The European Parliament voted to object to draft regulatory technical standards (“RTS”) implementing the Packaged Retail and Insurance Investment Products (PRIIPs) Regulation (the “Regulation”) on 14 September 2016. The draft RTS set out detailed requirements for compliance, including the fundamental Key Information Document (“KID”) template. The RTS will now need to be re-drafted although it is unclear whether this can be done before the Regulation becomes operative on 31 December 2016.
Once the Regulation comes into force, PRIIPs KIDS will be required for all investment funds, insurance investment products and structured products sold to “retail investors” in the EEA, subject to an exemption for UCITS funds until 31 December 2019.
Background to PRIIPs
The Regulation applies to both “manufacturers” of PRIIPs (“PRIIPs Manufacturers”) and persons advising on, or selling PRIIPs to retail investors in the EEA. PRIIPs Manufacturers are required to produce a KID, a standardised document that is intended to allow investors to compare the key features and risk profiles of different investment products. The provisions of the Regulation are summarised in our OnPoint1, published in July 2016.
While the Regulation sets out some high-level detail that needs to be included in a KID, it delegates power to the Commission and the European Supervisory Authorities (ESAs)2 to produce additional rules, in the form of RTS, that set out more precise requirements for what needs to be included in a KID, including the KID template.
The RTS aim to ensure that KIDs for different products contain the same types of information and are displayed in a consistent format. For example, the RTS provide a harmonised format and content of KIDs, setting out detailed rules on how PRIIPs should be described, how their risk profile is calculated and displayed; and the information to be included on costs. Significantly, the RTS also include a template which sets out how the information in the KID should be presented.
In June 2016, the Commission adopted the draft RTS, which were due to apply from the Regulation’s 31 December 2016, operative date. The European Parliament objection means that the draft RTS can no longer come into effect.
The European Parliament Vote
During the ESA’s consultation on the RTS, many in the asset management industry voiced concerns over how the Regulation would apply to UCITS and other funds which are currently required to produce their own version of the KID, the “Key Investor Information Document” (“KIID”). While UCITS funds benefit from a grandfathering period until 31 December 2019, non-UCITS fund products in certain countries (such as the UK’s non-UCITS retail scheme or “NURS”) are required to comply immediately with the UCITS KIID requirements, and it is unclear how these products are to fit into the new PRIIPs framework.
Another major concern voiced by the asset management industry relates to the rules in the RTS requiring the display of predicted future performance in three hypothetical market conditions: unfavourable, moderate and favourable. It has been argued that using future performance rather than past performance is less transparent and risks misleading investors.
The European Parliament’s vote followed a motion to reject the RTS by the European Parliament’s Committee on Economic and Monetary Affairs (“ECON”) on 1 September 2016 based on concerns that they would not achieve the aim of providing accurate, accessible and comparable information to retail investors. Following ECON’s motion to reject the RTS, a further motion was put to the full European Parliament in plenary session on whether to reject the RTS.
The motion passed by the European Parliament raised the following concerns:
- that the rules requiring KIDs to contain future projections of a product’s performance and detailing the product’s expected returns over a number of years in different hypothetical market conditions were not consistent with the Regulation’s requirement of providing information which is ‘accurate, fair, clear and not misleading’. There were particular concerns that the rules would not make it clear that investors could lose money, even in relation to products which have regularly incurred losses over the recommended minimum holding period;
- that it was misleading that credit risk did not need to be factored into the risk categorisation of insurance products;
- that it was not clear how the RTS applied to multi-option products, particularly in relation to the exemption granted to UCITS funds under the Regulation; and
- that rules relating to when KIDs should display a “comprehension alert” did not contain sufficient detail and could lead to inconsistent application across the single market. A comprehension alert requires complex products to contain a warning that the product is “not simple and may be difficult to understand”.
MEPs resoundingly passed the motion to object by 602 votes to 4, with 12 abstentions.
The motion instructs the President of the European Parliament to forward the resolution to the Commission and to notify it that the RTS cannot enter into force. The resolution also calls upon the Commission to (i) submit new RTS, taking into account the European Parliament’s concerns, and (ii) consider delaying the application of the Regulation so as to avoid it coming into force without the RTS applying.
Timing for Implementation of the Regulation
The next step is for the Commission to invite the ESAs to amend the RTS and for the Commission to adopt new draft RTS once revisions have been made. The European Parliament and the Council will then have a further two months from the date they are notified that the Commission has adopted new RTS in which they may object. Only once this two month period is over will the new RTS be published in the Official Journal and come into force. However, this time period may be reduced if both the European Parliament and the Council inform the Commission of their intention not to object.
The resolution passed by the European Parliament calls on the Commission to consider a delay in the application date of the Regulation to ensure the smooth implementation of the Regulation’s requirements and to avoid a situation where the Regulation applies with no RTS in force. Prior to the vote, the Commission has been reluctant to delay the Regulation’s implementation, even rejecting a joint request for delay by the representative bodies of the EU banking, insurance and asset management industries in May 2016.3
If implementation is not delayed and the Regulation comes into effect without the RTS on 31 December 2016, it is difficult to see how PRIIPs Manufacturers can comply.
Funds and PRIIPs
The Regulation only applies to PRIIPs distributed to “retail investors” in the EEA.
The Regulation aligns the definition of “retail investor” to the future definition of “retail client” that will come into effect under MiFID II in January 2018. This definition captures any client which is not a professional client under MiFID II. For example, additional categories of persons will be treated by default as retail clients, including public and local authorities, and natural persons, regardless of net-worth. There is a mechanism for certain persons who would otherwise be retail clients to “opt-up” to professional status but this is a stringent and difficult process.