With members of the European Parliament Negotiating Team stating, in a letter addressed to Commissioner Hill, that they are “open to considering a wholesale delay of the application of MiFID II – MiFIR”, a delay to the new European market rules is now looking more likely than ever.
But there are concerns that this potential delay looming over the MiFID II/R application date could also impact other major interdependent EU reforms, including the regulation governing Packaged Retail Insurance-based Investment Products (PRIIPs).
Although there is some overlap between the regulations on PRIIPs and MiFID II/R under the investor protection theme, the PRIIPs regulation also requires manufacturers and distributors of PRIIPs to comply with some specific disclosure obligations.
Whilst our previous PRIIPs related article looks specifically at the consultation paper published on 11 November 2015, which sets out draft regulatory technical standards (RTS) on the Key Information Document (KID), this article provides an overview of the obligations and additional key information surrounding the PRIIPs regulation.
- What is the purpose of the PRIIPs regulation?
In an effort to address the shortcomings and failures highlighted by the financial crisis of 2008, there has been a significant push for an increase in the regulation and supervision of the financial sector. Within the EU, increasing consumer protection and rebuilding confidence in these markets has been one of the key aims.
The regulation governing PRIIPs seeks to do this by enhancing transparency and comparability through greater disclosure to clients.
- What is the definition of a PRIIP?
The text of the regulation states that a PRIIP is a two-term definition, where a PRIIP is a product that is one or both of the following:
- a Packaged Retail Investment Product (PRIP)
- an Insurance-based Investment Product (IIP).
Article 4 of the regulation clarifies that a PRIP means an “investment, including instruments issued by special purpose vehicles … 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”.
In addition, an IIP means 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 fluctuation”.
- What falls within the scope of the regulation?
With the definition of PRIIP being wide, market participants may well be unclear on what falls under the scope of the regulation.
Although the lists are not comprehensive, some of the products that fall into and out of scope are detailed below.
Products that fall into scope:
- Investment funds
- Structured products
- Insurance products
- Life insurance products that hold an investment element
- Derivative investments
- Structured deposits.
Products that fall out of scope:
- Corporate shares held directly
- Sovereign bonds held directly
- Non-life insurance products
- Life insurance products where the benefits are payable on death or incapacity
- Various pension products.
It is important to note that UCITS have currently been carved out of the regulation for a period of 5 years after the regulation’s entry into force (on 29 December 2014), after which UCITS may fall under the obligations.
- How does the PRIIPs regulation seek to achieve greater transparency?
The method behind increasing transparency within the PRIIPs market has originated from the Simplified Prospectus for Undertakings for Collective Investments in Transferable Securities (UCITS).
The intended aim of the Simplified Prospectus was to provide investors with a short document highlighting the key details about UCITS, with the information from its prospectus. Although many would agree that the theory behind the Simplified Prospectus for UCITS would have worked well, once it was put into practice it became complicated. As a result, the Simplified Prospectus was replaced by a Key Investor Information Document (KIID), which has been much better received by market participants.
In a similar vein, the regulation surrounding PRIIPs asks for all those to whom the requirements apply to provide a KID to retail investors before they invest in PRIIPs.
The purpose of the KID is to create a short and standardised document that will communicate all relevant information about a PRIIPs to retail clients. In addition, article 6 of the regulation states that the KID must only contain information that relates to the nature and features of the product and be separate from any marketing documents, with no cross-references to marketing material.
- Who is the regulation applicable to?
The regulation surrounding PRIIPS applies to all manufacturers and distributors or financial intermediaries who issue PRIIPs, which are invested in by retail clients.
More specifically, the responsibility of preparing the KID rests with the product manufacturer, whereas the responsibility of providing the KID lies with the entity advising or selling the PRIIP. It has been stressed that the KID must be provided to retail investors and not just ‘made available’.
- What needs to be included within a KID?
The recent joint consultation paper on KIDs for PRIIPs details the draft RTS under this regulation. It also provides a template for the KID and specifies that PRIIP manufacturers should use this to draw together key information for the retail investor, as required under the regulation.
