knowledge 5 August 2016 |

Q&A on the PRIIPs Regulation

What is the PRIIPs Regulation?

The PRIIPs Regulation seeks to promote investor protection by enhancing transparency over the key features and risks of PRIIPs sold to retail investors. To achieve this objective, it requires a “PRIIP manufacturer” to prepare and produce a KID in accordance with a prescribed format and content. The person advising on or selling the KID must provide it to retail investors.

The PRIIPs Regulation also empowers the European Insurance and Occupational Pensions Authority (EIOPA) and national competent authorities to temporarily prohibit or restrict the marketing, distribution or sale of insurance-based investment products or a type of financial activity or practice of a (re)insurance undertaking.

The PRIIP manufacturer and a person advising on, or selling, the PRIIP must establish appropriate procedures and arrangements for ensuring that retail investors can submit a complaint against a PRIIP manufacturer and that complaints regarding the KID receive a substantive reply in a timely and proper manner.

The PRIIPs Regulation provides for the Commission to adopt delegated measures based on regulatory technical standards (“RTS”) prepared by the European Supervisory Authorities (“ESAs”). The Commission has published two draft Delegated Regulations to date. The first lays down RTS with regard to the presentation, content, review and revision of KIDs and the conditions for fulfilling the requirement to provide the KID (“the draft Delegated Regulation”) and the second lays down RTS with regard to product intervention measures.

What are “PRIIPs”?

The term “PRIIPs” covers two types of products, namely packaged retail investment products and insurance-based investment products. In both cases, the key feature of the product is that the amount repayable to the investor is subject to fluctuation because of exposure to reference values, or subject to the performance of one or more assets that are not directly purchased by the retail investor.

Examples of PRIIPs include investment funds, life insurance policies with an investment element, derivatives, structured products and structured deposits.

Insurance products that do not offer investment opportunities and deposits solely exposed to interest rates are not PRIIPs. Neither are deposits or certificates that represent traditional deposits (other than structured deposits), or assets that are held directly, such as corporate shares or soverign bonds. Individual and occupational pension products that have as their primary purpose the provision of an income in retirement are also excluded. According to the PRIIIPs Regulation’s recitals, this is “in consideration of their peculiarities and objectives”.

Who is a retail investor?

A retail investor is a) a retail client who is not a professional client under the Markets in Financial Instruments Directive 2014/65 or b) a customer for the purposes of the Insurance Mediation Directive 2002/92 where that customer does not qualify as professional client under the Markets in Financial Instruments Directive. The PRIIPs Regulation only requires a KID to be produced in respect of PRIIPs sold to retail investors.

Who is a PRIIP Manufacturer?

A PRIIP manufacturer is any person that manufactures a PRIIP or makes changes to an existing PRIIP, including, in particular, fund managers, insurance undertakings, credit institutions or investment firms. An SPV that issues a financial instrument may also be a PRIIP manufacturer.

What is a Key Information Document?

A KID is a 3 page document that provides retail investors with simple and comparable information on a PRIIP. Its purpose is to improve the retail investor’s understanding of the nature, risks, costs, potential gains and losses of a PRIIP and to help him or her compare the PRIIP to other products. The KID constitutes pre-contractual information and must be consistent with any binding contractual documents, with the relevant parts of the offer documents and with the PRIIP’s terms and conditions. The KID must be clearly separate from marketing information.

Who is responsible for drawing up a KID and ensuring its accuracy?

The PRIIP manufacturer is responsible for drawing up the KID and keeping it updated. The PRIIP manufacturer may delegate the task of drawing up the KID where it is impractical for the manufacturer to do so. The KID must be drawn up before the PRIIP is made available to a retail investor and the PRIIP manufacturer must publish the KID on its website.

The PRIIP manufacturer is responsible for ensuring the accuracy of a KID. A retail investor may be able to hold a PRIIP’s manufacturer liable for an infringement of the PRIIPs Regulation where he or she suffers damage as a result of reliance on a KID that is (i) inconsistent with pre-contractual or contractual documents under the PRIIP manufacturer’s control, (ii) is misleading or inaccurate; or (iii) where the KID does not comply with the required form and content requirements as set out in the PRIIPs Regulation.

Must a KID have a specific format and content?

The PRIIPs Regulation harmonises the format and content of KIDs and requires PRIIP manufacturers to present the KID by means of the template laid down in Annex 1. The draft Delegated Regulation contains further details regarding the KID’s contents.

In general terms, a KID must be accurate, fair, clear and not misleading. It must be written in a concise manner and in

language that is clear, succinct and comprehensible. It may only contain cross references where these are related to the information required to be included in the KID. For complex PRIIPs, a “comprehension alert” is to be included in the KID.

The KID must be divided into the following sections:

General Information - this section sets out details regarding the PRIIP (name and, where present, its International Securities Identification Number or Unique Product Identifier), the identity of the PRIIP manufacturer and its contact details, as well as the name of its competent supervisory authority and the date of the KID’s production or of its most recent revision.

What is this Product? - this section deals with the PRIIP’s main features and nature, including: its name; its objectives and how these are to be achieved; a description of the type of retail investor to whom the PRIIP is intended to be marketed; details of any insurance benefits offered by the PRIIPs; and its term, if known, including an indication as to whether the PRIIP manufacturer can unilaterally terminate the PRIIP and the circumstances in which the PRIIP can be automatically terminated.

