What is it?
PRIIPs introduces a new pan-European pre-contractual product disclosure document – a key information document, or "KID" – with the objective of enabling retail consumers to make informed choices and compare products when they are considering buying packaged retail and insurance-based investment products.
Details on the required content and underlying methodology for KIDs were set out in draft Regulatory Technical Standards ("RTS") developed by the European Commission.
What does PRIIPs apply to?
A PRIIP is a product that falls into one or both of the following categories:
|Packaged retail investment product||an investment (including instruments issued by special purpose vehicles under Solvency II or securitisation special purpose entities under AIFMD) 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 retail investor; and/or|
|Insurance-based investment product||an insurance 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 fluctuations.|
This broad definition means that products ranging from investment funds (including UCITS and retail AIFs) to futures, options or structured products are within the scope of the Regulation and subject to the requirements set out therein. There has been ongoing debate and discussion at industry level in relation to the applicability of PRIIPs to derivatives, and the Commission has confirmed that derivatives are in scope. UCITS providers are already required to produce KIDs under UCITS IV and thus a transitional period up to 31 December 2019 applies, during which UCITS providers are exempt from the requirements under PRIIPs.
The Regulation explicitly excludes the following from its scope:
- Non-life insurance products listed in Annex I to Solvency II
- life insurance contracts where the benefits under the contract are payable only on death or in respect of incapacity due to injury, sickness or infirmity;
- deposits other than structured deposits as defined in MIFID II:
- securities as referred to in points (b) to (g), (i) and (j) of the Prospectus Directive, being assets that are held directly, such as corporate shares and sovereign bonds;
- pension products which, under national law, are recognised as having the primary purpose of providing the investor with an income in retirement and which entitle the investor to certain benefits;
- officially recognised occupational pension schemes within the scope of the Occupational Pension Funds Directive or Solvency II;
- individual pension products for which a financial contribution from the employer is required by national law and where the employer or the employee has no choice as to the pension product or provider
The requirements of the Regulation are scheduled to come into effect on 31 December 2016 (other than for UCITS).
There is, however, significant disquiet in the industry around the scope of the Regulation, the timing involved and the appropriateness of the information to be included in KIDs. In September the draft RTS were rejected by the European Parliament, who stated that the legislation was flawed and misleading and likely to cost investors money. The Parliament echoed the industry position by calling on the Commission to consider postponing the application date of the Regulation for one year, until 1 January 2018, stating that such a postponement would provide time to clarify open questions and reach the goals of PRIIPs. The Parliament expressed concerns relating to, amongst other things, the proposed methodology for the calculation of future performance scenarios, a lack of clarity relating to the treatment of multi-option products and that a lack of detailed guidance on the comprehension alert may create a serious risk of inconsistent implementation across the single market.
The Commission will now have to propose new RTS for implementing the Regulation addressing the Parliament's concerns. There will be significant pressure to prepare and approve these new RTS in good time for entry into force with the Regulation on 31 December 2016, particularly given that the possibility of implementing PRIIPs without finalised RTS was previously rejected by the Parliament's Committee on Economic and Monetary Affairs. The desired postponement in implementation of the Regulation now seems a very likely prospect.
Who is affected?
Manufacturers and sellers of packaged retail investment products and insurance-based investment products, and persons advising on or selling such products. This includes credit institutions, MIFID firms, insurance undertakings, fund managers and other retail product distributors. The responsibility for delivering the KID lies with the person or entity advising or selling the PRIIP to the investor - the PRIIP manufacturer or the distributor.
These entities will need to begin providing retail investors with prescriptive KIDs from the end of this year (31 December 2016 - although note the transitional provisions in relation to UCITS).
The draft RTS initially prepared by the Commission specifying the contents of the KID were published on 30 June 2016, with the objectives of ensuring that all retail investors have access to standardised information that will allow them to understand and compare the economic and legal features of the PRIIP and make informed investment decisions, as well as providing them with an overview of the investment policy and strategy of the PRIIP and the risks associated with them – particularly market risk, credit risk and liquidity risk.
In the interests of establishing a common template for KIDs, the RTS set out detailed requirements relating to the content and presentation of the KID, including
- a general information section containing information on the PRIIP manufacturer and its competent authority
- information on the type of product, the objectives and strategies associated with it, the type of retail investor to whom the product is marketed and the term of the PRIIP;
- the level of risk associated with the product using a summary risk indicator, indication of possible maximum loss and performance scenarios;
- information on the consequences of the PRIIP manufacturer being unable to pay out;
- detailed information on costs, including methodology for calculations;
- rationale for recommended holding periods or minimum required holding periods; and
- outline of complaints procedure.
The RTS includes a template form of KID.
The Parliament's rejection of these RTS means that revised RTS will be forthcoming, but creates unfortunate uncertainty for those market participants who are subject to the Regulation and working to prepare for compliance within the existing timeframes.
Notwithstanding the uncertainty around timing and content of the level 2 measures, the requirements of the Regulation are unlikely to change. Consequently PRIIPS product manufacturers, distributors and advisers will need to consider their plans for operational aspects of the new regime, and continue working to position themselves for compliance by 31 December of this year insofar as is possible.
Some of the practical steps that can be taken include:
- identification and analysis of products in scope;
- assessment of distribution processes and split of responsibilities between manufacturer, distributer and advisers/sellers;
- compilation of information on types of investment products manufactured, risk profiles, costs, calculations and target markets;
- establishing procedures for production of KIDs and information-gathering and monitoring for maintenance and update of KIDs;
- preparing procedures for publication and distribution of KIDs; and
- establishing sufficient complaints procedure for investment products
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.