In a little over six months, a key piece of the EU’s enhanced investor protection regulation comes in to force. On 31 December 2016, the Packaged Retail and Insurance-Based Investment Products (PRIIPs) regulation will introduce a Key Information Document, or KID for all financial products sold to retail investors in the EU.
The PRIIPs KID creates a common disclosure framework that will allow retail investors to easily compare investment products across the EU, offered by banking, insurance, or securities firms. It is an attempt by EU policymakers to boost transparency and reduce the complexity of public information about investment products, and to make it easier for retail investors to weigh the risk and costs of an investment before diving in.
The proposed rules include a common template that is prescriptive in the texts and layouts to be used. Among the requirements are strict rules on the length of the document. Regardless of investment product, the PRIIPs KID is limited to three A4 pages.
The template also includes: information on the manufacture of the product; an explanation of the product’s objectives and the means of achieving them; and a risk/reward section, including a risk indicator composed of seven simple classes for risk and a reward section that outlines three “performance scenarios”—unfavorable, moderate, and favorable. Information costs must also be disclosed and are broken into two categories: “costs over time,” a figure that summarizes the total costs of the PRIIP, and “composition of costs,” which breaks down costs such as those resulting from portfolio transactions.
Firms must comply with the section order and titles set out in the template, though there are no rules on the length of individual sections. The KID must be republished annually, and must be provided sufficiently early for a retail investor to be able to take its contents into account when making an investment decision.
THIS KID LOOKS A LOT LIKE THE OTHER
For UCITS asset managers, this will all sound awfully familiar to the UCITS KIID (Key Investor Information Document) that went live in 2011 under UCITS 4. They are so similar that the joke goes, what’s the difference between the UCITS KIID and PRIIPs KID? You lose an “I” and gain a page. However, aesthetics aside, there are some meaningful differences between the PRIIPs KID and UCITS KIID.
- Template: PRIIPs KID is far more prescriptive in its format than the UCITS KIID. All KIDs must be laid out in Q&A style and follow a prescribed order with the same headings.
- Performance Disclosure: The KID must provide future performance under different scenarios, based on past performance. Under UCITS rules only past performance is disclosed in the KIID.
- Default Risk: The KID contains a disclosure on what happens if the product manufacture is unable to payout due to default. No such disclosure exists under UCITS rules.
- Costs: The KID cost disclosures include forecasting transaction costs, which is not required in the UCITS KIID cost disclosures.
- Complaints: The KID must contain instructions on how investors can complain about product. No such disclosure exists under UCITS rules.
WHAT THE PRIIPS KID MEANS FOR ASSET MANAGERS
The ultimate policy goal is to have one standard document for all investments sold to retail investors, including UCITS funds. So, on 31 December 2019, the UCITS KIID will be replaced with the PRIIPs KID. Despite the fact that the UCITS’ adoption of the PRIIPs KID is three years away, there still will be an immediate impact on asset managers.
The scope of PRIIPs, which includes non-UCITS funds that are sold to retail investors, presents operational challenges for asset managers. For example, UK Investor Trusts or Non-UCITS Retail Schemes will require a PRIIPs KID. Managers without UCITS, will have to invest in the capability to produce —and reproduce annually—the PRIIPs KID, either by developing in-house capabilities or by engaging a provider. UCITS managers, will have to produce both the UCITS KID and the PRIIPs KID for the next three years, which will add to overhead and costs. Some in the industry have suggested that this may lead groups to adopt the PRIIPs KID early for their UCITS products. Unfortunately, while it’s an attractive idea, it is actually illegal. This is because the UCITS KIID is enshrined in law. Therefore, it is impossible for a UCITS fund to adopt the PRIIPs KID early, without an amendment to the UCITS framework (which is not a swift process and would likely take longer than the three year grandfathering period).
UCITS funds that are sold in an insurance wrapper are another concern for managers. Although the UCITS fund is not required to produce the PRIIPS KID, the insurance product is. As insurance companies look to produce KIDs for these products, this will almost certainly lead to data requests for the underlying UCITS fund and managers. UCITS managers will be required to develop the necessary data feeds for the insurance companies or risk having their product removed from the wrappers.
If properly implemented, the PRIIPs KID promises to be a positive development for the asset management industry. It should allow EU investors to more easily compare investment products and help level the playing field between asset managers, banks, and insurers. However, the industry will first have to endure the short-term pain of implementing another regulatory reporting requirement.