The FCA published its policy statement PS 22/2 on changes to UK PRIIPs last Friday (25th March 2022) and it's much as was set out in its consultation last summer in CP 21/23.
Changes to the performance section
As flagged last year, the biggest change is to the performance section. Unlike the EU, where the solution to discredited performance scenarios has been to make the calculations even more complex and use a longer price history, the FCA’s answer has been to remove them altogether and replace them with narrative explanations of “the main drivers of investment performance for the PRIIP”.
In the policy statement, the FCA has removed Annex IV in its entirety from the PRIIPs regulatory technical standards (RTS) and replaced it with Annex 4A, which provides more information on what is required.
As you might expect, the first requirement is for the information to be “accurate, fair, clear, non-misleading and likely to be understood by…retail investors”, and it must also be compatible with the objectives set out in the KID, likely to be useful to retail investors when making their investment decision and comparing the product to other PRIIPs, and it must be “supported by objective data”.
In more detail, this section of the KID needs two sub-sections, headed “what could affect my return positively?” and “what could affect my return negatively?”, which are pretty self-explanatory. As a minimum, it must also set out the main factors likely to affect returns, together with other factors that could have a material impact; any benchmark, index or target must be named and it must explain how the PRIIP is likely to compare in terms of performance and volatility. And, finally, there must be a description of what an investor could expect if they redeem their investment early “under severely adverse market conditions”.
It would be interesting to see if much more than the minimum above could be included, while still ensuring it is likely to be understood by retail investors.
And, despite slipping some hints about past performance into the consultation paper, it won’t appear on a UK PRIIPs KID any time soon, at least not until after further discussions with HM Treasury on the wider subject of retail disclosures.
Other changes to the risk section and transaction cost calculation methodology
Other than performance, there have been some less dramatic changes to the UK version.
In the risk section, the FCA has kept to its plan to make groups increase the summary risk indicator (SRI) if the calculated one understates all the risks, but it has removed the need to inform them each time this is done. Venture Capital Trusts will need to show a minimum SRI of 6.
The unpopular slippage methodology for calculating implicit transaction costs has been retained, but with some minor tweaks. Any anti-dilution measures (which must be disclosed in the costs section) can only be included to the extent that they do not reduce total transaction costs below the explicit costs (commission, taxes and any other amounts paid out). Index tracking funds that rebalance at a set time and active funds with low turnover will be able to use half of the bid-ask spread instead of the slippage methodology to calculate their implicit transaction costs.
UCITS KIID exemption to remain in place
The FCA has confirmed that the UCITS KIID exemption in the UK will remain in place until the end of 2026, but no decision has yet been made on whether EU-domiciled UCITS funds will be able to use their EU PRIIPs KIDs when being marketed into the UK or if they will need to produce a UK UCITS KIID.
The final – and possibly most critical – update is that the Handbook changes took effect immediately on publication of the policy statement last week, but there is a transition period until 31 December 2022, so the only big bang on New Year’s Eve this year will be the usual annual fireworks, rather than all UK PRIIPs making the change at exactly the same time.