Particularly in times of low interest rates, corporate bonds can contribute to improving risk diversification in a private investment portfolio. However, a study conducted by BaFin has shown that since 2018 retail investors have been investing less and less in corporate bonds (see info box, “How BaFin conducted the study”). There is a reason for this: many companies do not produce a key information document under the Regulation on Key Information Documents for Packaged Retail and Insurance-Based Investment Products (PRIIPs). Yet this is a prerequisite for retail investors to be allowed to purchase corporate bonds. The basic intention here was positive: to protect retail investors. But the reality is that retail investors are buying fewer corporate bonds – and this limits the range of products available to them.

Background

A possible cause for this decline could be the PRIIPs Regulation, which came into force on 1 January 2018. In certain circumstances, corporate bonds can be deemed packaged retail investment products (PRIPs) within the meaning of Article 4 no. 1 of the PRIIPs Regulation .

Under Article 5(1) of the PRIIPs Regulation, a PRIIP manufacturer, such as a bank, is required to produce and publish a key information document (KID) before it is allowed to offer a packaged investment product to retail investors. Furthermore, Article 13(1) of the regulation specifies that anyone who advises on or sells such a product must provide retail investors with the KID in good time before the customer signs a contract committing to the purchase. To put it simply: no key information document means no packaged retail investment product. In Germany, there are sanctions to enforce this.

There are various reasons why companies often do not produce a KID for corporate bonds. For one thing, companies are sometimes unwilling to take on the extra costs or possible liability risks associated with a KID for new issues. Furthermore, issuers do not produce KIDs for corporate bonds issued before the PRIIPs Regulation came into force on 1 January 2018 because the costs can outweigh the benefits. Moreover, third country issuers that do not need to target the European retail investment market do not produce a KID either.

Fewer investment options for retail investors

The broad coverage of the PRIIPs regulation consequently reduces the investment options available to retail investors. Whether this is beneficial to retail investors is therefore questionable.

The Federal Ministry of Finance (BMF) has already recognised the issue. In 2019 it published a position paper which explained that simple corporate bonds, also known as “plain vanilla bonds”, should be exempt from the PRIIPs Regulation. BaFin also supports this suggestion. However, the European Commission has not yet acted on it. In order to at least reduce the uncertainties on the bond market, BaFin published a guidance notice regarding the scope of the PRIIPs Regulation. With the same intention, the Joint Committee of the European Supervisory Authorities published a statement of a similar nature on 24 October 2019.

Figure: Value traded in billions

This figure shows the annual value traded for corporate bonds bought and sold by retail investors via German companies subject to the reporting requirements. The dashed lines show the average values for purchases and sales in 2016 and 2017. (c) BaFin