As mentioned in our Volume 8, Issue 75 publication of Structured Thoughts, the EU Packaged Retail Products and Insurance-Based Products Regulation (the "PRIIPs Regulation") will become effective on 1 January 2018.
Requirement for Preparation of a KID
From the start of 2018, any product within the scope of the PRIIPs Regulation can only be sold to an EU retail investor (including a retail client under MiFID II) if a Key Information Document ("KID") is provided in advance to such investor. The KID is intended to be a short-form pre-contractual disclosure document and must not exceed three pages of standard-sized text. The PRIIPs Regulation, together with the Regulatory Technical Standards ("RTSs") set out detailed and prescriptive criteria for the information to be included in the KID.
Scope of the PRIIPs Regulation
For non-insurance products to come within the scope of the PRIIPs Regulation, the amount repayable to investors has to be subject to "fluctuations because of exposure to reference values to the performance of one or more assets which are not directly purchased by the investor." It will not therefore apply to "vanilla" fixed, or floating, rate notes. However, many or most structured products are likely to come within the scope of the PRIIPs Regulation, and any issuer of a product that embeds a derivative or makes any payment of principal, interest or other amount by reference to the value of any asset or index should consider carefully whether the PRIIPs Regulation will be relevant.
Although the territorial scope of the PRIIPs Regulation is not clear on its face, the EU Commission has published guidelines that state that a KID will need to be provided where an in-scope product is made available to EU retail investors (whether or not the product manufacturer or distributor is based outside the EU). However, no KID needs to be provided to any investors located outside the EU, even where the issuer or distributor is within the EU.
Points for Issuers and Manufacturers to Consider
It is important for any issuer/manufacturer of a product that comes within the definition of a PRIIP that may find its way to EU retail investors to either ensure that it is able to comply with the obligation to prepare a KID for such product or to take steps to ensure that it cannot be sold or transferred to EU retail investors. Two key issues here for product manufacturers to bear in mind are:
- Where a PRIIP is to be made available to an EU retail investor, the obligation to prepare the KID is on the product manufacturer (even if based outside the EU). The obligation to deliver the PRIIP to the investor lies with the person advising on or selling the PRIIP to the retail investor. Therefore, although a distributor should not be selling a PRIIP to an EU retail investor unless it knows that the manufacturer has prepared or is preparing a KID, manufacturers should ensure that their distributors are fully aware as to whether the product can be made available to EU retail investors, and that relevant contractual selling restrictions and offering legends reflect this position.
- The PRIIPs Regulation applies to sales in the secondary as well as the primary markets and the obligation to produce the KID is still the product manufacturer's in respect of secondary sales. It is therefore important that the whole chain of distributors, be bound by relevant selling restrictions. It is also advisable, where a product is not intended to be sold to EU retail investors, to ensure there is a prominent legend to this effect on the relevant offering documents.
Market Standard Legends and Selling Restrictions
The International Capital Markets Association ("ICMA") has been working with the industry to develop forms of PRIIPs legends and selling restrictions. It has developed language for two options: first, where there is to be a blanket prohibition on sales to EU retail investors (in this case, there is alternative language for standalone issues and for programs where no issuance can be sold to a retail investor); and second, a form of legend/restriction for program issuances that can be switched on or off, depending on whether the particular issuance is to be made available to retail investors.
It they have not already done so, we would recommend that all issuers and manufacturers of packaged or structured products that could be sold into the EU in either the primary or secondary markets consider whether such legends and selling restrictions should be incorporated into their products, and review their contractual arrangements with their chain of distributors.