Following a number of reviews, the European Union published its final regulatory technical standards (RTS) on Key Information Documents (KIDs) for Packaged Retail Insurance-Based Investment Products (PRIIPs) in April 2017.
Key insights
- The KID is an operational challenge for manufacturers, and firms will need to prepare their PRIIPs soon as the January 1, 2018 effective date approaches
- The European PRIIPs Template is expected to make it easier for UCITS to provide relevant information to insurers
The PRIIPs regulation introduces greater transparency for consumers about the strategy, underlying investments, costs, performance and risk of retail investment products (e.g., Undertakings for Collective Investment in Transferable Securities (UCITS) funds, non-UCITS retail schemes (NURS), insurance-linked investments and structured products).
The current version is expected to provide greater clarity about investment products for end investors
The question now is how the requirements around the KID,1 a standardized disclosure document, will affect asset managers and investors. While the latest KID is only marginally more detailed than past versions, the current version is expected to provide greater clarity about investment products for end investors.
KID value to investors
Since PRIIPs are retail-centric, regulators envisaged KIDs as brief documents that communicate to clients “the main features of an investment product in a simple and accessible manner.”2
Despite the supposed simplicity of the document, it took some time for policymakers to agree on how to calculate the costs, risks and performance metrics to be included in the KID. The initial version of the RTS contemplated that KIDs would contain mandatory disclosure to investors on expected PRIIP performance during favourable, unfavourable, and moderate market conditions.
However, the European Parliament (EP) rejected the initial version of the RTS on September 14, 2016. Members of the EP felt the original formulas for predicting performance estimates could have misled retail clients by overestimating performance, potentially leading to investors unintentionally taking on more investment risk than intended. Accordingly, the final version of the RTS includes four mandatory disclosure scenarios – favourable, unfavourable, moderate and a new “stress scenario”.
As the PRIIPs regulation was introduced, in part, to combat investors' inability to source information, compare products and make better-informed investment decisions, it follows that the regulatory focus for KID would be on promoting disclosure and investor transparency.
KIDs must be brief, clear and easy to understand
Under the final version of the RTS, the requirement is that investors not be inundated with information. The KID is not aimed at institutional investors, and regulators have instructed managers to avoid using advanced financial jargon that could potentially overwhelm retail investors. KIDs must be brief, clear and easy to understand.
Impact on asset managers
Creating a concise overview of a business is challenging, and manufacturers of PRIIPs are facing significant operational hurdles. According to the Deloitte EMEA Centre for Regulatory Strategy,3 “Manufacturers will need to establish an inventory of all their PRIIPs, identifying all non-UCITS that meet the PRIIPs definition and are sold to retail investors. They will need to source and collect accurate and up-to-date information and data about each PRIIP, from the right department in the firm to populate the KID."
The volume of KIDs that must be produced is a significant undertaking for PRIIP manufacturers, who will need to ensure that KIDs are consistent with other required documentation.4 The approaching January 1, 2018 compliance deadline should galvanize organizations towards executing their KID strategy.
The European PRIIPs Template is designed to reduce the potential risk of a two-tiered implementation process emerging
PRIIPs' KID reporting will be an additional burden for UCITS fund managers whose products have an insurance component. UCITS IV introduced a Key Investor Information Document (KIID); however, the level of fee information required in that document is insufficient for insurers to meet compliance requirements5 for PRIIPs. UCITS are subject to PRIIPs rules, although they are not required to submit a PRIIPs' KID until 2019.
Due to the complications the PRIIPs reporting obligations would have caused for insurers holding UCITS in their portfolios, the industry has worked collectively to address this issue and created a data exchange framework, the European PRIIPs Template (EPT). The template is designed to reduce the potential risk of a two-tiered implementation process emerging6 and sets out a standard data set that can be used by fund managers to provide data and information regarding their products to insurers. As a result, insurers can more readily signpost UCITS-compliant funds sold through a PRIIPs-relevant wrapper using the same data fields as for PRIIPs products.
The fine-tuning of the KID will assist investors in making more informed investment decisions. However, the new reporting may be difficult for some managers, although efforts have been made to streamline the disclosure process in relation to UCITS funds.
Sources
- FT Adviser (April 25, 2017) How to Get Ready for PRIIPs
- European Commission (November 9, 2016) Commission extends the application date of the PRIIPs Regulation by one year
- Deloitte No Time for KIDding around: PRIIPs is on the Way
- Ibid
- Investment Europe (July 1, 2016) The Pain of PRIIPs
- Asset Servicing Times (March 9, 2017) EC unveils PRIIPs RTS Amendments