The Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation is a European regulation mandating that retail investors receive a disclosure document (known as Key Information Disclosure, KID) before investing in certain products.
The purpose of this KID is to create a short and standardized document that will allow the investor to understand and compare different products. This document will communicate information on the product’s key features, risk, rewards and the costs.1
It is one of many regulations coming from the EU Parliament and Council focused on increasing consumer protection and sits closely with the Markets in Financial Instruments Directive (MIFID) II elements.
This regulation is applicable from December 31, 2016 and, despite some firms’ hopes that it would be delayed (as MIFID II has been), this deadline looks firm. The Financial Conduct Authority (FCA) set out in January:
“It’s important that all firms who manufacture, sell or advise on PRIIPs understand what the changes mean for them before the implementation date of 31 December 2016.”2
What are PRIIP products?
Packaged Retail and Insurance-based Investment Products are investment products where the amount repayable to the retail investor is subject to fluctuations because of an exposure to reference value or performance of assets which are not directly purchased by the retail investor.3 For example, structured products such as deposits and securities or insurance investment products such as unit-linked or with-profits policies.
The FCA have set out non-definitive lists of these but there is a risk that different member states will have their own interpretation so firms should scope carefully to assess what products this applies to in relevant jurisdictions.
What is a Key Information Disclosure (KID)?
The KID is a prescribed template which must be completed in line with the guidance given.4 It must be accurate, fair, clear and not misleading and must contain all of the following (among other things):
- Nature and main features of the PRIIP;
- Risk and reward profile;
- Summary risk indicator and performance scenarios;
- Prescribed warnings;
- Whether investor is exposed to non-manufacturer entities;
- Relevant investor compensation/guarantee schemes;
- Costs associated with an investment in the PRIIP;
- How long an investor should hold the PRIIP and if they can take the money out early;
- How to complain.
Who needs to do what?
The focus is on the product manufacturers to prepare the KID and publish it on their website. The document template is prescribed however, in order to complete it they may need to reach out to their distributors to obtain key information such as product target market.
What activities should be considered in implementing PRIIPs?
|Firms are encouraged to undertake the following activities to implement this disclosure document|
Source: Accenture, June 2016
What are the challenges?
The implementation of this regulation present many challenges including:
- Identifying the applicable products is not straightforward;
- Developing clear explanations for all the required points that will fit within a very small space in the prescribed template.
- Calculating the actual costs to disclose will, in our view, require extensive analysis of costs which are not easily broken down and allocable per product;
- Gathering the data to complete the document that is likely available across fragmented systems and potentially third-party systems;
- Assessing how to monitor the “trigger events” requiring an update and developing a working process for updates in “good time” as required in the regulation.
What else do firms need to think about?
PRIIPs and MIFID II put an increasing focus on transparency, with disclosures of fees, risks and performance clearly set out for retail customers holding investment products. This means customers (and the regulator) will be clearly able to see whether the products they hold are giving them a good outcome.
The recent insurance thematic review from the FCA has shown existing customers are often not getting value and/or being well treated.5 Regulations such as PRIIPs and MIFID II have enhanced disclosure requirements that will mean consumers (and the regulator) will be better able to tell how products have performed. The business plan reiterates the regulator will be watching how firms respond.6
As firms produce KIDs they will uncover instances where products have not delivered as hoped or anticipated. Firms should take this opportunity to consider whether products should be amended, remediation activity undertaken and/or changes recommended to customers.
For support in planning for and delivering compliance with PRIIPs, please contact Accenture.
- “PRIIPs disclosure: Key Information Documents,” Financial Conduct Authority, March 12, 2015. Access at: https://www.the-fca.org.uk/firms/priips-disclosure-key-information-documents
- “Regulation round-up,” Financial Conduct Authority, January 2016 issue. Access at: https://www.fca.org.uk/your-fca/documents/regulation-round-up/rru-january-2016.
- “Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs),” European Parliament. Access at: http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014R1286
- Thematic Review TR16/2 Fair treatment of long-standing customers in the life insurance sector” Financial Conduct Authority, March 2016 issue. Access at: https://www.fca.org.uk/static/documents/thematic-reviews/tr16-02.pdf
- “TR16/2: Fair treatment of long-standing customers in the life insurance sector,” Financial Conduct Authority, March 3, 2016. Access at: https://www.fca.org.uk/news/tr16-02-fair-treatment-of-long-standing-customers-in-the-life-insurance-sector
- “Business Plan 2016/17,” Financial Conduct Authority. Access at: https://www.fca.org.uk/static/documents/corporate/business-plan-2016-17.pdf
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