On October 24, 2014, the EU Council published what is expected to be the final text of the EU Regulation on key information documents (KIDs) for packaged retail and insurance-based investment products (PRIIPs). This draft reflects the position adopted by the EU Parliament in April this year following a lengthy and, at times, difficult legislative process. It is expected this draft will be formally approved by the EU Council shortly, following which it will be published in the Official Journal of the European Union and come into force 20 days after that day. The provisions of the Regulation will not, however, become effective until two years after it comes into force.
Under the Regulation, when a person is advising on or selling a PRIIP to retail investors, a KID must be provided to the investor prior to any contract being concluded. The primary obligation to draw up the KID will be on the manufacturer of the PRIIP (including any entity that makes significant changes to an existing PRIIP). The Regulation contains detailed requirements as to the form and content of the KID, which must be a maximum of three sides of A4 paper. The KID should be a “stand-alone” document separate from marketing materials, and must contain key information relating to the product. Although key information is not defined, an explanatory statement to be included in the KID will state that the information is intended to help the investor understand the nature, risks, costs, and potential gains and losses of the product and help with comparison with other products.
Although the KID requirements will have a significant impact on the structured products industry in the EU, many of the concerns highlighted by the industry in the consultations during the legislative process were reflected at least some extent in the final Regulation, and some of the proposals which gave the industry most concern were not included in the final text. In particular:
- the proposal for a “complexity label” was dropped and replaced with a “comprehension alert” (which must notify investors that the product is not simple and may be difficult to understand);
- there is no requirement for an “on-line calculator”;
- there is no reversal of the burden of proof in the liability provisions; and
- there is no prohibition on the preparation of a KID for certain types of complex products (which would have effectively banned such products for retail investors).
In addition, previous proposals to include specific product intervention powers for national and European authorities have been dropped (except in relation to insurance-based PRIIPs), and are now dealt with exclusively in the MiFID II legislation.
The European Parliament had also proposed the extension of the requirement to publish a KID to a wider range of investment products. This is not reflected in the final Regulation; however, the EU Commission must review the Regulation within four years, including as to its possible extension to other products. It is possible the review may also revisit some of the other issues highlighted above.