participants are looking into this as a matter urgency and it would be good if anyone with further info or thoughts could share them on this blog please. It would be a great shame if Retail become barred from buying high quality inflation protection.
  • The safety first approach continues with same large broker classifying a range of bonds as "becoming complex" with associated dealing restrictions from 3rd Jan 18.

    Given the background and guidelines they have to work to, their action is entirely understandable.

    However, they also offer a very short questionnaire which, depending on the responses given, can allow dealings to continue thereafter.

    There will doubtless be more to say on this whole subject in the coming days and weeks.
  • Interesting. Obviously it's a very good thing that this broker has gone to the trouble to set up the questionnaires rather than simply refusing to sell anything deemed "complex" to retail investors. Hopefully others will take as similar approach.

    And to be fair, some of the instruments out there are quite complicated - subordinated bonds with call dates and coupon resets for example. Maybe it is reasonable to ask buyers to confirm they know what they are doing?

    I have two concerns about this though. Firstly there's the message that bonds in general are somehow "scary" for small investors, compared to shares which also involve investment risk. Discouraging new investors and, ultimately bond issuers is not going to help the retail bond market to grow.

    Secondly, there's the direction of travel. Asking investors to self certify that they have a given level of knowledge and understanding could be a staging post towards requiring us to provide formal evidence (eg a finance qualification of some kind), thus further shrinking the market.

    The ironic thing is that the more heavily regulated the bond market becomes, the more small investors will be pushed towards equities - and potentially towards trouble if there's a big stock market correction. Is this what the regulators really want?
  • Louis - you are correct and I doubt it is what the regulators want. It's a fast moving subject and should settle down, hopefully in a clear and logical manner, during January.... hopefully...
  • It wasn't we 'amateur' investors who bet the ranch on CDO's and other daft and ultimately catastrophic investments. They need look no further than Bitcoin to find a so called complex investment, but regulating it is too difficult so they focus on retail bonds? You couldn't make it up.
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