PRIIPs versus PRIPs?
The compromise text of the Regulation agreed on 1 April 2014 included a key change in terminology: where the original Commission draft talked about Packaged Retail Investment Products (‘PRIPs’), the compromise text instead refers to Packaged Retail and Insurance-based Investment Products (‘PRIIPs’).
So what is the difference – if any – between PRIPs and PRIIPs?
The short answer is that – aside from a small change in scope (see below) – ‘PRIIPs’ means the same thing as ‘PRIPs’ did: a broad category of retail investments in a variety of legal forms, which fulfil similar functions, and which have ‘wrapping’ between the retail investor and direct exposure to the market1.
On 3 July 2012 the European Commission published a proposal for a Regulation on Key Information Documents (‘KIDs’) for Investment Products. Specifically, this applied to ‘Packaged Retail and Insurance-based Investment Products’ (‘PRIIPs’).
The Regulation was part of a wider legislative package, along with IMD II and UCITS V, intended to improve the safety of retail investors through new rules on advice standards and information disclosure.
During trialogue negotiations, the European Parliament proposed almost 400 pages of amendments, including a massive extension of scope whereby the Regulation would cover all retail investments.
On 4 April 2014 the Council of the EU announced it had reached political agreement with the European Parliament, which formally adopted the text at a plenary vote on 15 April, effectively ending the legislative process. The final, marked-up approved compromise text was also published online.
Who does the Regulation apply to?
• Product manufacturers will be responsible2 for drawing up a KID, and publishing it on their website before a PRIIP can be marketed. They will be held liable for any losses caused by a failure to comply with the Regulation. ‘Manufacturers’ includes anyone who has substantively changed the risk or cost structure of an existing product, e.g. by combining products.
• Product distributors – including the product manufacturer for direct sales – will be required to provide a KID to a retail customer at some point before3 concluding a sale.
What does the Regulation apply to?
Despite the European Parliament’s attempts to extend the scope of the Regulation to all retail investments, the Regulation will apply only to PRIIPs: a broad, new, ‘horizontal’ category of products, which may take a variety of different legal forms – including funds, structured deposits, pensions, insurance products – but which fulfil similar functions for retail investors.
• Packaged: investors are exposed to fluctuations in the market (rather than e.g. obtaining a simple interest rate), but without holding assets directly; instead some sort of ‘wrapping’ mechanism (e.g. pooling of capital, use of derivatives, or reference rates) intervenes between them and the market;
• Retail: whether a product is really for ‘retail’ investors is something determined at the point of sale, and not by reference to the manufacturer’s intentions4- although no-one would need to prepare a KID for a product which is never going to be sold to retail investors;
• Investment products: the common function of PRIIPs is in offering medium-to-long term capital accumulation that beats the risk-free rate, typically by combining exposures to multiple underlying assets. Individual PRIIPs may offer additional features e.g. capital guarantees or insurance.
|The definition of PRIIPs includes: ||And excludes: |
- UCITs and other funds (but see below);
- ‘with profits’ policies, and other life insurance products with a maturity or surrender value (and which are at least partially exposed to market fluctuations);
- all structured products, including structured deposits5; and
- some instruments issued by Special Purpose Vehicles.
- products with no investment risk;
- direct holdings of shares and bonds;
- deposits other than structured deposits;
- general insurance, and life insurance that only pays benefits on death or incapacity;
- occupational pension schemes; and
- any other pension product with the primary purpose of providing retirement income.
UCITS, the Key Investor Information Document, and transitional provisions
The Key Investor Information Document (‘KIID’) was introduced by the 2008 recast of the UCITS Directive (‘UCITS IV’). It is “a short document containing […] product information about the essential characteristics of the UCITS concerned”.
The new PRIIPs ‘KID’ is based on the UCITS ‘KIID’; although the two are very similar they are not wholly identical, as the KIID contains some UCITS-specific information.
For this reason there will be a five-year transitional period in which the PRIIPs Regulation will not apply to UCITS, which will continue to use the KIID as before.
At the end of this period, the Commission will consider how the UCITS KIID might be amended to bring it closer in line with the PRIIPs KID, so that the two might be more easily compared.
Content of the KID
The KID should be a stand-alone document, separate from marketing material and any other disclosures required (e.g. by MiFID, or the Distance Marketing Directive; these regimes will continue to exist in parallel.)
The Regulation also sets out principles for style and presentation: the most fundamental principle is that a KID should be short and non-technical, “a maximum of three sides of A4-sized paper … using characters of readable size”, presented in a common format allowing investors to compare details of different PRIIPs.
