Regulation on Key Information Documents for packaged retail and insurance-based investment products (PRIIPs)

Regulation on Key Information Documents for packaged retail and insurance-based investment products (PRIIPs)

The PRIIPs EU Regulation introduces a standardised, easy to understand, precontractual “Key Information Document (KID)” for PRIIPs, which should facilitate comparison between different products.

The Regulation applies since 1 January 2018. The original application date was delayed by one year. BIPAR actively supported this delay when it became clear that the level 2 Regulatory Technical Standards (RTS) further specifying the content, presentation, review and delivery of the KID would not be ready in time. The Regulation is binding in its entirety and is directly applicable in all Member States.

Key issues for intermediaries/financial advisers

BIPAR agreed, from the outset, that for all products which include an investment risk, specific, proportional and relevant pre-contractual information should be available. BIPAR requested clear confirmation about who is responsible for the KID. Throughout the legislative process BIPAR opposed any additions to the KID regarding information on the person selling the product, which is already adequately addressed in specific instruments such as MiFID and IMD/IDD. Since the application, BIPAR discussed with its members the availability and use of KIDs in practice, for example, on risk rating and the risk scales used or on the costs/pricing scenario for the basis of the KID.

Subject matter and scope

The Regulation applies to packaged retail and insurance-based investment products, which are, broadly speaking, products where the amount repayable, or the maturity or surrender value is subject to fluctuations. It does not apply to non-life insurance or to life insurance contracts where the benefits under the contract are payable only on death or incapacity due to injury, sickness or infirmity. It does not apply to “simple” deposits, certain securities and pensions (for pensions, the Commission should assess the situation by December 2018).

The Regulation only aims at the protection of retail investors (i.e. “client” as defined in MiFID II or “customer” as defined in IMD I where that customer would not qualify as a professional client as defined in MiFID II).

Responsibilities of the manufacturer/person selling

The manufacturer is defined as "any entity that manufactures PRIIPs and any entity that makes changes to an existing PRIIP, including, but not limited to, altering its risk and reward profile or the costs associated with an investment in a PRIIP".

The person selling a PRIIP is defined as "a person offering or concluding a PRIIP contract with a retail investor".

The product manufacturer - before making a PRIIP available to retail investors - draws up the KID and publishes it on his website. The person advising or selling has to provide the KID to the investor for free and in good time before the latter is bound by any contract or offer.

The Regulation also contains a reference to persons advising or selling, along with the manufacturers, regarding the establishment of appropriate procedures and arrangements that ensure that retail investors have an effective way of submitting a complaint against the manufacturer, that they receive a substantive reply in a timely and proper manner and that procedures are also available in case of cross-border disputes.

Form and content of the Key Information Document

The KID is a maximum of 3 pages, is clear and understandable/readable and is intended to provide information on the nature, risks, costs, potential gains and losses of the product and help comparison with other products.

It contains information on:

  • the manufacturer and supervisor,
  • the date,
  • if needed, a comprehension alert warning to the investor that the product is not simple,
  • the nature and main features of the product (type; objectives and means for achieving them; description of the type of retail investor to whom the PRIIP is intended to be marketed; details of insurance benefits- if any; terms of the PRIIP),
  • the risk-reward profile,
  • the consequences of default of the manufacturer,
  • the costs (summary indicators and total aggregate costs) - reference is made to distribution costs to be provided by the advisors, distributors or any other person advising on or selling the PRIIP.

Levels 2 and 3 measures

  • A delegated Regulation (based on RTS prepared by the three ESAs) which provides more detail on the content and presentation of the KID, including the calculation of costs; the review/revision of the KID; and the provision of the KID.
  • A delegated Regulation on product intervention which contains criteria and factors to be taken into account by National Competent Authorities and EIOPA in determining when there is a significant investor protection concern or a threat to the orderly functioning and integrity of financial markets or to the stability of the whole or part of the financial system of at least one Member State or respectively of the Union.
  • There is an empowerment for a Delegated Act on the details of procedures to establish if a PRIIP targets specific environmental or social objectives (“EOS PRIIPs”) but the Commission has not yet published its Delegated Act. The ESAs did publish their final technical advice to the Commission in July 2017. BIPAR had stated in its response to the ESAs’ consultation that regarding product oversight and governance rules, this is the manufacturers’ liability and referred to MiFID II and IDD rules in this respect. BIPAR added that “EOS POG rules” should, besides the EOS’ specificity, not be different from the POG rules for other PRIIPs.

In their final technical advice, the ESAs state that: “at this time the establishment of specific and detailed standalone obligations for PRIIPs targeting specific environmental or social objectives would not be proportionate. Existing sectoral measures offer already, or are already in the process of putting in place, a sufficiently stringent and flexible basis for the sound regulation of PRIIPs targeting environmental and social objectives.”

The ESAs also recommend that:

  • The PRIIP manufacturer targeting environmental or social objectives has to clearly specify these objectives, together with an appropriate and proportionate strategy on how to achieve them.
  • The PRIIP manufacturer should disclose the objectives to retail investors and how they will be achieved.
  • The PRIIP manufacturer has to install and well document governance and monitoring measures, where the latter need to be proportionate to the objectives and strategy of how to achieve the objectives.
  • The PRIIP manufacturer should conduct regular reviews on the progress made in achieving the specified and disclosed objectives.

Level 3 measures

In July 2017, interpretative Guidelines on the KID for PRIIPs from the European Commission were published in the Official Journal of the EU. The Guidelines are not legally binding as such and are based on stakeholder feedback received, amongst others, at the Commission’s workshop on the implementation of PRIIPs (July 2016 - which BIPAR attended and where BIPAR tabled questions). Their aim is to facilitate the implementation of -and compliance with- the PRIIPs Regulation. They cover issues such as application of PRIIPs rules by Multi-Option Products’ (MOPs) manufacturers, KIDs for IBIPs, PRIIPs only sold by intermediaries; etc.

In July, August and November 2017, the ESAs published “Questions and Answers” on the KID for PRIIPs. Q&As are also not legally binding, nor are they subject to a "comply or explain" procedure. They aim at “promoting common supervisory approaches and practices in the implementation of the KID”. They cover issues such as costs added by brokers, the meaning of biometric risk premium/insurance premium, the role of advisers and intermediaries in case MOPs, etc.

Next steps

The Commission is due to review the Regulation by 31 December 2018. This review consists of various surveys.It also has to conduct a market survey on national online fund calculators by 31 December 2018.

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