Supervisory authorities increasingly see the need for better consumer protection. In Europe and in the UK, regulators have already introduced minimum standards for the content of marketing materials for financial products, and consumer protections, into the sales and advice process. Now the European Commission has proposed new protections for “packaged retail investment products” (PRIPs), while the Financial Services Authority (FSA) is pressing ahead with its Retail Distribution Review (RDR). Unfortunately, the two are not consistent. Any UK financial institution selling products to the retail market should monitor the consultations and proposals (and, with the FSA, RDR newsletters). It should test and adjust its own product design and sales processes to be able to comply with the new rules as soon as they come into effect.

Packaged products and the RDR

The RDR captures any “personal recommendations to a retail client concerning a retail investment product”. Briefly, it aims to:

  • Improve the way firms describe their services to consumers
  • Provide for costs to be clearly agreed between adviser and consumer, not set by the product provider
  • Increase professional standards of investment advisers and
  • Require personal investment firms to have the capital resource to address consumer complaints

FSA has made most of the rules that underpin the RDR and will bring them into force at the end of 2012. Apart from the changes to conduct of business and organisational requirements, there will be a new definition of “retail investment product”, catching:

  • Life policies
  • Units (in any type of fund)
  • Stakeholder and personal pension schemes
  • Interests in investment trust savings schemes
  • Securities in investment trusts
  • Any other designated investment which offers exposure to underlying financial assets in a packaged form which changes that exposure when compared with a direct holding in the financial asset
  • Structured capital-at-risk products

whether or not any of these are held within an ISA or a Child Trust Fund.

This builds significantly on the current definition of a “packaged product”, which covers only the first four categories, and not even all types of fund.


The EU PRIPs initiative, on the other hand, focuses on:

  • Standard form key product information to enable consumers to compare different types of retail financial product
  • Addressing conflicts of interest (specifically fees and costs) and selling practices within financial institutions that sell the products

The Commission’s consultation has just closed. It plans to define a PRIP as “a product where the amount payable to the investor is exposed to (a) fluctuation in the market value of assets or (b) payouts from assets, through a combination or wrapping of those assets, or other mechanisms than a direct holding”.

It might back up this broad definition with a “white list” of PRIPs. Its current thinking is:

Definitely PRIPs

  • Structured products of all kinds (including structured deposits)
  • Undertakings for collective investment in transferable securities (UCITS)
  • Non-UCITS funds
  • Unit-linked and index-linked life insurance policies warrants (including covered warrants)
  • Asset-backed securities and other similar debt instruments
  • Convertible shares and convertible bonds
  • Capital redemption operations linked to unit-linked investment funds

Maybe PRIPs

  • Derivatives
  • With-profits life insurance and traditional life insurance investments that have profit sharing
  • Variable annuities
  • Hybrid life insurance products (combining, for example, unit-linked life insurance elements with investments in traditional insurance funds)
  • With-profits capital redemption operations


  • Subordinated bonds
  • Non-financial spread bets (e.g. sports spread bets)
  • Traditional life insurance investment products without profits and pure protection insurance

 It wants to use existing European standards to create cross-sectoral harmonisation. It plans to:

  • Introduce a “Key Investor Information Document” (KIID) similar to the new UCITS model for regulated funds (as a “horizontal” or overarching Directive)
  • Reflect the Markets in Financial Instruments Directive (MiFID) conduct of business and conflicts management requirements (by amending several sectoral Directives)

for all PRIPs when they are sold to retail customers, regardless of who is selling them.

So what?

Any product provider or intermediary whose business involves products that might loosely be described as “packaged” will almost certainly have to carry out a thorough review of their product design and sales process. Banks, in particular, are likely to find themselves subject to more MiFID-style rules if structured deposits are considered to be a PRIP. And, as if that were not enough, both the Commission (during the MiFID Review) and FSA are threatening to become involved early on in the process of product development, potentially even having the power to ban products. At the moment, the message may be “watch this space”, but banks should watch it carefully because the scope of a PRIP may be wider than anyone imagines. At the moment, describing an elephant is far easier.

Law stated as at 21 February 2011