The Packaged Retail and Insurance-based Investment Products Regulation (“PRIIPS Regulation”) requires product manufacturers to prepare Key Investor Documents (“KIDs”) for all Packaged Retail and Insurance-Based Investment Products (“PRIIPS”) that are offered to sale to retail investors in the EEA. This includes alternative investment funds (“AIFs”) sold to retail investors. The PRIIPS level 2 text provides a set template which product manufacturers must follow when preparing the KIDs. The template requires various calculations to be undertaken which give performance scenarios and risk/reward indicators, and there is no flexibility with the strict requirements of the template (i.e. product manufacturers cannot amend the template if a section doesn’t make sense for their particular product).
FCA statement on the application of the PRIIPS Regulation The strictness of the template meant that the industry was concerned that it was not appropriate for their products, or that some of the performance scenarios and risk / reward indicators were misleading to investors. Investment managers have an obligation to be fair, clear and not misleading in their communications with investors, which may be seen to conflict with some of the requirements of the PRIIPS Regulation.
The FCA released a statement in January stating that they are comfortable that, if manufacturers believe that some of the content of the KIDs could mislead investors (e.g. by making performance scenarios appear too optimistic), then they can (and should) provide explanatory materials to put the calculations into context. This is quite a change from the position under the PRIIPS Regulation and the level 2 text, which both state that manufacturers should not refer to any other documents outside the KID which might help explain the document to investors (the KID is meant to be self-contained and easy for investors to access and understand). This is some added flexibility from the FCA that should be borne in mind by firms when preparing the KIDs.
When does a product become ‘available’ to EEA retail investors? The industry has tended to approach implementation of the PRIIPS Regulation such that KIDs are only required to be produced for products being sold to EEA investors. This is broadly correct.
However, there are a few products which are not actively marketed to retail investors, but nonetheless retail investors are invested therein, and may require a KID to be prepared.
Some important factors to bear in mind are:
- The PRIIPS Regulation applies to EU and non-EU alternative investment fund managers (“AIFMs”) advising or selling PRIIPS, including AIFs, to EEA retail investors
- A KID is needed once a product is ‘made available’ to retail investors. This is the case even if the approach by the retail investor was unsolicited and therefore no actual ‘marketing’ took place for the purposes of AIFMD
- A ‘retail investor’ has the same definition as ‘retail client’ under MiFID II. In the UK, this is set out in the Conduct of Business Sourcebook section of the FCA Handbook
- This definition includes high net worth individuals, employees of the AIFM and local authority pension plans (which previously would have treated as professional investors). Under MiFID II, these categories of retail investor can ‘opt up’ to professional status, and therefore be treated as a professional client by an investment manager (this affords them fewer protections)
- Unless a retail investor opts up to professional status, a KID must be prepared for an AIF, even if it is not actively marketed to EEA retail investors
- This does not apply to retail investors already invested in AIFs, but will apply to new retail investors, and also to those existing retail investors who ‘top up’ their current investments in these products
Retail investors can opt-up to professional investor status if they satisfy two of three of the following criteria:
- The investor has carried out 10 or more significant transactions a quarter over the past year
- The size of the investor’s portfolio exceeds EUR 500,000
- The investor works or has worked in the financial sector for at least one year
Investors must confirm in writing to managers that they wish to be treated as a professional investor, and that they understand they will lose certain regulatory protections by not being treated as a retail investor.
Managers must then carry out its own assessment to determine if the investor can be treated as a professional, and then communicate its final decision to the investor.