Packaged Retail and Insurance-Based Investment Products (PRIIPs) – regulation memo

The PRIIPs (Packaged Retail and Insurance-based Investment Products) regulation aims to improve retail investor protection.

The PRIIPs (Packaged Retail and Insurance-based Investment Products) regulation aims to improve retail investor protection. The scope of market players impacted as PRIIPs’ manufacturers is broad and includes asset managers, insurance companies, corporates, banks and futures exchanges.

About the PRIIPs regulation

The PRIIPs regulation aims to improve retail investor protection by:

  • Providing basic pre-contractual information via the introduction of the Key Information Document (KID)
  • Improving the quality and comparability of information on the key features of investment products (in particular on risk, performance and costs)

The PRIIPs regulation entered into force on 3 January 2018.

(Latest update – 23 February 2022)

The European Supervisory Authorities (ESAs) consulted on a call for evidence, which closed in December 2021, to obtain feedback on the following topics:

  • General survey on the use of the KID
  • General survey on the operation of the comprehension alert
  • Survey on the practical application of the rules
  • Use of digital media
  • Scope of the PRIIPs Regulation
  • Differentiation between different types of PRIIPs
  • Complexity and readability of the KID
  • Performance scenarios and past performance
  • PRIIPs offering a range of options for investment (Multi-Option Products (“MOPs”))
  • Alignment between the information on costs in the PRIIPs KID and other disclosures

To prepare the review of the PRIIPs regulation, the European Commission (EC) has asked the ESAs to deliver their advice by 30 April 2022.

The Regulatory Technical Standards (RTS) published in February 2017 define:

  • The uniform presentation of information in the KID to achieve comparability across different types of investment products;
  • A methodology to harmonise the calculation of the summary risk indicators, performance and costs.

(Latest update – 23 February 2022)

On 7 September 2021, the Commission adopted a Delegated Regulation amending the current PRIIPs RTS with respect to:

  • The underpinning methodology and presentation of performance scenarios
  • The presentation of costs and the methodology for the calculation of summary cost indicators
  • The presentation and content of information on past performance
  • The presentation of costs by PRIIPs offering a range of options for investment and alignment of the transitional arrangement for PRIIP manufacturers offering units of funds as underlying investment options with the UCITS exemption

The date of application of that Delegated Regulation is 1 July 2022. However, it is expected that the EC will publish RTS “quick fixes” by April 2022 with a view to delaying the entry into application of PRIIPs RTS until January 2023.

On 20 December 2021, the following amendments were published in the Official Journal:

  • To the PRIIPs Regulation to extend to 31 December 2022 the UCITS exemption from providing a key information document (KID) under the PRIIPs regulation.
  • To the UCITS Directive to avoid the duplication of pre-contractual disclosures to retail investors through the PRIIPs KID and UCITS Key Investor Information Document (KIID) from 1 January 2023

Scope

The PRIIPs regulation includes the following investment products:

  • Non-insurance based investment products (where the amounts repayable to the investor are subject to fluctuations because of exposure to reference values or to performance of assets which are not directly purchased by the investor), UCITS, retail AIFs, derivatives, structured securities (such as convertible bonds), pension products and annuities that are not recognised in national law as retirement products, and structured deposits;
  • Insurance-based investment products (where these allow for fluctuating pay-outs on maturity or early exit): with profit or life insurance contracts with variable bonuses, or which contain unit-linked and index-linked life elements;
  • Instruments issued by securitisation: Special Purpose Vehicles (SPVs).

PRIIPs manufacturers/issuers must draw up a KID for each product in scope. The KID is to be published on the company website prior to the product being made available to retail investors.

The KID is to be a clearly worded 3-page document, which provides investors with a simple overview of the most important details of the product they are buying, including a general description of the product, cost, risk profile and possible performance scenarios.

Any distributor or financial intermediary who sells or provides advice about PRIIPs to a retail investor or receives a buy order on a PRIIP from a retail investor must provide the investor with a KID.

Industry implications

At a minimum, the following aspects need to be addressed by PRIIPs’ manufacturers and distributors:

  • The distribution process and the respective liabilities of the manufacturer and adviser/seller
  • Marketing issues – in particular how to ensure the risk profile and the cost indicators are suitable for the target market
  • Defining the content, given the lack of space in the KID (three sides of A4-sized paper)
  • The production, dissemination and update of the KID
  • The transparency requirements that may overlap between PRIIPs and MiFID II

Apart from having to condense the main features of the product into a restricted space, the main challenge for manufacturers is to determine and to review on a regular basis:

  • The four future performance scenarios
  • The summary risk indicator
  • The costs indicator, which includes implicit transaction costs

The new RTS will affect the existing KID production system.

BNP Paribas Securities Services’ view

The range of products impacted by PRIIPs has represented a major challenge for the European Supervisory Authorities, particularly in ensuring a level playing field for the various types of products.

Indeed, the parameters, methodologies, calculations and presentation of risk indicators, performance data, and cost disclosure must not place products at an advantage or disadvantage.

 Key concerns persist on the potentially misleading character of:

  • Transactions costs that capture market movements
  • Future performance scenarios which are based on historical data 

Key dates

November 2014 – Publication of the Level 1 text in the Official Journal

January 2018 – Entry into application of PRIIPs

End of 2020 – Early 2021 – Expected publication of reviewed RTS

April 2022 – ESA’s advice on the review of the PRIIPS Regulation

July 2022 – Entry into application of the new RTS, but expected to be delayed until January 2023

January 2023 – Entry into application for UCITS and investment funds which already apply UCITS KIID rules