In our Winter 2016 Quarterly Funds Update, we set out the new requirement to publish a key information document (KID) to prospective retail investors in investment funds under the Packaged Retail Investment and Insurance-based Investment Product Regulation (the PRIIPs Regulation). At that time, the PRIIPs Regulation was intended to apply from 31 December 2016, but that was pushed back to 1 January 2018. A delegated regulation supplementing the PRIIPs Regulation (the Delegated Regulation), which contains the technical standards in respect of KIDs, also applies from 1 January 2018.
In this article, we provide a brief reminder and update regarding the requirements and the scope of the PRIIPs Regulation, together with a summary of the technical standards.
The PRIIPs Regulation
Under the PRIIPs Regulation, a KID must be provided to retail investors (i.e. investors who are not classified as professional investors under the MiFID test). The KID must be accurate, fair, clear and not misleading. The fund manager will usually be responsible for producing a KID. Retail investors must receive the KID free of charge “in good time” before they enter into any binding contracts or offers relating to the fund (unless certain limited circumstances as set out in Article 13(3) of the PRIIPs Regulation apply). The marketing communications of a fund must also state that a KID is available and provide information on how retail investors may obtain it. The requirement for a KID applies to new retail investors in funds already in existence prior to 1 January 2018, as well as to retail investors in funds established from that date onwards.
The PRIIPs Regulation is silent on territorial scope. However, the FCA stated in its Policy Statement PS17/6 that in its view, non-EEA fund managers dealing with EEA retail investors must produce a KID, but there is no requirement for EEA fund managers dealing with non-EEA retail investors to do so. A similar view is expressed in the Commission’s guidelines published in July 2017. These provide that the PRIIPs Regulation applies to any fund manager dealing with retail investors “within the territory of the EU”, but that a KID is not required where a fund is only made available to retail investors outside the EU.
Form and contents of a KID
The PRIIPs Regulation sets out certain prescribed information about an investment fund which must be included in a KID (see our previous article). The Delegated Regulation supplements these requirements by providing prescriptive technical standards regarding the form of a KID and its contents.
Some key points to note are that:
- When printed, the KID must be a maximum length of 3 sides of A4 paper.
- The template for a KID can be found in Annex I of the Delegated Regulation. This template sets out the sections and headings of the KID that must be included pursuant to the PRIIPs Regulation, such as the nature and main features of the fund, its risk profile, its potential returns, the costs to be borne by retail investors, the redemption terms of the fund, and how to make complaints about the fund or the fund manager.
- The KID must include a description of the fund’s intended retail investors. When considering the wording to include here (and also when considering how far in advance to provide the KID to retail investors), fund managers should take into account a variety of, such as the complexity of the fund, the needs and objectives of the fund’s targeted retail investors, the retail investors’ knowledge and experience of similar investments, and their ability to bear investment loss.
- The KID must include a summary risk indicator, in the form of a number ranging from 1 (low risk) to 7 (high risk). Annex II of the Delegated Regulation provides the methodology for calculating the appropriate number, and Annex III sets out the template for the summary risk indicator and certain narratives which must be included where applicable.
- Other Annexes of the Delegated Regulation prescribe the methodology, templates and narratives which must be applied in respect of the other more complex sections of the KID, namely (i) the “Performance Scenarios” table indicating the potential returns for retail investors under different scenarios at certain points over the term of the fund; and (ii) the section setting out the fund’s costs.
- The fund manager must review the KID every time there is a change which will (or is likely to) significantly affect the information in the KID, and at least every 12 months following the date of initial publication.
The Commission must carry out a review of the PRIIPs Regulation by 31 December 2018, which is expected to include a review of how the rules prescribed in the PRIIPs Regulation are being applied in practice.