A review of the Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products which will be implemented within the EU financial services industry on 1 January 2018.
For many entities operating within the EU financial services industry, the European Commission’s announcement to delay the application of the Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products (“PRIIPs”) until 1 January 2018 was met with relief. The implementation of PRIIPs was postponed following the European Parliament’s rejection of the Regulatory Technical Standards (“RTS”). The RTS will provide uniform pre-contractual disclosure rules for products falling within the scope of PRIIPs, to ensure retail investors receive clear, comparable and non-misleading information on the relevant products.
Scope
A PRIIP is defined as investment product where the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the retail investor; or an insurance product which offers a maturity or surrender value and where that maturity or surrender value is wholly or partially exposed, directly or indirectly, to market fluctuations. The wide scope of PRIIPs means that all manufacturers and financial intermediaries that distribute PRIIPs to retail investors fall within its scope. However, certain products, including non-life insurance products and pension products, are specifically excluded from its application and UCITs are not obliged to comply with PRIIPs until 1 January 2020.
Disclosure Requirements
PRIIPs introduces the obligation to provide a Key Information Document (“KID”), which is a pre-contractual key fact sheet that will inform retail investors of the main features and risks of a product in a clear and accessible manner. The form and content of the KID will be standardised by the RTS in order to facilitate the comparison of similar products and co-ordinate disclosure requirements across the European insurance market. The KID will provide the following information;
- information on the product manufacturer;
- the nature and features of the product;
- whether it is possible to lose capital;
- the costs and risk profile of the product;
- relevant performance information;
- a comprehension alert, highlighting to the retail investor that the product may be difficult to understand;
- how complaints can be made; and
- certain other specific information which may be necessary for understanding the features of individual types of product.
Impact
The product manufacturer is responsible for producing the KID, while the responsibility of providing the retail investor with the KID lies with the advisor or seller of the product. Manufacturers will be held liable where a retail investor suffers a loss as a result of the KID being misleading or inaccurate, inconsistent with binding contractual documentation, or where the KID does not comply with the prescribed form and content requirements. PRIIPs introduces a substantial burden on manufacturers as individual KIDs will have to be produced for each product and are required to be kept up-to-date.
Conclusion
The delayed application of PRIIPs aligns its implementation with MiFID II, which will apply from 3 January 2018. Given that many of the requirements introduced under PRIIPs will overlap with those under MiFID II, clients are advised to adopt a consistent approach in ensuring compliance with both sets of regulations.