The Regulation on Key Information Documents for Packaged Retail and Insurance-based investment products ("PRIIPs") is of interest to a range of stakeholders, such as fund managers, insurance undertakings, credit institutions, and investment firms, involved in the manufacture or distribution of investment schemes and other packaged products in the retail market. It will change the way that firms present and provide product information to clients.
PRIIPS sets out uniform rules on the format and content of the key information document and on the provision of such documents to retail investors to allow them to understand and compare key features and risks inherent in a PRIIP.
The key areas include:
- Before a product can be sold to retail investors, PRIIP manufacturers will need to produce a key information document for their products and ensure such information is accurate, fair, clear and not misleading. It is to be available on their website and must follow a prescribed format and include prescriptive information;
- Persons advising on or selling PRIIPS are required to provide the key information document in good time before any transaction is concluded. There are some small allowances on this point for distance communications. Firms may use electronic formats but the investor has the right to ask for paper. This must always be offered free of charge;
- The measures are aimed at harmonising divergent national approaches to investor protection, which hamper competition and can result in poor consumer outcomes;
- The rules are aimed at driving transparency, product comparisons, and greater risk awareness in consumers;
- The PRIIPS does not introduce or change any passporting provisions allowing for the cross-border sale or marketing of PRIIPS to retail investors; and
- Intervention powers will be reserved to EIOPA on a similar basis to those ESMA and the EBA enjoy under the MiFID II Regulation 600/2014 (i.e. MiFIR).
The PRIIPS Regulation (1286/2014/EU) was published in the EU’s Official Journal on 9 December 2014 and it comes into force 20 days after that. As a regulation it is directly applicable so EU Member States do not need to take steps to implement the PRIIPS measures in their national legislation. It shall apply from 31 December 2016.
The PRIIPS Regulation in brief
For the purposes of the PRIIPS Regulation, a PRIP (packaged retail investment product) is an investment, including those issued by certain special purpose vehicles and securitisation special purpose entities, where the sum repayable to the retail investor is subject to fluctuations because of exposure to reference values or the performance of one or more assets that are not directly purchased by the retail investor. An insurance-based investment product is an insurance product offering a maturity or surrender value wholly or partially exposed, directly or indirectly, to market fluctuations. A PRIIP, therefore, is a product which is either or both of these.
The PRIIPS Regulation concentrates on the key information document as it believes this forms the basis for the underlying investment decision by the retail investor. The key information document is considered a standalone document, classified as pre-contractual information, not to be mingled with marketing material or messages. The document must be consistent with key provisions in the contractual documentation for the product. Member States have the discretion to require prior regulatory approval of key information documents (see Article 5(2)).
Retail investors would potentially have a civil right of action against any product manufacturer that infringed the Regulation, if the investor could show the investor suffered damage as a result of reliance on the key information document that was misleading, inaccurate or inconsistent with pre-contractual or contractual documents under the manufacturer's control.
Firms are required to introduce appropriate complaints handling processes – see Article 19 for additional information – although in the UK this appears to be in line with existing requirements.
Intervention powers are reserved to EIOPA, however, Member States retain powers to sanction firms and to do so in line with national laws, which may include criminal sanctions.
UCITS are within the definition of investment products covered by the PRIIPS Regulation. However, as the UCITS IV Directive (2009/65/EC) introduced key investor information requirements there is a five year transitional period before UCITS will be within the remit of the Regulation. Personal pension products are also out of scope at the present time along with other products detailed in Article 2(2).
Firms must check the necessary information to include in the key information document in detail and be aware of the required format and design restrictions.
Features of a key information document
- No more than 3 sides of A4.
- Focus on the information that retail investors need.
- Easy to read – readable font size (legibility).
- Language and style should be clear and understandable (readability).
- Use design features with care (e.g. colour should not interfere with legibility or readability if printed or reproduced in black and white).
- Branding should not obscure key information messages.
- The document must use an official language of the Member State where it is used – any translations must be faithful and accurate. The document must use the same language as the supporting marketing materials.
- The document must follow the format in Article 8:
- "Key Information Document" must appear clearly at the top of the first page
- The mandatory explanatory statement must be used (see Art 8(2))
- The document must include:
- the name of the PRIIP
- the identity and contact details of the manufacturer
- the competent authority of the manufacturer
- the date of the document
- a comprehension alert (see Article 8(3)(b))
- prescribed sections and provisions (see below)
Prescribed information - "What is the product?"
