The PRIIPs Regulation sets out rules on the format and content of the key information document to be provided to retail investors in respect of PRIIP investments. The intention is to enable investors to understand and compare the key features and risks inherent in PRIIPs.
The key points to note include:
- By 1 January 2018 the providers and sellers of ‘PRIIPs’ must provide retail investors with a standard form Key Information Document (KID). As defined, in addition to the obvious, ‘retail investors’ could include staff, friends, family, high-net-worth investors and sophisticated investors.
- KIDs must follow a template format and in doing must reduce issues of risk, return, strategy, cost, default and investor exit rights into simple and standardised descriptions. The objective is to achieve product transparency and comparability.
- The regulatory guidance to be followed in creating a KID is extensive and complex and clients are advised to allow good time to create their KIDs.
- PRIIPs cover a wide range of investment products regardless of legal form – the key issue is whether the investor is exposed to the performance of underlying assets not directly purchased by them. PRIIPs will cover funds, insurance products, derivatives and structured products among other products.
- The rules apply to both product provider, but also intermediaries selling or advising on a PRIIP – and may apply regardless of whether a UK product is being sold abroad, or a product from overseas is being sold in the UK.
To the extent PRIIPs is still on your ‘to-do’ list, we set out below a Q&A to help navigate the PRIIPs Regulation. Please contact your usual Taylor Wessing contact or use the contact details below should you require any assistance implementing PRIIPs. It is not too late to be compliant for 1 January 2018.
What is the PRIIPs Regulation? The PRIIPs Regulation is a directly applicable EU regulation (EU Regulation (EU) No 1286/2014). It is supplemented by a delegated regulation containing regulatory technical standards (EU Regulation (EU) No 2017/653) devised by the European Commission and the European Supervisory Authorities. The FCA has issued guidance in the form of consultation and policy papers on these rules (CP16/18 and PS17/6).
What is the definition of a PRIIP? An investment where, regardless of the legal form of the investment, the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the retail investor, or which is an insurance product that offers a maturity or surrender value that is wholly or partially exposed, directly or indirectly, to market fluctuations.
What products fall within the PRIIP definition? FCA guidance is that the following are PRIIPs:
- Regulated collective investment schemes (CIS) such as non-UCITS retail schemes (NURS) and qualified investor schemes (QISs), but not Undertakings for Collective Investment in Transferable Securities (UCITS).
- Unregulated CISs, whether AIFs or not, such as (but not limited to) PE funds, investment companies, investment trusts, VC funds, European Social Entrepreneur Funds (EuSEFs), European Venture Capital Funds (EuVECAs).
- Insurance-based investment products such as unit-linked policies, with-profits policies and Holloway sickness policies and fluctuating return annuities (that are not pension products).
- Derivatives: options, futures, and contracts for differences.
- Structured investment products (whatever their form) such as for example, convertible securities, insurance policies or instruments issued by SPVs.
- Structured deposits.
- Securities issued by SPVs with variable returns (e.g. convertible securities that may convert from equity to debt securities).
- Debt securities (bonds, notes or debentures) where the amount repayable is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the investor.
The FCA have also issued guidance to the effect the following are not PRIIPs: general insurance and non-life insurance without a surrender value, deposits, assets held directly by the retail investor such as shares or sovereign bonds, pensions and also debt securities where the amount repayable to the retail investor is fixed.
Who is a ‘retail investor’ for these purposes’? A retail investor encompasses anyone who is not a ‘professional client’ as defined in MiFID2. This test is more onerous than might be thought on first sight and will include even ‘high net worth’ or ‘sophisticated’ investors where they do not meet both a qualitative test (expertise, experience and knowledge sufficient to understand the particular product) and a quantitative test. The quantitative test is more challenging and the investor needs to meet two of three tests. While one of the tests is reachable by most high net worth investors (€500,000 investment portfolio), the other two tests are harder: (1) investments in the relevant product type at an average frequency of 10 per quarter over the previous four quarters; and (2) the investor works or has worked in the financial sector for at least one year in a professional position where their role required knowledge of the product in question.
These tests can mean that staff, friends, family and some high-net-worth investors and sophisticated investors will not necessarily be ‘professional investors’ with respect to certain products and would qualify as retail investors.
What information needs to be contained in a KID? The Key Information Document must follow a template approach designed by the European regulatory authorities and set out in Regulatory Technical Standards (RTS). KIDs have been designed to result in information that can be readily understood by retail investors and furthermore can be reliably compared against other PRIIP products. The RTS contain extensive regulatory guidance on factors to include in a KID, such as:
- Costs: There is guidance as to the methodology for calculating costs and how they should be presented in the aggregate, broken down and as incurred over standardised time frames, expressed in monetary and percentage terms.
- Risk: PRIIPs must be given a risk factor on scale of 1-7 and in doing so present and take into account complex technical standards as to assessment of market, credit and liquidity risk. Furthermore the KID must present projected performance data over different scenarios such as favourable, moderate, unfavourable, stressed scenarios. The computations required are complex.
- Intended duration of investment, exit rights and what is likely to happen on a product or provider default event. Again there is extensive guidance on the presentation of these scenarios.
Who needs to prepare/provide a KID? The PRIIPS Regulation places the onus on the product manufacturer to create a KID for their product, but intermediaries distributing PRIIPs (sellers/advisers) are also under an obligation to provide a KID where they intermediate a sale.
When should a KID be made available? In order for the retail investor to be able to make an informed investment decision, those advising on or selling PRIIPs should provide the KID in good time before any transaction is concluded. For distance communications, there is allowance for providing a KID immediately after the transaction is concluded as long as it is not possible to provide the KID in advance and the retail investor consents.
How should a KID be made available? A firm advising on, or selling, a PRIIP must provide the KID to the retail investor in one of the following media:
- on paper, which should be the default option where the PRIIP is offered on a face-to-face basis, unless the retail investor requests otherwise;
- using a durable medium other than paper, where the conditions in the PRIIPs Regulation are met; or
- by means of a website where the conditions in the PRIIPs Regulation are met.
Geography and non-UK products: The requirements of the PRIIPs Regulation might apply to (a) third-country (non-EEA) manufacturers and distributors which make PRIIPs available to retail investors in the EEA and (b) EEA manufacturers and distributors producing PRIIPs for, and/or selling PRIIPs to, third-country (non-EEA) retail clients.
Impact on other disclosure obligations? The rules requiring provision of a KID do not necessarily disapply other legal or regulatory obligations to make disclosures to investors, such as a prospectus or fund documentation. It is advisable to check in any case whether, and if so to what extent, the new PRIIP obligations interact with other existing disclosure requirements.
Are KIDs required for secondary sales, investor top-ups, successive transactions, legacy or ‘closed’ products? The PRIIPs Regulation and EU level guidance does not as yet address this and in the light of this the FCA are reluctant to express a view. They indicate that this is being raised with the EC but for the time being encourage firms to use their judgement.