Why do PRIIPs matter and why does PRIIPs disclosure reform matter?
PRIIPs cover an extensive range of packaged products including:
- investment funds;
- insurance based investment products;
- retail structured securities;
- structured term deposits.
- are designed to offer exposure to multiple underlying assets;
- offer capital accumulation over the medium term;
- entail a degree of investment risk;
- are marketed to retail investors.
The new rules on PRIIPs (likely to be implemented in 2016) will bring within a prescribed disclosure regime a number of types of packaged products which currently fall outside the type of enhanced disclosure which apply to investment funds such as UCITS.
Products within the scope of PRIIPs
The following specific product types fall within the PRIIPs regime:
Investment Funds – whether open or closed ended.
Insurance based investment products – including unit linked and index linked life insurance policies.
Retail structured securities – typically structured securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issue and/or a foreign currency.
Structured securities may be sold to investors as, among other things, certificates, structured notes, bonds or warrants.
Structured term deposits – structured or market linked term deposits held with a bank or building society on terms under which the capital will be repaid, Investors' money is treated as if it is in a restricted access bank account but unlike a traditional savings account that pays a fixed rate of interest, interest received will depend on the performance of underlying financial instruments.
Why are PRIIPs subject to so much regulatory attention?
PRIIPs are a focus for regulators because:
- packaging typically raises costs and complexity and makes investments difficult to compare;
- PRIIPs can disguise the complexity of underlying investments (eg a typical structured product may include a wrapper such as a fund or note but have an underlying embedded derivative);
- currently disclosure regimes for PRIIPs are fragmented and inconsistent based typically on structure rather than economic effect;
- PRIIPs are prone to conflicts of interest between manufacturers, distributors and investors.
The plan for PRIIPs
The plan for PRIIPs is to introduce a new pan-European pre-contract disclosure document containing, in broad terms, the following standardised information:
- the identity of the product and manufacturers;
- the nature and main features of the product;
- cost and past performance;
- risk and reward profile.
The PRIIPs regime will make a radical change to disclosure for a range of investment and insurance products currently subject to patchy and inconsistent disclosure (eg retail structured securities and structured term deposits).
Institutions distributing PRIIPs within or into the EU will need to consider changes to distribution models.