Section II of the regulation and the draft RTS list the content required within a KID. In particular, the headings and the required information to be provided under each are noted – a summary of these is provided below.
- “This document provides you with key information about this investment product. It is not marketing material. The information is required by law to help you understand the nature, risks, costs, potential gains and losses of this product and to help you compare it with other products.”
- Name of product
- Name of PRIIP manufacturer
- Website of PRIIP manufacturer
- Contact details of PRIIP manufacturer
- Regulator in Member State
- Date of publication.
- What is this product?
- Intended market.
- What are the risks and what could I get in return?
- Risk indicator
- Performance scenarios.
- What happens if XYZ Asset Management is unable to pay out?
- What are the costs?
- Costs over time
- Composition of costs.
- How long should I hold it and can I take money out early?
- Recommended minimum holding period: (X) years.
- How can I complain?
- Other relevant information.
Note that for complex PRIIPs a “comprehension alert” must be included.
For additional information on the draft RTS concerning the KID for PRIIP, see previous JWG analysis, which breaks down the requirements concerning the KID into 7 sections.
- What format restrictions have been placed on the KID?
As the KID is intended to be a short document, and to prevent similar unintended consequences that occurred under the Simplified Prospectus initiative, article 6 of the regulation states that the KID must be a maximum of 3 A4 pages.
With this page restriction in place, the regulation also stresses that the text must also be ‘easy to read’ with the characters being of readable size.
This regulation covers all EU Member States and so the language used within the KID must be the official language of the host Member State or a language accepted by competent authorities of the Member States. Furthermore, the language used must be “clearly expressed and written in language and a style that communicate in a way that facilitates the understanding of the information, in particular, in language that is clear, succinct and comprehensible”.
Colours can be used in the KID, but must be used in such a way that the comprehensibility of the document is not diminished if the document is printed/photocopied in black and white.
Before the PRIIP is made available to retail investors, the KID must be published on the website of a PRIIP manufacturer. The KID must be provided in a durable medium, which can be paper or a website (where certain conditions are met). In addition, retail investors need to be informed of their right to request a paper copy free of charge.
- What disclosure requirements apply to the KID?
Those advising on, or selling, PRIIPs must circulate the KID to a retail investor in ‘good time’ before the PRIIP is made available to them or transaction is concluded.
The information contained with the KID must be kept up to date and those impacted by the regulation envisage frequent reviews of the document. If a change has been made to the KID, it will have to be redistributed to retail investors. Taking the reviewing and updating requirements into account, market participants have described the KID as a ‘live document’.
- With what other initiatives is this regulation interdependent with?
As previously mentioned, there is some interdependency between MiFID II and the regulation surrounding PRIIPs. The key overlap relates to the disclosure of information on costs, although, as noted in the PRIIPs discussion paper, it is currently unclear whether “the information in the KID on costs might be considered complete and sufficient for the purposes of disclosures required by MiFID II about the costs associated with the PRIIP itself”. Alignment of MiFID II and the regulation on PRIIPs is something that the Joint Committee of the three European Supervisory Authorities (ESAs) is looking into.
A number of products that fall under the scope of PRIIPs regulation also fall under the UK’s Retail Distribution Review (RDR). This FCA initiative requires a separation in costs, from what a retail client pays for the advice they receive and the charges associated with the product. Under PRIIPS, all costs and charges must be disclosed, therefore, in essence, the regulation on PRIIPS requires the information separated out under the RDR to be combined.
- When does the regulation become applicable?
This regulation was published in the official journal of the European Union on 9 December 2014 and came into force 20 days later on 29 December 2014. As it stands, the regulation will become directly applicable to all Member States on 31 December 2016.
By 31 December 2018, the regulation will be reviewed by the European Commission and, importantly, the scope will be revised to determine whether other products should be included.
Overall, the regulation governing PRIIPs poses a number of operational challenges that market participants affected will have to consider. Specifically, manufacturers will have to consider the most effective means by which they can produce KIDs that meet all the technical requirements. In addition, the ‘PRIIP lifecycle’ must be properly managed in order to ensure that KIDs are correctly reviewed and updated.
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