Many European fund managers have benefited from transition periods since the PRIIPs regulation was first introduced in 2018, but all things come eventually to an end: From 1 January 2023, as per the final decision of the European Commission, all investment funds are required to provide Key Information Documents (KIDs) to their non-professional investors in the EU.

End of the transition period

The Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation, which is directly applicable in all EU member states, had required already in the beginning of 2018 from manufacturers to prepare PRIIPs KIDs to inform their retail and semi-professional investors before selling their products. However, for UCITS managers (Undertakings for Collective Investment in Transferable Securities) it was sufficient to prepare their established UCITS KIIDs (Key Investor Information Document) during a generous transition period. European AIF (Alternative Investment Fund) managers, too, potentially benefitted from transition periods that postponed the necessary disclosure of PRIIPs KIDs, depending on the EU member state.

As a result, many fund managers that sell fund shares to Cyprus or other EU investors are required to prepare now for the first time the PRIIPs KIDs. But this is not the only PRIIPs related evolvement that is currently troubling the European fund industry. Even fund managers who have implemented the design of their PRIIPs KIDs already, need to update their underlying calculation methodology to align with the new PRIIPs regulatory technical standards, applicable in 2023.

What are PRIIPs KIDs?

PRIIPs KIDs are three-page documents in a standardised format which is based on detailed specifications from the regulatory technical standards. The PRIIPs KIDs are meant to be made available to investors before the sale of the product and also published on the manufacturers' website. Their purpose is to provide non-professional investors with the most crucial pre-contractual information to allow them to perform their investment decision. The main goals of the document are transparency and comparability. Hence, PRIIPs KIDs are meant to be designed in a simple language. They include a description of the purpose and the type of the project. The KIDs should also state the product's risks as well as all applicable costs. Another important element of the PRIIPs KIDs are the performance scenarios which describe potential outcomes of the fund in four different scenarios (favorable, moderate, unfavorable and stress scenario) over different investment time horizons. These performance scenarios are expected to be published on a monthly basis for open-ended funds.

New technical standards

The end of the extension coincides with updated PRIIPs regulatory technical standards that apply from January 2023. The new technical standards update the methodology that PRIIPs providers are expected to follow during the production of PRIIPs KIDs.

The European Commission decided for the update of the technical standards in order to address the feedback from experts and the market to further improve transparency and comparability of the PRIIPs KIDs. Particularly the applicable methodology for UCITS and open-ended AIFs to calculate performance scenarios and cost indicators has changed significantly in the new technical standards.

The short implementation period and the extensive calculation required, impose operative challenges to the fund managers that must not be underestimated. Although the shown performance scenarios indicate a straightforward understanding of possible outcomes of the investment, the methodology behind the calculation is complex and often requires a large amount of historical performance data. Small deviations in the methodology lead to varying outcomes of the scenarios. Hence, it is likely that regulators will lead their intention in the future on the applied calculation methodology, since the intended transparency and comparability of the KIDs can only work, if correct and consistent calculations are performed by the fund managers. Furthermore, fund advisors and the fund managers themselves should be interested in a fair depiction of the possible performance of the funds, to avoid an exaggerated display of costs and potential losses but also the too optimistic display of performance, creating unachievable expectations for the investors. Hence, fund managers are well advised to act on time to address the recent developments in the PRIIPs regulatory landscape and ensure that they obtain the required expertise consultants to meet the complexity of the task - either inhouse or from external advisors.

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