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New PRIIPs Q&A covers KID updates and investor protection guidelines

2 April 2024

Regulatory News Alert

At a glance

The European Supervisory Authorities (ESAs) have provided clarifications on a few topics, including:

  • The scope of application on “open for subscription” products
  • Specific requirements for disinvestment procedures and uniliteral termination rights to include in the Key Information Document (KID)
  • Differentiation between “proxy” and “benchmark” definitions and their usage
  • Clarification on the type of currency risk to mention in the KID
  • Exemption of intermediate holding periods for products lacking exit options before the recommended holding period ends

However, the most impactful element of this new Q&A concerns aligning the applicable timeline for updating the annual past performance annex with the UCITS Key Investor Information Document (KIID) rule and confirming the absence of a prescribed timetable for updating PRIIPs KID. 

A closer look

General topics – Definition of the term “open for subscriptions”

Following the introduction of new PRIIPs RTS for investment funds in January 2023, open-ended investment funds “open to subscription,” which classify as PRIIPs category 2, are obliged to publish data on previous performance calculations on a website. ESAs have now defined “open to subscription” to include:

  • Products available for subscription by existing or new customers
  • Products accessible to retail investors on a secondary market
  • Products in their marketing phase, such as closed-ended Alternative Investment Fund (AIF)
  • All products in which new or existing investors can invest additional amounts

It does not include products where only existing retail investors can continue to make previously agreed regular payments (such as savings plans).

Information to include under the “What’s the product” section

The ESAs set down detailed rules to distinguish between a benchmark and a proxy. While a benchmark is typically an index and must be explicitly named in the KID if the management of PRIIP includes reference to a benchmark in accordance with Article 2(2a)(d) of the PRIIPs Delegated Regulation, “proxy” is a more general term that is used in different contexts to capture cases where a substitute, such as a comparable product is used to meet the regulatory requirements for risk and performance calculation.

Moreover, in respect to potential duplicate information, it was noted that while the “what’s the product” section should contain information on the existence of disinvestment procedures, the “how long I should hold it and can I take my out early” section should be used for additional explanation, such as in case of notice periods, redemption gates, or other liquidity management tools.

When the PRIIPs manufacturer is eligible to unilaterally terminate the contract, it must be clearly stated in the KID for both circumstances: when the product itself is terminated, and when circumstances related to the investor occur, such as a failure to comply with agreed conditions.

Market risk calculation – Appropriateness and usage of the benchmark

Category 2 products with daily net asset value (NAV) theoretically require market risk measure (MRM) calculations over a minimum of 2 years of daily prices. However, the ESAs confirmed that the time series used for calculation is expected to cover up to 5 years.

Regarding benchmarks, it has been clarified that they should be derived from actual market data that is available, and the use of synthetic or artificial proxies is not consistent with the PRIIPs Delegated Regulation.

Timeline on past performance annex update applicable for UCITS for AIF

The timeline for updating past performance annexes for UCITS products should not exceed 35 business days after 31 December, extending the requirement from EU Regulation 583/2010.

For other PRIIPs, such as certain type of alternative investment funds (AIF), these products are expected to publish past performance data for each completed calendar year as soon as the data is available. Consequently, past performance data is still expected within the first 35 business of a year.

Since past performance information is not included in the KID itself, there may be differences between the timeline of the annual KID review and the annual past performance annex update.

Additionally, further confirmation was provided on the following points:

  • The currency risk highlighted in the risk section should warn the investor about potential currency risks between the currency of the product and the one of the Member State.
  • Intermediate holding periods must not be displayed for products lacking an exit option before the end of the recommended holding period. This applies to both performance scenarios and cost over time and reduction in yield tables.
  • The cost over time amount after one year must be consistent with the decomposition presented in the cost table.

How Deloitte can help

You would like to receive support in analyzing the potential impacts of the new ESAs guidance on your current PRIIP KIDs? Don’t hesitate to reach out to us. 

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