Regulation for Packaged Retail and Insurance-based Investment Products (PRIIPs) and the supporting Key Information Document (KID) have been marred by confusion and disagreement since it came into force on 1 January 2018.
Changes to PRIIPs Regulation and the content of KIDs are imminent and actively being debated at a policy level in the EU.
As we await further developments, we have taken a deep dive into the history of PRIIPs Regulation and KIDs, the outstanding issues, proposed changes, and how product manufacturers, such as fund managers, banks and insurance companies, and product distributors are likely to be impacted.
Before looking at what the regulation introduced, we need to look at the two types of products that fall into the definition of a PRIIP – packaged retail investment products (PRIPs) and insurance-based investment products (IBIPs).
In the latter group are products that combine an insurance structure with some investment element, so general insurance and pure life assurance are excluded.
However, it is the definition of PRIPs that has caused most confusion. In fact, the regulation started by listing what is NOT in scope, including pension products, deposits and securities. After initial confusion, it became clear that investment trusts, while being listed securities, are also packaged investment products available to retail investors.
If they are available to retail investors, PRIPs include investment funds, structured products and derivatives, but confusion has continued around real estate investment trusts (REITs) and some corporate bonds. UCITS funds – at least share classes available to retail investors – are in scope, but were given a specific exemption to continue with their own key investor information document (KIID), initially until the end of 2019 and later extended until the end of 2021.
The PRIIPs Regulation states that any organisation which ‘manufactures’ a PRIIP must prepare a ‘Key Information Document’ (KID) for each PRIIP that they produce and publish them all on their website. Additionally, the regulation sets out that anyone who advises on or sells a PRIIP to a retail investor must provide them with a KID ‘in good time’ before completing the contract to buy the product, which has implications on intermediaries and distributors of funds.
There are some exceptions to this in that KIDs may be provided after a transaction has taken place when the retail investor has purchased the PRIIP through ‘distance’ communications (with their permission) and it has not been possible for it to have been provided beforehand.
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The PRIIPs KID is a pre-contractual generic disclosure document created by those who manufacture PRIIPs. The document (which must be created for each separate PRIIP that is produced) is intended to inform retail investors of the main features of that product, as well as its risks, costs and the potential gains and losses associated with investment in it. This information must be set out in ‘a clear and accessible manner’ in advance of any potential investment and be available on the manufacturer’s and/or seller’s website(s). They must be written in a concise manner, no longer than a maximum of three sides of A4 paper ‘when printed’ and promote comparability, focusing on its key features.
Specifically, a KID must contain the following information:
- Its name and identification details, its manufacturer and associated regulatory authority;
- A section setting out what the product is, including its nature, main features, its type, target investor market and investment objectives;
- A section focusing on risk and return, including the inclusion of future performance scenarios, which set out expected returns over different time periods and in different economic conditions;
- Details on what happens if the manufacturer is unable to meet its obligations to pay out;
- A section on the associated costs borne by the investor;
- Details on the expected timeframe the product should be held and any associate penalties for withdrawing assets early;
- Details on grievance procedures and how investors can complain if necessary;
- Other information which may be of relevance to the investor.
The information included within a PRIIPs KID must also be accurate and up to date and the manufacturer needs to ensure that they are reviewed regularly and revised if necessary. The regulation states that a review should take place at least once every 12 months and when changes are made which are likely to impact the accuracy of the information included.
At the time of writing (Autumn 2020), it should be noted that the specific content of a KID continues to be debated at policy level in the EU. Three European Supervisory Authorities (EBA, EIOPA and ESMA, together the ESAs) are in disagreement over targeted changes to the regulatory technical standards (RTS), which include showing a product’s past performance on its PRIIPs KID, as they are with UCITS KIIDs.
The Undertakings for the Collective Investment in Transferable Securities (UCITS) regulatory framework, which allows for the sale of mutual funds across Europe, has been in place since the 1980s. It has been broadly popular within the industry, acknowledged both for its longevity and the strength of its investor protection requirements and has been adopted as the gold standard in a number of other countries as well. As part of the UCITS framework, fund groups already have to provide investors with a two-page KIID, which differs somewhat from the PRIIPs KID (more on this later on).
