On 31 March, 2016, final draft regulatory technical standards (“RTS”)7 were published in relation to the presentation, content, review and provision of the Key Information Document (“KID”) pursuant to the EU Regulation (the “PRIIPS Regulation”)8 in relation to packaged retail investment and insurance-based products (“PRIIPs”). Although a number of market participants have called for a delay of the current implementation date of the PRIIPS Regulation set for 31 December 2016, it appears that the relevant EU regulatory authorities intend to press on with the existing timetable.
The final draft RTS were published by the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA, and together, the “ESAs”) and have now been submitted to the EU Commission for approval. The ESAs previously published a Joint Consultation Paper in November 2015 in relation to the draft RTS.9 The revised draft RTS are substantially similar to those set out in the previous Consultation Paper. It is now expected that the EU Commission will go ahead and adopt the draft RTS substantially in their current form so that they will come into force at the same time as the implementation date for the PRIIPs Regulation.
Proposals in Relation to the Presentation and Content of the KID
Proposals in Relation to the Presentation and Content of the KID The draft RTS set out a mandatory template to be used for each KID (including mandatory text). Certain permitted adaptations to the template are also provided. Amongst the major issues addressed in relation to presentation and content are set out below.
The draft RTS requires a summary risk indicator ranking the PRIIP on a numerical scale from 1 (lowest risk class) to 7 (highest risk class). The draft RTS contain a methodology for the assignment of each PRIIP to the relevant risk class, the inclusion of narrative explanations and, for certain PRIIPs, additional warnings.
The criteria for establishing the relevant risk class are set out in Annex II to the draft RTS. The ESAs have identified market and credit risk as the major factors of risk that need to be reflected in the indicator, alongside liquidity risk. A narrative warning is required directly below the indicator where the PRIIP is considered to have a material liquidity risk having regard to the factors set out in the RTS or to be illiquid. Where a product is denominated in a currency other than the legal tender in the member state in which it is being marketed, a narrative must be included stating that the investor’s return may change as a result of currency fluctuations.
The draft RTS set out requirements for performance scenarios. The ESAs state that, after examining many options and assessing consultation responses, the favoured approach is to use the measure of market risk as a basis for identifying a future spread of possible outcomes reflecting typical past returns over a suitable performance window. The KID is required to include three performance scenarios: an unfavourable scenario, a moderate scenario and a favourable scenario. Annex IV to the RTS sets out the criteria to be used in relation to each scenario. Annex V sets out how the performance scenarios are to be presented, and also includes a template for the narrative to be set forth below the performance scenarios. If the unfavourable impacts of the product would not be adequately covered in the unfavourable scenario, an additional scenario must be added to show intermediate periods demonstrating such potential impacts.
An additional scenario for insurance-based investment products is required to be based on the moderate scenario where the performance is relevant in respect of the return of the investment.
The scenarios shall be calculated for the recommended holding period. For PRIIPs with a recommended holding period between one and three years, performance shall be shown at two different holding periods (one year and at the end of the recommended holding period). For PRIIPs with a recommended holding period of three years or more, performance shall be shown at three holding periods (one year, half the recommended holding period rounded up to the nearest year, and the recommended holding period).
The draft RTS set out various requirements in relation to the presentation of costs. These require the inclusion of two tables – one entitled “Costs over time” that summarises the overall impact of the costs in money and percentage terms and showing how the costs accumulate for different holding periods. The other is entitled “Composition of costs” and identifies the key costs in a summary breakdown to enable a consumer to see how these might apply, and to how they might use the product. The format of these tables is set out in Annex VII to the RTS, and the methodology for the calculation is set out in Annex VI to the RTS. If relevant, a narrative must also be included stating that the table takes into account exit penalties. The table must also include a breakdown of one-off costs, recurring costs and incidental costs, all in accordance with methodology specified in Annex VI to the RTS.
In relation to certain standardised exchange-traded derivatives, the ESAs consider that a different approach on performance information will offer more useful information for retail investors. Here, performance scenarios shall be included in the form of pay-off structure graphs as set out in Annex V of the RTS.
In relation to PRIIPs offering multiple investment options, the KID may either be generic, related to the product in general, including information on the range of risks and costs (but not all the detail on every specific option) or specific KIDs can be produced for each option to combine the generic information with the specific information for that option.
Revision of the KID
Article 10 of the draft RTS sets out requirements for revision of the KID by the PRIIP manufacturer. This must be undertaken on at least an annual basis, and there is an obligation for ad hoc revisions to be made when necessary under the detailed methodologies for calculating the summary risk indicator, the performance scenarios and the costs, and when necessary for products offering multiple options.
Timing of Publication of the KID
The draft RTS state that the person advising on or selling the PRIIP shall provide the KID in “good time” (as required by the PRIIPs Regulation) so as to allow retail investors enough time to consider the document before being bound by any contract or offer. In determining how long the investor needs in this regard, the person advising or selling the PRIIP must take into account, as appropriate: (a) the knowledge and experience of the retail investor with the PRIIP (or a similar PRIIP), (b) the complexity of the PRIIP and (c) the urgency for the retail investor of concluding the proposed contract or offer
A number of concerns have been raised by relevant industry participants that the 31 December 2016 deadline for implementation of the PRIIPs Regulation is unrealistic. In January 2016, Insurance Europe called for an extension of one year to give product manufacturers time to test the KID. It has also expressed concerns that the proposed KID will not explain insurance-based investment products correctly and will make such products seem more expensive than other investment products without explaining the additional insurance protection provided by insurance-based products. Other industry bodies, including the European Structured Investment Products Association and the European Fund and Asset Management Association, have raised similar concerns on timing and also requested a one-year delay in PRIIPs implementation. Market participants have also raised concerns that there are still areas of uncertainty in relation to the PRIIPs regulation that are not addressed by the draft RTS. These include the application of the PRIIPs regulation to existing products and whether any grandfathering will apply and the use of the KID in countries other than the home country of the manufacturer
There is, however, no sign that the European authorities are considering any delay in the implementation of the PRIIPs Regulation, and the draft RTS contemplate implementation in accordance with the current timetable.