What are the risks and what could I get in return? - this section briefly describes the PRIIP’s risk and reward profile. Among other things, it must contain a summary risk indicator. The draft Delegated Regulation provides seven classes of market risk measures and stipulates the methodology for assigning each PRIIP to one of those classes. This section must also contain details of the possible maximum loss and at least three appropriate performance scenarios, representing unfavourable, moderate and favourable scenarios.

What happens if the [name of the PRIIP manufacturer] is unable to pay out? - this section gives a brief description of whether the retail investor may face a financial loss due the default of the PRIIP manufacturer, or another entity. It must also set out whether the loss is covered by an investor compensation or guarantee scheme and whether there are any limitations of conditions to that cover.

What are the costs? - this section describes the costs associated with an investment in the PRIIP. The draft Delegated Regulation sets out the methodology for calculating the costs, including the figures that must be calculated and the format to be used: costs must be expressed in both percentage and monetary terms.

How long should I hold it and can I take my money out early? - this section indicates whether there is a cooling off or cancellation period for the PRIIP. It should also indicate the recommended and, where applicable, required minimum holding period. It should set out the ability to make and the conditions for disinvestments before maturity including all applicable fees and penalties as well as information about the potential consequences of cashing in before the end of the term or recommended holding period.

How can I complain? - this section contains information about how and to whom a retail investor can make a complaint about a product or the PRIIP manufacturer’s conduct or that of a person advising on, or selling, the product.

Other relevant information - this section gives a brief indication of any additional information documents to be provided to the retail investor at the pre-contractual and/or the post-contractual stage, excluding any marketing material.

How is the KID distributed?

A person advising on, or selling a PRIIP must provide the KID to a retail investor. In addition, the PRIIP manufacturer must maintain a copy of the KID on its website. Marketing communications must also indicate that a KID is available and supply information on how and from where it can be obtained.

When must a person advising/selling a PRIIP provide the KID to a retail investor?

Generally, the retail investor must be provided with the KID in good time before being bound by any contract or offer relating the PRIIP. According to the draft Delegated Regulation for the purpose of determining the time needed by each retail investor to consider the KID, the person advising on or selling the PRIIP should take into account:

• the retail investor’s knowledge and experience with the PRIIP or with PRIIPs of a similar nature or with risks similar to those arising from the PRIIP;
• the PRIIP’s complexity; and
• where the advice or sale is at the retail investor’s initiative, the urgency explicitly expressed by the retail investor of concluding the proposed contract or offer.

Where the transaction is by means of distance communication the KID may be provided immediately after the transaction is concluded. This is subject to a number of conditions being met, including that it must not be possible to provide the KID in advance and the retail investor consents to receiving the KID after the transaction’s conclusion.

In what form must a KID be provided to a retail investor?

The KID must be provided in paper form in the case of face to face contact between the person advising on, or selling the PRIIP and the retail investor, unless the investor requests another form. Otherwise, the KID may be given in a durable medium other than paper, once certain conditions are met, including that the retail investor has been given the choice between information on paper and in the durable medium and has chosen the latter in a way that can be evidenced. The KID can be provided through the use of a website once various conditions are met.

How often must a KID be reviewed and updated?

The PRIIP manufacturer must review the KID regularly and revise it where the review indicates that changes need to be made. According to the draft Delegated Regulation, the KID should be reviewed both on a periodic and on an ad hoc basis. The periodic review should take place at least every 12 months and the KID should also be reviewed whenever there is a change that significantly affects the information contained in it.

Where a review indicates that changes need to be made to the KID, the PRIIP manufacturer must make these changes without delay and publish the revised KID on its website.

Do UCITS and Alternative Investment Funds (AIFs) fall within the scope of the PRIIPs Regulation?

Both UCITS and AIFs offered to retail investors (including some Qualified Investor AIFs) are within scope. AIFs must comply with the PRIIPs Regulation from 31 December 2016. However the PRIIPs Regulation exempts UCITS from the obligation to prepare a KID until 31 December 2019.

The European Commission must review the PRIIPs Regulation by 31 December 2018. As part of that review, it must consider whether the exemption for UCITS should be prolonged or whether the requirement to produce a Key Investor Information Document under the UCITS Directive 2009/65 should be replaced by or considered equivalent to the KID under the PRIIPs Regulation.

What happens next?

PRIIPs manufacturers will need to meet significant operational challenges over the coming months to ensure that they comply with the PRIIPs Regulation by 31 December 2016. This includes putting in place processes for identifying PRIIPs products, producing a KID for each product, and ensuring that the KID is reviewed both periodically and on an ad hoc basis. They must also post the KID on their website and put in place an effective complaints procedure.

While European financial associations and Insurance Europe have lobbied extensively to delay the implementation of PRIIPs, the European Commission has refused to postpone its implementation. However, in recognition of the challenges faced by some stakeholders, the ESAs are now focusing on developing Q&A to clarify how to apply certain technical provisions relating to the technical methodologies included in the draft Delegated Regulation. We expect these to be published shortly.