On 31 December 2016, the Packaged Retail and Insurance-Based Investment Products (PRIIPs) regulation comes into force, a key piece of the EU’s post-crisis investor-protection regulation. To make it easy to evaluate and compare investment products sold in the EU, PRIIPs contains a requirement that all EU retail investment products come with a Key Information Document, or KID.
The PRIIPs KID will create 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’s 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.
Though PRIIPs comes into force at the end of the year, the rules have yet to be finalized. In November of 2015, the EU supervisory authorities for banking, insurance, and securities markets released their KID proposal, outlining the information KIDs should contain, how the information should be presented, and other rules and methodologies governing its distribution.
The proposed rules included 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, the PRIIPs KID is far more prescriptive in its approach to template and disclosures, and the cost discourses go far beyond what is currently done under the UCITS KIID.
What the PRIIPs KID Means for Asset Managers
Despite the fact that the PRIIPs KID will not immediately impact UCITS asset managers, they cannot afford to ignore the rulemaking process for it.
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. Once the PRIIPs rules are set, they are unlikely to be modified when UCITS asset managers need to adopt them in 2019. If managers do not engage in the process now, they could face an unwelcome surprise when they have to modify their UCITS KIIDs.
Another key issue for asset managers is the scope of PRIIPs, which includes non-UCITS funds that are sold to retail investors. For example, UK Investment Trusts or Non-UCITS Retail Schemes will require a PRIIPs KID. This will present operational challenges for asset managers. For managers without UCITS, this will mean investing in the capability to produce —and reproduce annually—the PRIIPs KID, either by developing in-house capabilities or by engaging a provider. For UCITS managers, it will mean producing both the UCITS KID and the PRIIPs KID for the next three years, which will add to overhead and costs.
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.
This article was originally published in the 2016 Regulatory Field Guide. The guide features insights from a number of our experts on key regulatory developments that will have the greatest impact for asset managers in the year ahead – and beyond. Visit bbh.com/regulatoryfieldguide to explore the guide.