On 26 March 2021, Irish Funds (the Irish funds industry representative association) issued an update on the legislation governing packaged retail investment products or PRIIIPs. Irish Funds understands "from sources in the Commission that a legislative proposal is expected to be published in mid-May that will include the PRIIPs RTS, extension of the UCITS exemption and necessary amendments to existing legislation to resolve outstanding issues. The proposal will likely include 1 July 2022 as the application date for the RTS and as the new end date for the UCITS exemption. [Irish Funds understands] that the insurance industry will be pushing for the RTS to apply [from 1 January 2023] rather than the 6 months as the Commission envisages, Timelines on approving this legislation will remain tight but the Commission remains confident it can be agreed by the end of the year."
Currently, UCITS are exempt from the requirement to produce a PRIIPs KID until 1 January 2022. As these transitional arrangements for UCITS are set down in the Level 1 PRIIPs Regulation (1286/2014, as amended), only a Level 1 amendment could alter this position.
Mandated Level 1 PRIIPs Review
Under the PRIIPs Regulation, the Commission was mandated to carry out a review of those Level 1 rules by December 2018. Despite a one-year delay to the deadline for the Commission's review until December 2019, no review has to date been completed by the Commission. The mandated Commission review provides for an assessment of whether the PRIIPs transitional arrangements for UCITS should be prolonged, or whether the KIID provisions in UCITS IV might be replaced by or considered equivalent to the PRIIPs KID.
According to recently published correspondence from the Commission to the ESAs, the Commission's review of the PRIIPs Regulation is not now expected to be completed until Q1 2022. However, the Commission has noted the need to make urgent amendments to the PRIIPs rules, based on the RTS, pending completion of its broader review of PRIIPs Level 1 rules.
Based on Irish Funds' update, it appears that such urgent amendments will be published in mid-May and will include a 6-month (or 12-month if the insurance industry's suggestion is adopted) extension to the UCITS transitional arrangements under PRIIPs until 1 July 2022. The reference in the above Irish Funds update to "necessary amendments to existing legislation to resolve outstanding issues" may also be an indication of the Commission's intention to address the issue of UCITS being subject to dual requirements to produce both a PRIIPs KID and a UCITS KIID. To date, no proposal has been made to 'switch off' the UCITS KIID and even if the UCITS exemption from the PRIIPs rules is extended to 1 July 2022, the time for making legislative changes is limited.
In February 2021, the ESAs adopted amending regulatory technical standards (RTS) for compliance with PRIIPs and submitted them to the Commission for endorsement. The ESA-adopted RTS incorporate various existing UCITS KIID provisions into the PRIIPs framework and recommend that the coexistence of the PRIIPs KID and the UCITS KIID be avoided. The ESAs note that this would mean that the UCITS Directive would need to be amended so that UCITS are no longer obliged to provide a UCITS KIID to retail investors. The ESAs chose not to provide a recommendation on which document, if any, should be provided to professional investors instead of the UCITS KIID as they are of the view that more time is needed to reflect on this issue.
Methodology for performance scenarios under the RTS
One of the key differences between the PRIIPs KID and the UCITS KIID relates to how performance is presented. PRIIPs KIDs must show forward-looking performance scenarios with a requirement to project performance returns (both value and percentage) based on historical data. Different scenarios based on four difference economic conditions (stress, unfavourable, moderate and favourable) must be presented for up to three time periods including the recommended holding period. In the draft RTS adopted by the ESAs, a new methodology is proposed for investment funds' presentation of performance scenarios with the following main elements:
- To not use a "model" and instead present performance scenarios (unfavourable, moderate, favourable) showing a range of future outcomes that are a more direct estimate from a distribution of past returns of the PRIIP (or a relevant benchmark), at different points in time in the past. The best, average and worst performances would be shown under certain parameters.
- A minimum 10-year data period would underlie these scenarios (at least five more than the recommended holding period) to try to capture both positive and negative periods of growth;
- To retain the stress scenario using the methodology in the current PRIIPs Level 2 rules, which, taking into account the recent market impact of the Covid-19 pandemic, has proven to be a relevant indicator of very adverse market events;
- It is anticipated that this revised approach would address the issues of the current methodology in terms of procyclicality, the "amplification factor" (e.g. favourable scenarios above levels ever achieved), and moderate scenarios that can be seen as over-optimistic.
In relation to the inclusion of past performance (which is not provided for under the current PRIIPs rules), the ESAs recommend, as a preferred approach, to include past performance information within the main contents of the PRIIPs KID. However, the ESAs understand that this would require a targeted amendment to the Level 1 PRIIPs Regulation.
The Commission now needs to adopt the draft RTS, which it is expected to do by mid-May. Once adopted, they will be subject to the usual scrutiny by the Council and the European Parliament. The RTS are due to apply from 1 January 2022.