30 January 2020

PRIIPs: a long and winding road

It’s been a long, difficult journey for the Packaged Retail Investment and Insurance Product (PRIIPS) regulation, and whilst there is a considerable lengthy distance left to travel before stakeholders can be confident of any long-term arrival destination, its alignment to many other key EU legislation emphasises its key importance to the entire European financial industry.

By Mark Kilbride

The original PRIIPS legislation (“level 1”) entered into force in December 2014 (i.e. 6 months after the closely aligned MiFID amended Directive). Back then, the European Commission (EC) estimated the total volume of retail investment products to be worth EUR 10 trillion.

Essentially covering all investment products marketed to retail investors (by asset managers, banks and insurance firms) it was initially intended to apply from January 2017. However, with 2 months left, it was deferred for one year by the EC after the European Parliament rejected the regulatory technical standards (“level 2”) in relation to the Key Information Document (KID), supplied by the troika of joint EU Supervisory Authorities (ESAs): ESMA, EBA and EIOPA.

Although similar to the earlier 2-page Key Investment Information Document (KIID) obligatory for all UCITS fund investors since 2011, the 3-page PRIIPS KID contains significant, additional disclosure of Risk, Performance and Costs & Charges information.

The KID was intended as a long-term replacement for its UCITS predecessor and associated management firms were given an initial 2-year grandfathering period (until Jan 2020) to prepare for the crossover. It remains a pre-contractual obligation to issue a PRIIPS KID wherever Alternative Investment Fund (AIFs) are sold to retail investors.

Current State of Affairs

The PRIIPS regime was eventually activated alongside MiFID II in January 2018.  From the very start, the PRIIPS KID was not favourably compared to the UCITS KIID (readily-accepted within the industry).  Crucial areas of difficultly remain the presentation of future performance scenarios, disclosure of costs & charges and multi-option products (MOPs).

As a result of these difficulties, the recent Cross-Border legislation package (CBD) published in July 2019 extended the UCITS exemption period until January 2022. In the meantime, the ESAs documented their proposals to address the KID issues raised by stakeholders and supervisors, publishing these in a consultation paper on 16 October 2019. They also held an interim Public Hearing in November 2019 to explain their draft proposals and elaborate specific changes to the PRIIPS KID.

PRIIPS KID Consultation: What’s it all about

The 123-page ESA Consultation Paper (CP) examines previously identified PRIIPS KID problems and proposes rectifications within the remainder of the UCITS exemption period. Suggested measures include:

Future Performance

  1. Revised probabilistic scenario methodology
  2. Compensatory mechanism (to address potential faults)
  3. Alternative illustrative approaches: Structured and Insurance-based Products

NB: Associated Consumer Testing of re-presented KID performance information is also outlined by the ESAs.

    Costs & Charges

    1. Modified slippage approach (including “negative” implicit Transaction cost results) – to placate “Strong concerns raised by Industry
    2. Introduce Proportionality thresholds (for funds with low portfolio turnover)
    3. Outline of alternative Reference Price methodology (“Principles based”)

NB:  There are four different PRIIPS KID Cost Presentation options presented for feedback.

    Multi-Option Products:

    1. Provide a “complete” product perspective for more commonly selected options
    2. Include additional MOP-specific narratives (to retail investors)
    3. Extended Costs Over Timetable (incl. additional rows linked to risk classes)

In the attempt to ease the interim transition of UCITS funds, the ESAs proposed to include past Performance information in the PRIIPS KID.

The CP also canvasses opinion on the future use of PRIIPS KID within the context of digital innovation, along with whether any of the cited ESA proposals should be enacted before 31 Dec 2021.

NB: the original level 1 regulation obliged the EC to conduct a review of the entire PRIIPs legislation enacted. Already postponed and yet to be formally re-scheduled, several industry representatives have expressed their opinion that a legal review is a prerequisite before the ESAs attempt redress of the level 2 specifications of the Key Investor Document itself.

What’s NOT included

There are many factors linked to the EU PRIIPS regime not specifically mentioned in the Consultation Paper that may impact the PRIIPS KID in due course.

ESMA recently completed another consultation covering UCITS Performance fees (feedback currently awaited to avert continuing regulatory arbitrage). ESMA and EC will also issue proposals for MiFID II and PRIIPS costs and charges alignment expected before 03 March 2020. Meanwhile, another postponed EC level 1 review of the Alternative Investment Fund Managers Directive (AIFMD)  remains incomplete.

The CP does not address successive Regulatory Filing obligations. These are presently compulsory for all UCITS KIIDs (both home and host National Competent Authorities [NCAs]), while discretionary for some PRIIPS KIDs (i.e. deemed necessary by selective NCAs in EU member states).

There is also no specific mention of practical considerations during the UCITS changeover period (e.g. highly likely processing logistical issues) in the run-up to 31 December 2021.

Ultimately, there remains no formal indication as to what will happen to the UCITS KIID in two years’ time (after the end of the exemption period) i.e. facing all investors (including non-Retail).

Anything else?

Possibly. The Sustainable Finance Action Plan (SFAP) will be covered in another article.  While there are few direct PRIIPS KID citations within the current SFAP legal components, they will certainly impact established UCITS, AIFMD and MiFID II legislation within the broad timeframe (up until Jan 2022).

Given the nebulous nature and sensitivity of the subject matter (along with growing media scrutiny and widespread demands for climate-change action), it would appear logical to anticipate interim changes of scope in relation to pre-Contractual Disclosure of sustainable financial products sold to retail investors. Otherwise, it does seem rather naïve to assume there will be absolutely no additional ESG impact to the PRIIPS KID (e.g. Eco-Labelling) for the duration.

Finally, with long-term UK-EU trade agreement negotiations due to commence in February 2020, the post-Brexit alignment of UK and EU firms and funds remains a critical, reciprocal PRIIPS KID factor for current UCITS and AIF entities (starting 01 Jan 2021).

What Next?

The consultation closed on 13 Jan 2020. The EU Funds Industry (including Kneip-affiliated associations: EFAMA, ALFI and Investment Association) all deployed considerable, collective effort in order to constructively address the entire Consultation Paper within the time made available.

The ESAs previously stated intention was to conclude their PRIIPS KID review alongside publication of Consumer Testing results, currently expected before end-March 2020. They would then submit their finalised PRIIPS KID proposals to the European Commission, ahead of scrutiny by the European Parliament and Council, later in the year.

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