- The nature and main features of the PRIIP
- Its type
- Its objective and means of achieving them (see Article 8(3)(c)(ii))
- A description of the intended investor especially their ability to bear loss and the investment horizon (e.g. you should aim to hold this product for no fewer than 5 to 10 years)
- Details of insurance benefits and when triggered
- Its term (where known)
Summary of prescribed information "What are the risks and what could I get in return?"
- A risk indicator – with narrative explanation
- Possible maximum loss of invested capital and additional financial obligations
- Performance scenarios and assumptions
- Conditions on returns on investment and performance caps
- Potential tax implications
Other prescribed information (in summary)
- Insolvency protections
- Intended term and early redemption
- Cooling off and cancellation provisions
- Complaints processes
- Information about other pre & post contractual information
Before the provisions apply, the European Securities and Markets Authority ("ESMA") will prepare draft regulatory technical standards ("RTS") to provide the clarity or substance to concepts in PRIIPS, such as the obligations in Article 8(3) (see the breakout box, prescribed information) and those around updates and reviews of the key information documents (see Article 10), which, once finalised, the European Commission will adopt. The RTS are expected in draft form on various dates over the next 18 months. It is advisable to spend time taking on board the specifics of the technical standards and implementing measures when released as much of the essential detail about how PRIIPS will be relevant to your firm will be set out in these measures.
The media in which the document may be provided is prescribed in the Regulation (see Article 14). Advisers and sellers of PRIIPS must provide retail investors with the key information document in good time before a binding contract is formed – or in certain cases after the contract is formed, without undue delay. Of course, these two timescales are very subjective.
The European Commission will prepare RTS on the area of provision of information to retail investors. Until the time that any precise timetables are set out, firms ought to adopt a common sense approach, which must factor in the sales methods through which the investment was made. The intention is to allow investors a chance to study the document should they wish to. Does your process allow this? Does it encourage it? It certainly should not be seen to discourage this. Will your senior manager be able to defend the firm's process as being objectively reasonable – to a complaints adjudicator or, in a systemic situation, to a regulator?
It is important to spend time planning your firm's approach to PRIIPS, what it may mean for your business processes, document production and review processes and how your organisation needs to approach implementing any change. Regulatory change is always a bit of a challenge for most organisations.
- Use your voice – work with your trade associations or other stakeholders to give constructive feedback to the European Supervisory Authorities and the FCA (or the regulators in your Member State) to influence RTS and subsequent supervision;
- Get the right people on board – allocate responsibilities in a way which is proportionate for the size of your business; your team might involve:
- Legal, tax and compliance – although central to implementation, legal, tax and compliance staff cannot handle the project alone and they will need to work with colleagues from across your business;
- Senior business personnel – under the new approach to accountability, ethics and culture, senior management needs to be engaged, through steering and reporting to the firm's Board, and requesting the necessary management information to monitor the firm's compliance position after implementation;
- Product specialists – it is important to understand which products are caught in the regime and those which are not; involve people who understand the detail of the underlying investment or insurance product and can assess these against the definition of a PRIIPS product and known exclusions;
- IT – if you use automated processes to develop or distribute materials, PRIIPS may well trigger systems changes and should be factored into existing developments, work plans and projects;
- HR training and competence experts – sales staff will need to understand what the documents are and how to use them – and how not to use them;
- Contract and audit specialists – relevant personal must ensure that responsibility for each requirement is allocated to the correct party and reviewing performance against relevant key performance indicators (e.g. that the key information document is actually provided to the investor as required); and
- Marketing and communications - will have a role to play along with other key operational areas – just identifying the number of documents that need to be produced, called in, replaced and re-distributed will be a significant task.
As the PRIIPS requires firms to amend and update information and inform investors, the long term nature of impacts on process and procedures must be factored into planning. The nature of these requirements will be set out in RTS and you may want to engage with the regulatory bodies or respond to any consultation on these to ensure the requirements are proportionate and manageable in practice.
Firms should prepare for PRIIPS and the costs and charges disclosures (see MiFID II (2014/65/EU) article 24) at the same time – the measures in PRIIPS are complementary to MiFID II and those in the IMD (2002/92/EC) and the AIFMD (2011/61/EU). PRIIPS shall apply from 31 December 2016 whereas related changes in MiFID II apply from 3 January 2017.
A key area to watch in the UK is around the guidance the FCA provides. As PRIIPS is a regulation, there is limited scope for the FCA to act, however, the PRIIPS regime cuts across most of those products within the scope of retail investment products caught by the UK’s Retail Distribution Review (RDR). RDR created separation from what a retail client pays for the advice they receive and the charges associated with the product. PRIIPS requires charges to be disclosed in the key information document, including any adviser charges linking the advice with a product contrary to the way in which the FCA separated them under RDR.