Andrew Barber, Partner, outlines the recent Financial Conduct Authority (FCA) policy statement PS17/6, explaining that it is part of an ongoing process to provide guidelines as to the PRIIPs Regulation, with more clarification expected from the courts, the European Supervisory Authorities (ESAs), or the European Commission in the coming months.

FCA sets out disclosure rules following application of PRIIPs Regulation, LNB News 03/05/2017 66.

The FCA has published a policy statement which summarises and responds to the feedback to a July 2016 consultation paper. It explains how the FCA’s disclosure requirements will change to reflect the introduction of the packaged retail and insurance-based investment products (PRIIPs) key information document (KID), and sets out final rules and guidance.

The policy statement also contains the disclosure framework that, following the direct application of the PRIIPs Regulation (EU) 1286/2014, will apply to firms that manufacture, give advice on, or sell PRIIPs to consumers in the UK retail market. In making changes to the FCA’s disclosure framework, the regulator aims to advance the FCA’s objectives of securing an appropriate degree of protection for consumers and promoting effective competition in the interest of consumers.

The FCA has published a policy statement which summarises and responds to the feedback to a July 2016 consultation paper. It explains how the FCA’s disclosure requirements will change to reflect the introduction of the packaged retail and insurance-based investment products (PRIIPs) key information document (KID), and sets out final rules and guidance.

The policy statement also contains the disclosure framework that, following the direct application of the PRIIPs Regulation (EU) 1286/2014, will apply to firms that manufacture, give advice on, or sell PRIIPs to consumers in the UK retail market.

In making changes to the FCA’s disclosure framework, the regulator aims to advance the FCA’s objectives of securing an appropriate degree of protection for consumers and promoting effective competition in the interest of consumers.

What is the background to this policy statement?

The PRIIPs Regulation was made in November 2014 and was due to take effect at the end of 2016. The PRIIPs Regulation, broadly, covers all products available to retail investors where the amount repayable to the investor depends on the performance of one or more assets that are not directly purchased by the investor.

Examples of PRIIPs are:

  • Investment funds
  • Fluctuating return annuities
  • Structured deposits
  • Debt and equity instruments with variable returns.

It requires the PRIIP manufacturer to draw up a KID for the PRIIP and publish it on its website. The PRIIPs Regulation sets out what the KID should cover and how it should be provided to retail investors, as well as giving regulators product intervention powers and duties to monitor the market for unsuitable products. The PRIIPs Regulation imposes a duty on the ESAs to develop regulatory technical standards (RTS) further specifying the content and layout of the KID. The ESAs were supposed to present these to the European Commission by March 2016 for the Commission formally to adopt

Although most parts of the PRIIPs Regulation apply directly in EU Member State law without the need for transposition, it requires Member States to put in place certain provisions (including ones relating to sanctions imposed for a breach). In the UK, the FCA has already put in place several rules relating to the disclosure of information to customers about various products. It therefore needed to review and revise these rules so they did not conflict with the Regulation or the RTS. It published Consultation Paper CP16/18 in July 2016, and this policy statement in May 2017.

The EU decided to delay the application date of the PRIIPs Regulation to January 2018, largely because of rejection of the first draft of the RTS (which is discussed below). The urgency to respond subsequently eased and the FCA delayed the publication of its Policy Statement until the RTS were finally adopted (see below).

What should firms be particularly aware of?

Firms should be aware that the RTS have proved controversial. The European Parliament rejected the first draft of the RTS, which included the standard form KID, in September 2016. It was concerned that, overall, KIDs drafted in line with the RTS would not present a fair picture in order to enable product comparison. In particular it also highlighted that there were flaws in some of the calculation methodology and that the required disclosures on compensation were unclear.

As a result, the application date was delayed for a year, and the approved RTS were adopted by the European Commission and published in the Official Journal on 12 April 2017. However, they are still subject to the approval of the European Parliament, which now has until 8 June to object. The FCA has since been able to make its final rules, but the organisation cautions that it may still have to change them if there is any further guidance or clarification from the ESAs or the European Commission.

