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When should we update new PRIIPs KID?

Navigating through uncharted territory with cost monitoring

PRIIPs KIDs went live for European investment funds distributed to retail investors on January 1 2023, at the end of the Undertakings for Collective Investment in Transferable Securities (UCITS) exemption.

The end of the exemption was aligned with the entry into force of new Regulatory Technical Standards (RTS) to lay out new requirements on the document, narratives and underlying analytics calculation.

As we observed for many regulations before PRIIPs, the new requirements are not 100% prescriptive and allow for market interpretation. This is particularly the case for two topics: the calculation of cost over time tables and determining when to update the PRIIPs KIDs.

The European Fund and Asset Management Association (EFAMA) is currently in discussion with the European Supervisory Authorities (ESAs) to obtain clarification on the costs over time table. However, there is currently little market guidance on when to update the PRIIPs KID.

PRIIPs regulation is clear on rules to update the PRIIPs KID due to changes in narratives, static data information, quantitative thresholds for the Market Risk Measure (MRM), Summary Risk Indicator (SRI) and performance scenarios which are required to be reviewed at least on a monthly basis. However, the regulation lacks detail on criteria for updating the PRIIPs KID in case of changes in the Costs, requiring manufacturers to interpret what qualifies as a “change that significantly affects or is likely to significantly affect the [cost] information contained in the KID”.

The UCITS Directive mentions a clear threshold for updating UCITS KIID based on changes in ongoing costs exceeding 5% in relative terms. In contrast, PRIIPs regulation does not provide explicit guidance on the same item and introduces two new cost figures, namely portfolio transaction cost and incidental costs, such as performance fees and carried interest.

… But what does “significant” mean in terms of cost?

Any change in one-off cost, such as entry or exit fee, and controllable ongoing costs, such as management fee adjustments, which are under the fund manager’s control, requires an update of the KID. For other ongoing costs, transaction costs, and Incidental costs, determining the “significant” threshold is the PRIIPs manufacturer’s responsibility. Balancing the risk of understating the costs for retail investors against misalignment with the prospectus, operational risk, and additional workload/cost for multiple KID updates within the year is crucial. But the impact extends beyond the KID. The new Regulatory Technical Standards (RTS) require the European PRIIPs Template (EPT) and Comfort European PRIIPs Template (CEPT) to provide the calculated and raw data of the KID to the insurers. The templates now need to be aligned with the PRIIPs KID. Hence, a trigger of new KIDs creates a downstream update of EPT, CEPT and sometimes European MiFID II Template (EMT).

In its Q&A of 1 March 2023, the Association of the Luxembourg Fund Industry (ALFI) suggests to apply the same update practice as for UCITS ongoing costs, but on the three different cost components separately, namely a 5% relative check. Although this formula on ongoing costs does not trigger many KIDs, applying it to transaction cost which can be very volatile with the Arrival Price methodology might trigger a high number of KID updates during the year with limited added value for the retail investor. Indeed, implicit costs due to Arrival Price spreads are not 100% under the direct control of the management company, but are a combination between quality of execution, volatility, market impact and slippage.

Market insights to the rescue!

During the first months of PRIIPs implementation for UCITS funds, the primary challenge revolved around KID updates. That is why, we initiated a benchmarking study with our clients and other Asset Managers, to assess the preference of PRIIPs category 2 (UCITS and UCITS-like AIF funds) product manufacturers.

We observed respondents preferring either a conservative approach of updating as frequently as possible to avoid risk of misstatement, or a pragmatic approach of minimizing the additional regulatory burden.

Currently, we have observed five practices on threshold selection.

On each type of costs:

1. Any change of costs, i.e., no threshold, would trigger a new KID
2. Changes in relative terms only would trigger a new KID
3. Changes in absolute terms only would trigger a new KID
4. Combination of relative and absolute thresholds to trigger a new KID

On the costs in aggregate:

5. Combination of relative and absolute thresholds on the sum of ongoing costs and transaction costs to trigger a new KID

The results of our survey are:

  • Methodology 1: no threshold, is applied by some participants mainly on incidental costs (23% of respondents), a few on ongoing charges (8% of respondents) but not on transaction costs. This means only applying an annual update of the value with the KID, apart from material change of management fees.
  • Methodology 2: (relative terms only) is favored for ongoing charges (35% respondents) but less so for transaction costs (8% respondents).
  • Methodology 3: (absolute thresholds only) is used by 8% of the respondents for ongoing charges and more commonly for transaction costs for 23% of respondents.
  • Methodology 4: (combination of absolute and relative thresholds) is the most popular approach, limiting updates for small values, applied for changes in costs of less than 5 basis points of the absolute figure. It is applied by 71% of respondents for transaction costs and 50% of respondents for ongoing charges.
  • Methodology 5: (combined approach on the sum of ongoing charges and transaction costs) is used by only one respondent.

If we look at the preference per each type of trigger rule, we observe the following:

  • For other ongoing charges, 31% decided to continue applying the UCITS monitoring rules updating the KID in case of a 5% relative evolution while another 38% decided to add on top a 5 basis points absolute change update.
  • Only 8% decided to not apply ongoing charges updates during the year (excluding changes in the general cost structure which trigger a direct update of the KID) and decided to update the figures on an annual basis.
  • The remaining 23% apply other thresholds as detailed in the graph below.

With regards to transaction costs, we observed more practices. This is due to the new type of cost disclosed and the volatility of this figure. Still, there is a trend toward applying a combination of both relative and an absolute thresholds (71% of the market participants) with most preferring a 5% relative and 10 basis points absolute threshold. Only 8% decided to apply the ALFI suggestion of 5% relative threshold.

Incidental costs do not apply for every product or every Asset Manager. However, among those subject to such fees, 23% do not perform any monitoring beyond the annual KID update. This is linked to the frequency of performance fee payments.54% of respondent tended to apply a combination of relative and absolute treshhold with the preference towardto 5% and 5 basis points implemented by 38% of all respondents with performance fees. The ALFI suggestion of 5% relative is followed by 15% of the market.

What’s next

The year-end is approaching, signaling the annual update for most participants in the UCITS KIID and PRIIPs KID annual processes. We expect UCITS KIID to be updated first to meet the 35 business day requirement. CSSF mentioned a recommendation to align the PRIIPs KIDs submission with the same time but it is a good practice rather than a regulatory requirement. PRIIPs documents should be updated before the anniversary of their end of december 2022 KIDs.

After this process is complete, we will continue to monitor the evolving market practice and potential updates in industry guidance.

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