On 18 July 2016, the FCA produced a consultation paper (CP16/18) outlining suggestions on how to prepare the rulebook for the introduction of PRIIPS. PRIIPS, which is designed to increase transparency of costs, risk and intended market, will take effect on 31 December 2016. It requires each manufacturer and distributor of insurance-based investment products (IIP) or packaged retail investment products (PRIP) to provide a Key Information Document (KID) with products to allow retail investors to compare products and make more informed choices.
As PRIIPS is an EU regulation, it will be automatically applicable without the need for the individual Member States to start national legislative implementation processes. The current product disclosure rules applicable in the UK are outlined in the FCA handbook, and certain rules will be superseded, amended or incompatible with the new regime. In order to prepare for the oncoming change, without transposing all of the PRIIPS provision into the handbooks, the FCA is suggesting changes to the current guidelines in these four key areas.
Conduct of Business Sourcebook (COBS)
KFD (Key Features Documents) and KFI (Key Features Illustrations), which explain the nature and complexity of the products, are required by the COBS to be included with ‘packaged products’. Although similar to the PRIIPS in scope, the term ‘packaged product’ includes some non-PRIIPS products, such as pension schemes and certain forms of long-term insurance contracts. In order not to create a conflict between the PRIIPS regulation and the handbook rules, the FCA proposed stopping the application of the current product disclosure rules to retail products only, as these will be protected by the new regime. However, the ‘packaged products’ that do not fall under PRIIPS scope will be governed by the current set of handbook guidelines, therefore, the rules stemming from MiFID, AIFMD or the Prospectus Directive would not be affected.
Non-UCITS Retail Schemes (NURS)
In its current shape PRIIPS excludes UCITS from its product scope; these are proposed to be incorporated on 31st December 2019. Present FCA rules require a NURS authorised fund manager to draw up a UCIT-equivalent KIID (Key Investment Information Document) for each product, by a way of modification by consent of certain rules regarding the KIID. In order to minimise costs, the FCA is proposing to the asset managers two options. As of 31st December 2016, they can choose between complying with current rules under the FCA Handbook, in order to minimise the disruption, or an introduction of a KID, in anticipation of the UCITS inclusion in PRIIPS regime in 2019.
Qualified Investor Schemes (QIS)
Under the FCA regime, fund managers of Qualified Investor Schemes (QIS) are required to prepare a prospectus containing specific information. The QIS, as a packaged product, is required to be provided with a KFD for both retail and professional clients. Because only retail customers fall within the ambit of PRIIPS, the FCA proposes to remove the requirement of providing KFDs for professional clients, as the prospectus is deemed to provide sufficient disclosure. To reflect PRIIPS, both the prospectus and the KID is required when QIS are sold to retail customers.
Alternative Investment Funds (AIF)
Certain insurance-based investment products (IIP) and packaged retail investment products (PRIP) will also be subject to the Alternative Investment Fund Managers Directive (AIFMD). This states that, in the UK or EEA, AIF’s investors, both professional and retail, must be supplied with specified information before they invest. Until now, authorised managers have enjoyed a flexibility in how this information could be disclosed. Depending on the type of product, a scheme prospectus, a simplified prospectus, a KIID or a KFD, could be used. The FCA suggested that, from 31 December, simplified prospectuses or KFDs can no longer be provided to retail investors to dismiss AIFMD obligations. The required KID will have to be supplemented with AIF information in another disclosure document. This could be either a scheme prospectus, as beforehand, or with a KIID for those UCITS managers who opt for this route until 31 December 2019.
A number of other issues were raised in the paper. Though the FCA does not necessarily provide specific solutions, it is looking for industry suggestions on the topics of unauthorised documents for retail investors, application of the rule to non-EEA persons, Solvency II information, structured deposits, optional disclosures, adviser charges and modification of general application COBS rules to retain its cohesion.
The deadline for the compliance with PRIIPS is short – there are only five months left. In order to make sure the UK is prepared for the changes, responses to the CP should be submitted by 19 September 2016.