Out-Law Guide 6 min. read
20 Jun 2014, 11:05 am
This guide was last updated in May 2016
The new requirements are intended to make it easier for retail investors to compare products to each other. It is hoped that this will increase customer value and force firms to carefully consider how their products will fare when distilled down to a uniform product description.
KIDs will be uniform disclosure documents providing standardised information about PRIIPs in a way that is designed to give retail investors sufficiently clear, comparable information on the range of products available. The European Commission hopes this will increase competition, as well as boost transparency for investors.
The downside is that the production of KIDs for each PRIIP will be a time-consuming and costly process, and will provide regulators with a new hunting-ground for non-compliant behaviour. However, a more optimistic view is that is could provide firms with an opportunity to stand out from the crowd for the right reasons by allowing the products which offer the best deal to customers to be more clearly identifiable.
What is a PRIIP?
The EU Regulation defines a PRIIP as any product which meets one of the following definitions:
By way of example, the following products in the retail market will be PRIIPs:
Due to the wide range of products that will be in scope, it is perhaps more helpful to note that the following products will definitely not be PRIIPs:
Although UCITS (undertakings for collective investment in transferable securities) meet the definition of PRIIPs, the existing UCITS Directive contains a requirement for Key Investor Information Documents which are largely identical to KIDs. For this reason, the regulation gives UCITS providers a transitional period up to 31 December 2019 during which they will be exempt from its terms.
In order to promote consistency and clarity of language, the regulation sets out mandatory rules for the form and content of the KID.
Responsibility for producing and distributing a KID
The obligation to produce the KID falls on the 'manufacturer' of the PRIIP. This includes the PRIIP provider and any entity which makes changes to the PRIIP, including changes to the costs or creating a new PRIIP out of combinations of PRIIPs. This definition has been created to provide for situations in which the PRIIP provider does not have final control of all details of the issued product – for example, when the product is issued and priced by an adviser.
There is no apparent prohibition on the outsourcing of this function, but outsourcing will not excuse the manufacturer from legal responsibility for compliance of the KID with the regulation.
The KID must be created before the PRIIP is made available to retail investors, and must be published on the firm's website. Although not a requirement, the regulation expressly permits local regulators to require sight of the KID before the PRIIP is marketed in that country.
Generally, the KID must be provided to retail investors by the PRIIPs distributor "in good time" before there is a binding agreement in respect of the product. In the case of distant sales, where the investor has contacted the distributor on their own initiative, the KID may be provided after concluding the product sale but "without undue delay", subject to the distributor providing specific information regarding the KID.
KIDs can be provided to investors on paper or, where the context of the transaction supports it, some other durable medium or via a website. The regulation is clear that, when selling PRIIPs face-to-face, paper should be the default option.
Form and content of the KID
As expected from legislation concerned with clarity and consistency of documentation, a large part of the regulation concerns the form and content of the KID. Some of the main requirements are:
Each KID must contain the following mandatory content and sections:
The Joint Committee of the European Supervisory Authorities (JCESA) published their final regulatory technical standards on KIDs in April 2016. The JCESA is made up of the three European financial regulators, and the regulatory technical standards contain more guidance on the presentation and the contents of the KID.
In the UK, the Financial Conduct Authority (FCA) has said that it will create a template KID for guidance and to assist firms in complying with some of the rules.
The regulation contains specific provisions related to the enforcement of its terms.
If a PRIIP manufacturer does not abide by the regulation's rules on the content of KIDs then it will be liable for damages if investors lose money. Other than those content requirements and in the case of misleading or inaccurate statements, PRIIP manufacturers will not incur civil liability in respect of the KID.
The regulation is designed to harmonise the regulatory environment across the EU, so the European Insurance and Occupational Pensions Authority (EIOPA) has the power to temporarily intervene in the promotion or sale of insurance-based investment products in the EU. This is consistent with the powers granted to other European supervisory authorities under MiFID II in relation to specific non-insurance investments.
In a further measure aimed at achieving consistent powers in respect of PRIIPs and MiFID products, the regulation gives national regulators the power to prohibit or restrict the promotion, distribution or sale of insurance-based investment products.
The PRIIPs regulation has been accompanied on its legislative journey by the revised MiFID and Insurance Mediation directives - known as MiFID II and IMD II. There are some important areas in which the respective instruments overlap, especially in the case of MiFID II.
The European Commission has recently proposed that MiFID II be delayed until 3 January 2018. If, as is expected will happen, the member states agree on the delay, this may result in a similar postponement of the implementation of the PRIIPs regulation. As there has been no announcement of such a delay from the Commission or the European supervisory authorities, firms should continue to prepare for implementation from the end of 2016.