The aim of the PRIIPs Regulation is to help retail investors to better understand and compare the key features, risks, rewards and costs of different retail products, by requiring that retail investors are provided with information in a short, consumer-friendly document.
Packaged retail and insurance-based investment products (PRIIPs) include all (new and existing) alternative investment funds ("AIFs"), regardless of domicile, that are available to retail investors in the EU. From 1 January 2018, for each such PRIIP, retail investors must be provided with a standardised key information document (KID) pre-investment.
While the primary obligation to prepare a KID falls on 'manufacturers' of PRIIPs, such as alternative investment fund managers (AIFMs) and self-managed AIFs, any person selling or advising on a PRIIP to retail investors will be under an obligation to provide a copy of the KID. A PRIIP manufacturer is any entity that (a) manufactures PRIIPs or (b) makes changes to an existing PRIIP including, but not limited to, altering its risk and reward profile or the costs associated with an investment in a PRIIP. Neither the PRIIP manufacturer nor the PRIIP need to be EEA entities to be caught by the PRIIPs Regulation. All self-managed funds, fund managers and distributors of interests in funds that could have retail investors in the EEA should consider what steps they need to take to comply in good time for 1 January 2018. Note that retail investors include sophisticated investors and high net-worth individuals as well as local and public authorities. However, it is possible to opt up retail investors to professional investor status, but, in order to do so, these investors must comply with onerous quantitative and qualitative tests.
Although the PRIIPs Regulation does not itself distinguish between listed and private funds, because of the way listed funds are marketed and freely traded the PRIIPs Regulation should be of particular interest to listed funds, their managers/advisers and book runners.
The PRIIPs Regulation sets out the format and content of a KID that must be provided to retail investors who are considering whether to buy a PRIIP. The KID is intended to be a simple, clear standalone document, which will be no more than three A4 pages long. Content-wise, the PRIIPs KID is similar to the UCITS Key Investor Information Document, but the PRIIPs KID will contain questions, such as: What is this product? What are the risks and what could I get in return? What happens if the manufacturer is unable to pay out? What are the costs? How long should I hold it and can I get my money out early? How can I complain? The cost disclosures are very detailed (and potentially different from MiFID II cost disclosures). More detailed rules on preparing KIDs are due to be contained in a Delegated Regulation setting out regulatory technical standards.
Where are we now and when do we have a final PRIIPs framework in place?
After the European Parliament's rejection of the RTS on the format and content of the KID, both the Parliament and a large majority of member states also called for a postponement in the entry into application of the PRIIPs Regulation. The Commission is now working with the European Supervisory Authorities ("ESAs") (that is, the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority) to resubmit the revised RTS (anticipated on 21 December 2016). In particular, the Commission has now asked the ESAs to make targeted changes in certain areas (including multi-option products and performance scenarios).
The Commission's expectation is that the revised PRIIPs framework should be in place during the first half of 2017 and apply as of 1 January 2018.
Liability and Penalties
If a retail investor can demonstrate loss resulting from reliance on a KID (including a translation) that was misleading, inaccurate or inconsistent with relevant parts of legally binding pre-contractual or contractual documents or with the content requirements, they can claim damages from the PRIIP manufacturer in accordance with the relevant national law (e.g., usually English law for a typical London listed fund). The right to claim damages cannot be waived in the investment contract.
Otherwise, each member state must set its own administrative sanctions that are "effective, proportionate and dissuasive". The Regulation allows these to include orders prohibiting the marketing of a fund. Administrative fines can be up to EUR 5 million, 3% of the total annual turnover or twice the profits gained or losses avoided because of the infringement, or even higher if required by a member state.
The impact of Brexit
Since the UK would not leave the European Union until two years after an Article 50 notification has been made, those affected will need to comply by 1 January 2018 even if their only EEA nexus is the UK. Even if the UK did not remain an EEA state after leaving the EU, funds with other EEA retail investors would still need to comply. For equivalence purposes, the UK could also implement rules similar to the PRIIPs Regulation into its national legislation.
What to do now?
Manufacturers of PRIIPs
- Start soon to prepare the KID so that it is ready for 1 January 2018 (especially if it needs to be translated into other languages by then too)
- before commencing any marketing on or after 1 January 2018, obtain advice from EEA member states on whether the KID needs to be filed with the local regulatory authority first
Persons advising on or selling PRIIPS
- contact the relevant PRIIP manufacturer to ensure that a KID will be available from 1 January 2018
- consider amending sales procedures to take account of the PRIIPs Regulation requirements.
- 21 December 2016 – ESAs to submit a revised opinion on the RTS
- 1 January 2018 – Effective date of PRIIPs Regulation
- 31 December 2019 – End of transitional period for UCITS (and NURS with KIIDs)