Press article: KIID – and it is only the beginning...
One might be forgiven for thinking that with UCITS IV now (more or less) firmly in force – some countries are still struggling to implement the Directive into national law – that all the noise about the KIID is in the past and it is time to sit back and evaluate the impact it is having.
One might be forgiven, but one would be wrong.
It is certainly time to evaluate, but as for anything being over, or any suggestion that it is time to sit back, nothing could be further from the truth.
It is worth remembering exactly what the KIID sets out to do. It seeks to quantify all UCITS in such a way that their investment policies and objectives, their degree of risk, and the charges that an investor pays when investing in them are readily accessible to the ubiquitous ‘man in the street’ in a document that is concise, in general just two pages, clear – expressed in ‘plain’ language, and readily comparable – with only limited scope for promoters to customise their ‘KIIDs’.
When introduced in the UCITS IV Directive, it was widely heralded as a positive development; it implicitly recognised the failure of the previous ‘Short Form Prospectus’ to achieve the same goals, it established a ‘level playing field’ for comparison, and it took steps to protect promoters and distributors alike from charges of miss-selling that became a very real concern in the wake of the financial crisis of 2008 and the subsequent Madoff affair.
It was anticipated that there would be challenges ahead for such an ambitious project, for ambitious it indeed is. One only has to reflect on the diversity and variety of different UCITS, - everything ranging from plain vanilla quasi tracker funds to complex structured investment vehicles or pseudo hedge funds involving the use of multiple layers of derivative products -, to begin to understand how difficult it may be to accurately describe the intricacies of such products in quite such a restrictive format. Add to that the sheer scope of the undertaking, a KIID for every share class in every UCITS in every language in which it is distributed, and you have the dimensions of the undertaking.
Deloitte conducted a survey over the first part of the year to assess the state of preparedness and the way the market was tackling the KIID. It yielded very interesting results. The lack of consideration given to the legal liability of the KIID was surprising; the anticipated costs were certainly not significant. But one stood out in particular; the varying views as to who should be in the lead in the co-ordination of the KIID.
It was foreseeable that this question of co-ordination could become key. The technology to assemble the KIID exists, there are numerous options available and it is fair to say that the market is reasonably well equipped on that front. The component data should, by this stage be well understood (although this, as became apparent, is not without its fair share of surprises as well.) What was clearly lacking was any clear vision as to how the different departments involved in the process, Legal, Risk, Compliance, Portfolio Management, Marketing, Operations, Vendor Management, etc. were to be brought together on a timely basis to identify and manage effectively a trigger event.
Interestingly, among those institutions that have already gone into production with some of their KIIDs, this effect has contributed in no small manner to slippage, with first launch dates pushed back in some cases.
The message is clear for those yet to embark on the implementation phase of their projects, you may not have as much time as you think. July 2012 is a hard date, and whereas slippage is unfortunate for the early movers, for those counting on using the full extent of the grand-fathering provisions, slippage could prove a much more serious matter.
It was thought, when the results of the survey were analysed, that the surprises in store for the market had been identified. But the survey focused mostly on process and preparedness. When attention was turned to content, the dimension of the challenge became even more apparent.
After the survey a battery of tests was developed to assess a KIID on qualitative as well as quantitative grounds. Of the external KIID’s reviewed to date, not one has passed the full battery of tests, even on the fixed and mandatory categories, and this without moving to areas such as interpretation of plain language and other more judgemental considerations.
This somewhat staggering conclusion was born out by other comments and statements that began to appear in the specialised press. As the first KIIDs came into circulation there was dismay in a number of quarters at the lack of attention paid to the intent of the Directive, - clarity and simplicity, with in some cases a simple copy of text from the prospectus being used as the effort of ‘plain language’ required by law.
So where does the KIID stand today? The challenge ahead is as great, if not greater than the challenge that has already been met. There is a much clearer view now of the capacities of the various service and technology propositions. There is concrete proof of the difficulties that are inevitably going to arise in co-ordinating all stakeholders. It can be seen how the already significant budgeted costs are likely to be understated by the true cost of the KIID when internal costs are fully assessed. And the close interaction between cross-border registration and the KIID is clear to see.
As the market moves to meet full implementation, the next major ‘wave’ of activity will most probably come in January next year where there is something of a bottle-neck already forming around the Anglo-Saxon intention to introduce the KIID in line with the annual mandatory production deadline, a live test ‘grandeur nature’ of what the market will face each year and every year, but with the added uncertainties of initial implementation. This will be closely followed by the scramble to meet the ‘drop dead’ date of July 2012 for those who today still feel that they have adequate time under the grand-fathering provisions.
As complexity hits home, especially around that all important area of co-ordination, it is likely that there will be a further shift in the most prevalent business models, as today’s in-house production is re-evaluated, and as the true benefits of working with external specialists become apparent in the wake of rising costs. And over time the KIID will most probably move towards the specialist model already in place for Cross Border Fund Registration, where external providers with the right balance of expertise, market profile, credibility, intellectual capital and experience can provide a cost effective solution difficult to replicate internally.
For whatever the complexities and the challenges, the KIID is here to stay.
The importance of the KIID has been underlined by Steven Maijoor of ESMA on many occasions: ”The KIID will represent a major improvement in the quality of information provided to potential investors (…)” and “(…)for the disclosure part, the KIID for UCITS has been identified by the European Commission as the appropriate benchmark”.
Already one can see certain countries adopting the KIID for all investment funds on a domestic basis, one can see non EU jurisdictions such as Switzerland embracing the KIID forward for their own markets. And on the horizon there is the potential PRIPs (Packaged Retail Investment Products) Directive that envisages a KIID for all non-UCITS even putatively extending into the realm of certain insurance products.
Transparency and investor information is no longer a ‘nice to have’; it is an essential. Meeting these challenges every day in increasingly complex markets, in an environment when the threat of investor litigation has become a very real possibility, requires a whole new skill set of professional analysis, understanding and expertise.
The challenge is only just beginning.