UCITS funds fall within the PRIIPs definition, but have been given an exemption to allow them to continue to provide a UCITS KIID instead of the PRIIPs KID. This has largely been because of UCITS KIIDs’ widespread use and acceptance within the industry, with national regulators, including the FCA, lobbying for their continuation. Nonetheless, it was always envisaged at policy level that PRIIPs KIDs would be the long-term replacement for UCITS KIIDs and this exemption was only ever time-delayed; initially until 31st December 2019, but with a further extension granted until the end of December 2021. Until an agreement is reached, as it stands, from 1 January 2022, UCITS funds will have to provide both a PRIIPs KID and a UCITS KIID, although it is fully expected that the UCITS Directive will be updated before the end of the exemption to remove the need to produce a UCITS KIID as well as a PRIIPs KID.
At the time of writing (Autumn 2020), the Joint Committee of the ESAs has proposed changes to the PRIIPs regulation. These changes sought to address some of the key areas that have been most widely criticised since the introduction of PRIIPs KIDs (such as the calculation and presentation of performance scenarios and costs) and to ensure these had been fixed ahead of the regulation applying to UCITS funds.
The Joint Committee was expected to submit proposed changes to the RTS to the European Commission for endorsement by the middle of 2020, but only two of the three ESAs could secure board approval, with the third believing that a more wholesale review of the regulation is needed. As a result, the ESAs have been unable to submit the revised RTS, but published them for everyone to see. Currently, these issues have yet to be resolved and the RTS remain unpublished.
Alongside this, for UK-domiciled funds, the Brexit transition period formally comes to an end at the end of 2020. While HM Treasury has yet to formally announce its plans in respect of which regulatory regime it will follow (or indeed if it will create a wholly new framework), it published a policy statement in July, which hinted at some divergence from the PRIIPs regime. Three amendments to the existing regulation have been flagged:
- enabling the FCA ‘to clarify the scope of the PRIIPs Regulation through its rules’ to avoid any ongoing confusion;
- replacing ‘performance scenario’ with ‘appropriate information on performance’ in the PRIIPs Regulation, which is likely to allow the inclusion of past performance; and
- allow HM Treasury to extend the current UCITS exemption by up to a further five years, i.e. up to the end of 2026, as the UK “government currently considers that the existing rules for UCITS disclosure are satisfactory”.
All of the above, it should be noted, will only be looked at ‘when Parliamentary time allows’. The UK government will most likely ask HM Treasury to undertake a review of the UK framework for investment product disclosure in the coming years.
The central issues currently concerning the PRIIPs Regulation relate to the following, as set out by the European Securities and Markets Authority (ESMA), who are one of the three supervisory bodies making up the ESAs, are:
- Illustrations of what the retail investor might receive in return from their investment (performance scenarios);
- Information on the costs of the investment;
- Specific issues for different types of investment funds;
- Specific issues for PRIIPs offering a range of options for investment (so-called “Multi-Option Products”, or MOPs).
While two of the three boards of the ESAs approved of the changes that were included in its final report, the third, EIOPA, did not. This meant that the report could not be formally submitted to the European Commission for endorsement. EIOPA’s resistance was because its board members believed that ‘a partial revision of the PRIIPs regulation [was] not appropriate at this stage’ and that ‘a number of Board members also indicated that for investment funds, they would prefer the past performance graph from the UCITS key investor information document to be included in the PRIIPs KID itself, rather than in a separate publication’. This latter issue refers to the fact that, because the regulation limits a KID to three pages, there would not be enough space to add a past performance chart, so the draft RTS proposed that it should be on a separate document with sign-posting from the KID. The draft report was published in July 2020 and no further date has yet been announced for a resumption in discussing these issues.
There are a number of differences and similarities between PRIIPs KIDs and UCITS KIIDs from the underlying regulation, disclosure requirements and what they set out to achieve.
As PRIIPs KIDs are forward-looking and UCITS KIID are backward-looking, a change of mindset will be needed when the UCITS exemption ends.
The forward-looking SRI and performance scenarios are based on historical data, with added complexity to try to show what investors should expect in future. So, while a UCITS KIID relies only on fund price histories for risk and return, a PRIIPs KID has additional calculations applied to these.
A positive aspect of the move to PRIIPs KIDs would be the removal of the 35-working-day rush at the start of every year to republish every UCITS KIID. Instead, PRIIPs KIDs must be reviewed at least annually and updated only if necessary. It would be possible, therefore, to stagger the review dates throughout the year (subject to any interim events that might trigger a review).
Reduction in Yield (RIY) is a well-established way for insurance-based products to illustrate the effects of costs on returns, but it is not something that fund groups have used up to now, so this would be an added complication.
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Transition from UCITS KIID to PRIIPs KID Production
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