Furthermore, the industry has sought guidance on certain questions not directly addressed in the Regulation or RTS, such as who bears the responsibility for PRIIPs where a product includes a number of options for investments manufactured by a range of product providers—this guidance has so far not materialised.

Firms should be aware of the FCA’s views on the responsibility for the KID, for example, what rests with the manufacturer (and who that is), and when the distributor may also need to produce one. The FCA clarifies that it considers the PRIIPs Regulation to apply to third-country manufacturers who make PRIIPs available to retail investors in the EEA. However, the FCA does not address who is responsible for ensuring these manufacturers produce compliant PRIIPs and there is no method for supervising these firms. UK-regulated distributors and advisers should, therefore, consider whether they are comfortable relying on the compliance of a KID produced by a third-country manufacturer.

The FCA is in a difficult position. It is aware of industry concerns, but equally aware that it should not take on the role of a national competent authority in answering or interpreting them—especially not when further views at EU level are expected. The FCA has, however, had to provide clarity in some cases in order to allow firms to plan necessary changes. It notes in the policy statement that while there are risks in giving its views now, it thinks it is appropriate to do so.

The FCA has explained what a PRIIP is, or may be. It notes that, although it will often be clear whether a product is a PRIIP or not, this will not invariably always be the case. It has therefore offered some guidance, with the caveat that it is just one voice among many—any of the courts, the ESAs, or the European Commission may also provide clarification.

The FCA also provided some indicative lists of products that will, or will not, be PRIIPs as part of its consultation paper. These are more detailed than what the PRIIPs Regulation states, and the examples given above come from the FCA list. Following the consultation, the FCA has slightly amended the lists, but says that if it has not now commented on certain specific questions (for example, around product top-ups and closed-book products) firms will, at least for now, have to use their own judgment.

The FCA says it plans to discuss some matters further with the ESAs and the European Commission. But for now, the FCA has made some changes to its initial suggestions and it has set out its views on how to characterise investment trust savings schemes, ISAs, debentures, venture capital trusts, dealing, portfolio management and custody services, and alternative investment funds. Although it does not have the answer to every question, it is clear that the FCA understands the need to differentiate between when a KID is required (for an underlying product that is a PRIIP) and not (for the surrounding service or wrapper that will not of itself be a PRIIP).

What action do firms need to take in light of this policy statement?

The need to produce a KID for any PRIIP to be sold to retail investors falls on any firm that manufactures, advises on, or sells the product. All firms affected by the changes must consider the new rules, and plan to be compliant with their requirements by 1 January 2018 when the PRIIPs Regulation takes effect. Given that the changes relate to customerfacing documentation—and that many cases will also depend on other firms, some of whom will be UK-regulated, others not—planning and transitional arrangements will be key as these are not changes that can be made overnight.

One apparently minor requirement, but which might nevertheless need lead time for some firms, is the requirement to only use colours that do not diminish or obscure important information if the document is printed in black and white.

Firms that manufacture PRIIPs must also plan to have compliant KIDs ready for distribution so that they can be used from 1 January 2018. Furthermore, firms that distribute or advise on PRIIPs should consider whether they have any disclosure obligations above providing the KID and whether other regulatory requirements apply. For example, whether an alternative investment fund product can lawfully be marketed to a retail client.

Although this issue seems like a simple idea, it does in fact create an increasing amount of questions the more one analyses the requirement. Law firms will most likely need to engage with their clients on the less clear elements of the PRIIPs KID expectations. For example, where the client is not itself the manufacturer, and where the product is sold in a wrapper, platform or similar structure, it will be important to properly analyse which products require KIDs, which are subject to other marketing or disclosure restrictions, and to put in place appropriate safeguards to address, for example, the consequences of a mistake in a KID that the distributor has not prepared.