The Regulation goes on to specify in detail the title and content of the KID; the order in which it should be arranged; and even some of the required boilerplate text and section headings:
- it must begin with basic, key information: <br/>the identity of the product; <br/>the identity and contact details of the product manufacturer; <br/>the national regulator responsible for the product manufacturer; <br/>the date of the document;
- a ‘comprehension alert’, where applicable, to warn if a product is particularly complex;
- ‘What is this product?’ <br/> <br/>type of PRIIP, its objectives, and how it achieves them (e.g. the underlying instruments); <br/> <br/> <br/>the consumer type to which the PRIIP is intended to be marketed; <br/> <br/> <br/>details of any insurance benefits, where applicable; <br/> <br/> <br/>the term of the product, if known; <br/>
- ‘What are the risks and what could I get in return?’ <br/>a simple summary risk indicator; <br/>a narrative explanation of the risks; <br/>the possible maximum capital loss, and any other financial risks; <br/>whether or not there is a capital guarantee; and if so, the conditions; <br/>indicative future performance scenarios; <br/>any other conditions on returns to investors, or performance caps; <br/>a statement of the tax regime which applies to the product; <br/>the precise details of any compensation or guarantee scheme, where applicable;
- ‘What are the costs?’ <br/>all costs, both one-off and recurring, indirect or direct, with total aggregate cost figures expressed both in cash terms and as percentage of investment; <br/> <br/>a note that the distributor can provide details of his own additional commission and costs; <br/>
- ‘How long should I hold it and can I take money out early?’ <br/>details of any cooling-off or cancellation period; <br/>the recommended and, where applicable, required minimum holding period;<br/>any conditions on disinvestment; <br/> <br/>any penalties, fees, or other negative consequences arising from early disinvestment; <br/>
- ‘How can I complain?’, with details on complaining;
- ‘Other relevant information’, including any additional documents to be provided to the investor
Further details might be specified later through the use of secondary legislation, including a note on whether the product “contributes to projects with environmental or social aims” (on which the European Parliament was particularly keen). As noted above, the product manufacturer is liable for the accuracy of the information.
Product manufacturers and distributors must put in place effective procedures which will allow investors to submit complaints to manufacturers.
Notification of national regulators
Under the Regulation, Member States will have the power to require product manufacturers to provide competent authorities with copies of every KID before commencing any marketing activities.
The European Parliament’s suggestion that competent authorities should need to sign-off every KID before a product can be marketed was, however, ultimately abandoned in the final text, as was the proposed requirement that manufacturers should regularly (re)assess the suitability of products for the needs of retail investors via a ‘documented product approval process’.
Product intervention powers
The Regulation gives national regulators product intervention powers (where they did not have these already) to ban or restrict the marketing, distribution or sale of particular PRIIPs. In practice, this extends the product intervention powers in MiFID II to any PRIIPs that would not otherwise fall under the ambit of the former.
In particular, the Regulation grants the European Insurance and Occupational Pensions Authority (‘EIOPA’) similar powers over insurance-based PRIIPs as MiFID II does for the European Securities & Markets Authority (‘ESMA’) and European Banking Authority (‘EBA’); namely, the power to make temporary product interventions, in certain circumstances, which may be renewed at three-monthly intervals.
This would allow EIOPA to prohibit or restrict the marketing, distribution or sale of “certain insurance-based investment products” (not all PRIIPs), as well as some types of (re)insurance undertaking.
At the time of writing, the Council of the EU still needs to adopt the text of the Regulation; but, as the text has already been agreed with the European Parliament, this step should just be a formality. Shortly after this, the Regulation will be published in the Official Journal, and will come into legal force two years laters.
The Commission stated on 14 April 2014 that it expects KIDs to be in place by the end of 2015, in practice.
In the meantime, ESMA, EIOPA and the EBA will prepare draft regulatory technical standards (‘RTS’) for approval by the Commission. The RTS will fill in further details about the contents and form of the KID.
1. Confusingly, the new text also uses the term ‘PRIPs’ as well – but this now means something different to what it used to. ‘PRIPs’ in the new text now just means ‘PRIIPs’ minus insurance-based investments (which were included in the original definition of ‘PRIPs’). For clarity, this report will use ‘PRIIPs’ throughout when referring to all retail investments, insurance or otherwise, covered by the Regulation.
2. Preparation of the KID can be delegated to a third party, but the manufacturer will still remain liable for any failings. The European Parliament’s suggestion that manufacturer and distributor should both be responsible for drawing up the KID was ultimately abandoned.
3.There is some flexibility allowed in the case of distance sales, etc.
4.This is the case even though it is the product manufacturer who would be responsible for producing the KID (see above). It is expected that most PRIIPs will normally be marketed to retail investors directly, however.
5. Following the MiFID II definition of ‘structured deposits’: “a deposit as defined in [the Deposit Guarantee Scheme Directive], which is fully repayable at maturity on terms under which interest or a premium will be paid or is at risk, according to a formula involving factors such as:
(a) an index or combination of indices, excluding variable rate deposits whose return is directly linked to an interest rate index such as Euribor or Libor;
(b) a financial instrument or combination of financial instruments;
(c) a commodity or combination of commodities or other physical or non-physical non-fungible assets; or
(d) a foreign exchange rate or combination of foreign exchange rates”