We have identified five key changes in the PRIPs proposal:
The Regulation will apply to all ‘investment product manufacturers’ regardless of sector, for example, fund managers, insurance undertakings, issuers of securities, credit institutions or investment firms. A ‘manufacturer’ includes those who makes changes to an existing investment product by altering its risk and reward profile or associated costs.
The Regulation will also apply to anyone who sells an investment product to a retail investor. This will be the distributor or the ‘manufacturer’ in the case of a direct sale.
The Regulation covers ‘investment products’- the ‘P’ and ‘R’ have been dropped from ‘PRIPs’ but the Commission’s intention appears to remain the same.
Investment products are defined as where ‘the amount repayable to the investor is exposed to fluctuations in reference values or in the performance of one or more assets which are not directly purchased by the investor’. This still captures the concept that the investor, while exposed to asset fluctuations, does not have a direct holding and so a form of ‘packaging’ or ‘manufacturing’ exists.
The ‘retail’ element is still present as it is relevant at the point of sale. Products such as investment funds, retail structured products and investments packaged as insurance policies will be caught in the ‘investment product’ definition.
The proposal lists products which will be specifically excluded from scope, such as insurance products that do not offer investment opportunities, products exposed solely to interest rates, and direct investments, for example, in corporate shares or sovereign bonds.
Importantly, and in contrast to the Consultation, investment products ‘used as individual retail pension products, i.e. accumulation vehicles for the purposes of retirement planning’ are in scope. The term ‘pension products’ is defined.
Occupational pension schemes which fall under the scope of the Solvency II Directive or the Institutions for Occupational Retirement Provision (IORP) Directive and pension products ‘for which a financial contribution from the employer is required by national law and where the employee has no choice as to the pension product provider’ are specifically ruled out of scope.
Due to the particularly heterogeneous nature of the pensions landscape across Member States, the complexity of harmonising rules relating to pensions could also risk delays to the initiative as a whole. ‘PRIPs inspired’ rules for occupational pensions will be something to watch out for as the Commission reviews the IORP Directive.
The Commission intends to meet its aim of harmonised disclosure requirements across retail investment products through the introduction of KIDs when investment products are sold to retail clients.
KIDs will have a strongly standardised “look and feel” to facilitate easy comparison and comprehension by retail investors. They should be ‘accurate, fair, clear and not misleading’, short and concise and written in non-technical, jargon-free language. Lessons learned from UCITS KIID implementation suggest that this will be easier said than done.
The proposal sets out specific information to be included in the KID. While KIDs, as proposed, follow the ‘principles’ of the UCITS Key Investor Information Documents (KIID), which became mandatory for sales of all UCITS from 1 July this year, they differ in certain respects.
For example, they introduce additional sections such as an indication of whether loss of capital is possible and the recommended minimum holding period and expected liquidity profile of the product.
There are also additional disclosure requirements where specific environmental, social or governance outcomes are targeted by the manufacturer and for pension products regarding projections of possible future outcomes.
A ‘common symbol’ should be displayed on the KID to distinguish it from other documents. Further detail is expected at Level 2, particularly regarding the all important methodology underpinning the presentation of risk and reward and the calculation of costs.
It is not yet clear at this stage what would be required in the case of the insurance investment product, for example an investment bond in the UK, where a consumer may be offered a wide range of possible funds choices within a single product.
A balance will need to be struck between ensuring that the KID contains sufficient information so that it is useful to the consumer in the decision-making process, whilst not overburdening them with too much information.
PRIPs proposes to make the investment product manufacturer responsible for preparing and maintaining the KID. Similar to UCITS KIID requirements, the person selling the product to a retail investor is required to provide the KID, free of charge, in good time before the sale (with certain exceptions). The proposal also sets out the medium in which the KID should be disclosed.
In addition to the initial preparation of the KID, manufacturers will also need to review their KIDs regularly and ensure they are kept up to date. Further detail on the relevant conditions for maintaining the KID is to follow at Level 2, including the circumstances in which retail investors should be informed about a revised KID for an investment product they have purchased. Effective processes will be necessary to ensure that updating and distributing new KIDs does not become a ‘never-ending’ process.
The manufacturer will be held liable if the KID is misleading, inaccurate or incomplete, or it contains information that is inconsistent with other information documents required by law. Delegation to a third party will not change this overall responsibility and so this risk will need to be managed when considering outsourcing. The ‘burden of proof’ will fall on the manufacturer, rather than on the consumer, to prove that the KID was drawn up in compliance with the Regulation.
The KID is expected to be a stand-alone document, clearly separate from marketing materials. As the Commission intends it to serve a specific purpose different to other disclosure requirements, such as under Solvency II or the Prospectus Directive, it will exist in parallel to these Directives.
However, the Commission has indicated that it is open to addressing the case for removing duplication across disclosure requirements in future.
In the meantime, manufacturers will not be able to produce the KIDs in isolation but will need to review all disclosures for each investment product, whether marketing materials or those required by law, to ensure consistency.
While UCITS fall under the ‘investment product’ definition, the Commission proposes a five year transitional period before determining whether: they should be subject to the PRIPs Regulation (with the relevant KIID provisions repealed from the UCITS Directive); the relevant rules in the separate Directives should be maintained, but aligned; or the transitional period should be extended. This will follow a review of the effectiveness of the PRIPs Regulation which is set to take place four years after its implementation.
New to the initiative, competent authorities will be given product intervention powers when KIDs fail to comply with the Regulation, or are not provided at all. Sanctioning powers include: prohibiting or suspending marketing of retail investment products; requesting production of a new KID; and/or informing retail investors of their rights and where they can direct complaints or claims for redress.
There will be increased disclosure to the public where firms fail to comply. Firms will need to ensure they give the KID requirements appropriate attention to ensure compliance and to avoid the risk of delays to product marketing or being identified in public disclosures.
In terms of complaints, the Regulation sets out that investment product manufacturers must establish appropriate complaints procedures and, as also proposed in IMD II, Member States must establish procedures for the out-of-court settlement of disputes.