KIID implementation - How far is Luxembourg? | Press article
The inimitable Spencer famously described the Americans and the British as two peoples divided by a common language. It is tempting to wonder what he would have made of the KIID and its focus on “plain language”—indeed his definition of plain language would have been a treat to read.
That was one question that unfortunately we could not ask in our recent survey on the KIID. However, as the KIID became almost the first tangible result of UCITS IV to reach the market, along with the Simplified Notification Process, it was apparent there was a good number of questions to be asked in understanding both its internal dynamics and the state of preparedness of the market to meet this challenge.
And challenge it undoubtedly is, from every point of view: content, extent, intent. All promoters of UCITS (and some of non-UCITS caught up in the enthusiasm with which some regulators have seen in the KIID a standard they would like to see extended to all fund products including Alternatives) are faced with the challenge of providing, in a largely codified form with little scope for divergence except in how they describe their funds in each relevant section, a two-page summary that will allow investors to readily appreciate the risks of investing in a specific fund, facilitate comparison and enhance both investor protection and the overall transparency of the market.
When we consider that in Luxembourg alone there are over 3,500 regulated funds—many distributed in multiple jurisdictions—or that the KIID is produced at share class and distribution language level, we are already talking about something between at least 300,000—and perhaps as many as 500,000—KIIDs. When we further consider that many promoters with fund complexes domiciled in Luxembourg also have ranges in Dublin and “purely” on-shore ranges in the UK or France, for example, then the scope of the task facing the market becomes apparent.
Clearly there were many questions, so we went out and asked them.
We targeted a cross section of promoters active in cross-border registration on an anonymous basis in order to collect more sensitive data on costs, organization and similar subjects. We supplemented the initial findings with direct interviews with some of our leading clients for validation.
So what did we learn?
Amongst the many and sometimes counter-intuitive results you can find in detail by consulting the full survey, several points stood out.
A truly surprising 70% had not sought formal legal advice. For what is a legal document—one that is destined to the end investor and is expected to stand the test of expectation versus experience in even adverse market conditions—this was truly surprising, especially as one of the greatest grey areas surrounding the KIID is what constitutes compliance at the point of sale.
Less surprisingly, but as significant, is that there is very little clear vision as to how the coordination across promoters' organizations is going to work in practice. Producing a KIID—especially on an ongoing basis, including the all-important identification of a trigger event—is an operational process.
Yet the stakeholders stretch across all departments—legal, marketing, compliance, risk, service providers and so on. There is very little apparent transversal coordination on an operational, daily basis that can automatically provide the requisite level of interactivity.
And, of course, cost: a substantial proportion of respondents estimated their initial costs go beyond EUR 500,000 and their ongoing costs are between EUR 250,000 and EUR 500,000.
If one takes into consideration the tendency to underestimate (at best) internal cost, the KIID endeavor is going to result in a significant bill that someone will have to pay.
There are many various models already in the market, two-thirds of which are hybrid solutions, including both in-house and outsourced elements. Over time we would anticipate that this current prevalence will evolve as crossborder registration has, to a value-added service best left in the hands of the specialist.
The first KIIDs are in production, even if the majority are still works in progress. Some issues have been dealt with; others, and with them some major challenges, remain to be resolved. But the KIID is up and running.
To paraphrase Churchill, “This is not the end, this is not the beginning of the end, but it is perhaps the end of the beginning.”