The big idea behind PRIIPS regulation is to make it easier for retail investors to compare products to each other. It is hoped that this will increase customer value, promote investor protection by enhancing transparency and force firms to consider how their products will compare versus the competition when distilled down to a uniform product description. Whilst there had been a stop start element to the legislation regarding its implementation date, and ongoing clarity from the Commission regarding the Level 2 & level 3 Regulatory Technical Specifications, the recent clarification from the Central Bank that the disclosure required under the Life Regulations should be retained and that both pre contractual disclosure regimes (i.e, both generic and personalised ) will co-exist for an interim period, pending the review by the EU Commission of the PRIIPS Regulation , which is due to take place before the end of 2018 has focussed the minds as we enter the final 3 months before go live.
The regulation requires a “PRIIP manufacturer” to prepare and produce a Key Information Document (“KID”) in accordance with a prescribed format and content. Furthermore the person advising on or selling the KID must provide it to retail investors prior to that potential investor taking out a product with that advisor.
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 fluctuations because of exposure to reference values or to the performance of one or more assets that are not directly purchased by the retail investor.
Products covered include structured instruments, Non-UCITS unitised funds, Hedge Funds, Unit-Linked insurance policies and participating insurance such as With Profit Business. Products Not Covered are Occupational Pensions, Non Life Insurance, Term Insurance, UCITS and Direct Investments / Bank Deposits.
Key Information Document (KID) & who is responsible for drawing it up?
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 responsibility for producing the KID & keeping it up to date lies with the PRIIP Manufacturer. The KID constitutes pre-contractual information and must be consistent with any binding contractual documents. The KID must be clearly separate from marketing information and available on the manufacturer’s website.
A recent direction from the Central Bank expects that regulated entities, when providing both disclosure documents, clearly explain to retail investors the personalised nature of the Life Regulations disclosure document and the generic nature of the Key Information Document required by the PRIIPs regulations.
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 the KID that subsequently found to be misleading, inconsistent or not in line with the prescribed format.
Who is a retail investor & when must an advisor provide the KID to a retail investor?
A retail investor is a retail client who is not a professional client under MIFID or 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.
Generally, the KID must be provided to retail investors by the PRIIPs distributor “in good time” before there is a binding agreement in respect of the product. In the case of distant sales, where the investor has contacted the distributor on their own initiative, the KID may be provided after concluding the product sale but “without undue delay”, subject to the distributor providing specific information regarding the KID.
KIDs can be provided to investors on paper or, where the context of the transaction supports it, some other durable medium or via a website. The regulation is clear that, when selling PRIIPs face-to-face, paper should be the default option.
There is a specific format for a KID laid out on the regulations. In general it must be clear accurate & not misleading. There are a number of specific headings that the KID must follow:
- General Information
- What is the Product
- What are the Risks & what could I get in return ( Summary Risk Indicator )
- Details of Performance Scenarios setting out potential returns
- What happens if X Unable to pay out
- What are the costs
- How long should I hold it , Early maturity Possible
- How can I complain
Impact for Financial Brokers?
Whilst we await final technical clarifications in relation to 3 from the Commission the Impact for Financial Brokers is clear, this is additional paper work and regulation that one must adhere to and explain to potential customers as part of their sales process. The more optimistic view is that these changes could assist Financial Brokers in explaining to potential customers the key features, risks and comparisons of products in a common format whilst enhancing investor protection through transparency. But for now the jury is still very much out on the matter!.
Shane Quinn M.Sc, MA, B.Sc.Mgmt, CFP, QFA, SIA
Commercial Product Director
An earlier version of this article appeared in Irish Broker.