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Key information documents for packaged retail investment products (PRIPs) - 12/11/2013


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According to the Economic and Monetary Affairs Committee, small investors should get a Key Information Document (KID) giving clear, comparable and complete information on any investment product before signing a binding contract, said Economic and Monetary Affairs Committee MEPs voting on a draft law on 21 October 2013 on Key Information Documents, which shall be introduced in light of the upcoming Packaged Retail Investment Products (“PRIPs”) Regulation.

Parliament will put the rules to a plenary vote panned on 21 November 2013, before fine-tuning them with EU Member States.

The Targeted Products

The investment products which should be accompanied by a KID when sold to retail investors. These products include:

  • Products with capital guarantees, and those where, in addition to capital, a proportion of the return is also guaranteed;
  • Investment funds, whether closed-ended or open-ended (including UCITS);
  • All structured products, whatever their form (e.g. packaged as insurance policies, Funds, securities or banking products);
  • Insurance products whose surrender values are determined indirectly by returns on the insurance companies’ own investments or even the profitability of the insurance company itself as well as derivative instruments. Some of these products may be used as individual retail pension products, i.e. accumulation vehicles for the purposes of retirement planning.

According to the first reading of the committee of the European Parliament, the rapporteur agreed by way of compromise to exclude from the rules deposits, securities and insurance products which do not offer a surrender value.

The following amendments have been proposed by the European Parliament’s Committee on Economic and Monetary Affairs to the legislative proposal (Art 8a and Recital 28) in its draft report dated 15 February 2013 and 20/02/2013:

Warning Label for Complex Products

Investment products exposed to one or more of the risks described below shall disclose at the top of the first page of the Key Information Document in clearly visible print the following statement: "The competent authority considers this product to be too complex to be sold to non-professional investors, and has therefore not assessed its information document for that purpose."

The following investment products are considered not aimed at retail investors if one or more of the following conditions are met:

  1. The risk-reward profile or the costs are presented in an overly complicated manner;
  2. The product invests in underlying assets not commonly invested in by nonprofessional investors;
  3. The risk-reward profile is conditional upon the simultaneous occurrence of two or more events linked to at least two different asset classes;
  4. A number of different mechanisms are used to calculate the final return on the investment, creating a greater risk of misunderstanding on the part of the investor;
  5. The investment return includes packaging features which take advantage of investors´ behavioural biases, such as by offering a "teaser" fixed rate followed by a much higher floating conditional rate, or an iterative formula;
  6. The global exposure of the financial product, measured by its monthly value at- risk calculated within a 99% confidence interval at the time of trade, is above 20%.

Guidelines on the conditions referred above will be developed by the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA).

Transitional Period

UCITS Funds may continue to use and update the Key Investor Information Document (KIID) required by Directive 2009/65/EC for a transitional period of up to 5 years after the entry into force of this Regulation.

The same exemption should also apply to non-UCITS funds when these are already required under national laws to establish a Key Investor Information Document according to Directive 2009/65/EC.

We trust this information is of assistance and remain at your disposal for any further questions.

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Contacts

Name:
Michael John Flynn
Company:
Deloitte Luxembourg
Job Title:
Directeur - Regulatory Consulting
Phone:
+352 451 452 060
Email
mjflynn@deloitte.lu

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