European Union: EU Regulation On Key Information Documents For Packaged Retail And Insurance-Based Investment Products

Last Updated: 13 June 2016
Article by Dieter Buchberger and Patrick Mandl

Through the PRIIPs Regulation, the EU is introducing a new standard for key information documents for the most important investment products. The aim is to make investment products more transparent to retail investors, and to increase the comparability of different products.

EU citizens have invested more than 10 trillion Euro in financial products such as security funds, structured products and life insurances (for investment purposes). Short key information documents that offer the relevant information in a uniform way are supposed to make these financial products more transparent and enable retail investors to compare different offerings. This is the purpose of the EU's Packaged Retail and Insurance-based Investment Products Regulation, passed in November 2014 (Regulation (EU) Nr. 1286/2014). The regulation will become effective on December 31, 2016 and will be directly applicable in all EU member states.

The cornerstone of this new regulation is the introduction of a sheet of relevant information that is highly standardized with regards to both form and content, the so-called "Key Information Document" (KID). The KID is supposed to include all the information relevant for the investment decision of the individual retail investor in a concise way. The KID is an addition to the existing retail investor information obligations. By the end of 2016, providers of packaged retail and insurance-based investment products will have to issue a KID to their clients in addition to the information documents they are already obliged to .

To which financial products does the regulation apply?

The products covered by the new regulation include investment funds, structured products and structured deposits (packaged retail investment products), as well as life insurances with investment elements (insurance-based investment products), such as life insurances based on funds or index-linked life insurances. Taken together, these categories are referred to as PRIIPs, which the regulation is named after.

However, certain types of life insurance, such as life insurance products where the benefits are only payable upon death or incapacity for work, are not within the scope of the regulation. This is also applicable for other insurance products, such as life insurances for which the redemption value is not exposed to market fluctuations.

Through at least partial including insurance products in the regulation, the regulator aims to establish a "level playing field" between providers of financial products and insurance products respectively with regard to retail investor information standards.

Which transition periods apply?

Both UCITS (Undertakings for Collective Investment in Transferable Securities) and AIF (Alternative Investment Funds) are within the scope of the PRIIP Regulation. However, as a similar form of a KID was introduced for UCITS (through the UCITS IV Directive), there is a transition period of at least 3 years for UCITS . This also applies for AIF, if and insofar as a member state decided to apply the UCITS information requirements also to AIF.

In Austria § 48 of the Alternative Investment Fund Act (AIFMG) stipulates that only specific types of alternative investment funds may be sold to private investors and only under the condition that a KID within UCITS standards is provided. However, there is an exemption for AIF in real estate: In this area, there is no obligation to provide a KID, as a simplified prospectus may be provided instead. Therefore the transition period of three years applies to AIF permitted to be sold to private investors. With regard to AIF in real estate, the provision of a simplified prospectus will most likely not suffice and it will at least be necessary to provide a KID in accordance with the UCITS standard.

What does a KID include?

A KID must convey the essential information on the product in a clear and comprehensible way. In particular, the KID must contain, among other elements, a summary risk indicator, information on the possible maximal loss of invested capital, appropriate performance scenarios, and information on the minimum holding period. The total cost, including direct and indirect costs to the investor, must also be disclosed. In terms of its content the KID for UCITS does not differ substantially from the KID required under the PRIIP Regulation. However, there are differences with regard to the disclosure of total cost as well as with regard to the information on risk. Also, it has to be noted that the provider is obliged to regularly ensure that the information contained in the KID is up to date and if needed to update the KID accordingly. Details on formal aspects of the KID, as well as the required frequency of updates to the KID will be set out in Technical Standards to be published by the European regulatory authorities. These are not yet finalized as consultations are still going on. Its publication is expected for Spring 2016.

How and when must a KID be provided?

The KID must be provided to the retail investor free of charge and in paper form. Alternatively KIDs may (under certain circumstances) be provided in a different form, such as in the form of another durable medium (USB sticks, E-Mail) or on a website. Provision of the KID on a website, however, is only permitted on the investor's request and upon duly notification on the extract link, among other requirements. Generally, the KID must be provided to the investor before the PRIIP is purchased, or before the investor has entered into any obligation. An exception applies only when the investor initiates the transaction, concludes the transaction using a mean of long distance communication, the provision of a KID is not possible. In such a case the investor has to be informed that the provision of a KID is not possible and that he has the option to delay the transaction in order to receive the KID before concluding the transaction and that the investor actively consents receiving the KID after the transaction. All of these conditions have to be taken into consideration, particularly for online sales.

What are the sanctions?

Sanctions in the case of non-compliance are substantial. These include fines of up to five million Euros or three percent of the annual turnover of the provider, prohibition on marketing and public warnings on the product and/or the provider. Therefore, providers of PRIIPs (such as insurance companies, retail banks, securities companies, investment funds and financial advisors) are advised to precociously prepare for these new informational requirements and take first steps necessary for implementing the regulation in their company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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