Implementing PRIIPs the uncertainty persists

Transcription

1 The PRIIPs KID Regime 1 Briefig ote July 2016 Implemetig PRIIPs the ucertaity persists It is ow less tha six moths util PRIIPs, the EU Regulatio o Packaged Retail ad Isurace-based Ivestmet Products (the Regulatio), comes ito force ad much remais to be doe i preparatio for its implemetatio. The Regulatio obliges maufacturers of a PRIIP, such as credit istitutios, ivestmet firms, fud maagers, isurace compaies ad exchages, to produce a clear, cocise documet the Key Iformatio Documet or KID where such products are made available to retail ivestors. The regime sets out rules for the cotet ad format of the KID, as well as for its review ad the timig for delivery. I additio, ay perso advisig o or sellig a PRIIP, which may be the PRIIP maufacturer itself for direct sales, or distributors ad itermediaries for idirect sales, also has to comply with the PRIIPs regime. Although the mai aim of the Regulatio is straightforward to make it easier for retail ivestors to compare products ad make a more iformed ivestmet decisio achievig this i practice is provig much more difficult. PRIIPs is a complex ad techical regulatio that presets a umber of practical ad quatitative challeges ad eve at this late stage there are a umber of questios that remai uaswered. The Europea Commissio (the Commissio) held a workshop for stakeholders o the implemetatio of the PRIIPs framework o 11 July 2016 (the workshop). It is hoped that the questios that were raised ad the issues that remai will be addressed i the comig weeks. Ucertaity o how best to tackle these issues has hidered implemetatio plas ad prompted calls from the idustry for the date of applicatio to be pushed back by oe year to December As yet these calls remai uheeded. However, i respose to idustry cocers about the very tight timeframe, the Europea Supervisory Authorities (the ESAs) have aouced that they ited to issue Level 3 guidace, i the form of Q&A, i the course of this summer, to aid implemetatio ad cosistet supervisio by the regulators of the regime. This meas that the Q&A will be published before the ed of the objectio period for the PRIIPs regulatory techical stadards (RTS), which were adopted by the Commissio o 30 Jue 2016, but this is cosidered ecessary because of timig cocers. There are a sigificat umber of outstadig issues o the Regulatio, as discussed i the workshop, icludig issues aroud scope, costs, risk disclosures ad performace scearios. I this briefig, we focus o the scope of the Regulatio ad outlie some of the key issues which have created ucertaity for firms strivig to implemet the Regulatio by the December 2016 deadlie. For more iformatio o the Regulatio see our cliet briefig The PRIIPs KID Regime. Product scope Oe of the biggest hurdles for the market has bee determiig which products are PRIIPs, which meas decidig whether a particular product comes withi the broad defiitio of packaged retail ivestmet products or isurace based ivestmet products, as set out i the Regulatio. The Commissio ad the ESAs have cofirmed that they will ot publish a list of i/out of scope products as part of the Level 3 guidelies ad have deferred this to the atioal competet authorities. This is uderstadable to a certai extet,

2 2 Implemetig PRIIPs the ucertaity persists give the uiverse of products ad their varyig features that might fall ito scope ow or i the future as ew retail ivestmet products emerge over time across the differet markets. As establishig whether or ot certai products fall withi the scope of the Regulatio is ot straightforward, there has bee a cocerted effort, lead by idustry associatios, for clarificatio from the ESAs o precisely which products are i/out of scope. I respose to these requests, some clarificatio has bee forthcomig, otably i relatio to derivatives trasactios. All derivatives i scope For some moths, there was cosiderable debate as to whether all derivatives, icludig those used for hedgig purposes are withi scope. The RTS seemed to poit to this which caused some surprise amogst stakeholders ot least because oe of the key elemets of the PRIIP defiitio is that the product is a ivestmet. Sice the purpose of hedgig derivatives is to reduce risk rather tha to offer a ivestmet opportuity, o the face of the Regulatio it seemed that hedgig derivatives were out of scope. This seemed to be supported by the fact that the use of a KID for derivative hedgig products is likely to be uiformative, precisely because they are purchased as risk maagemet tools ad ot as ivestmets. The issue was raised with the Commissio who cofirmed that, as there is o purpose test i the Regulatio, all derivatives are i scope, so it is irrelevat whether a product is iteded for ivestmet, risk maagemet or hedgig purposes. However, despite this cofirmatio, questios remai, most otably i relatio to FX Forwards i deliverable currecies, as well as derivatives with similar characteristics with o fluctuatio. The idustry awaits further clarificatio o these issues. What is a PRIIP? What is a PRIIP? OTC derivatives There are a umber of practical cosequeces of all derivatives beig i scope as, if a product is a PRIIP which is made available to retail ivestors, a KID must be produced. Oe of the most fudametal questios is how to produce a KID for hedgig derivatives sice, typically, ot all of the iformatio that must be show i the KID is available at the poit of sale, which is whe the KID is to be made available to the ivestor. For example, the hedge i respect of a particular product might oly be put i place at a relatively late stage, oce the maufacturer kows how much of a product has bee sold. At the lauch date, whe the product is sold ad a KID is required, the maufacturer will ot kow the cost of the hedge, so it is ot clear how these costs ca be icorporated ito the KID costs disclosure. Although at first glace this may seem academic o the basis that it is ulikely that hedgig products will be sold to retail ivestors, for these purposes retail ivestors are defied by referece to MiFID2 ad iclude small corporates, public sector bodies, local public authorities ad muicipalities. The fact, of course, that commercial compaies ad local authorities extesively use hedgig derivatives exacerbates the issue. Packaged retail ivestmet products a ivestmet, icludig istrumets issued by special purpose vehicles or securitisatio special purpose etities, where, regardless of the legal form of the ivestmet, the amout repayable to the retail ivestor is subject to fluctuatios because of exposure to referece values or to the performace of oe or more assets which are ot directly purchased by the retail ivestor Isurace-based ivestmet product a isurace product which offers a maturity or surreder value ad where that maturity or surreder value is wholly or partially exposed, directly or idirectly, to market fluctuatios A practical solutio to the timig problem put forward by the idustry is to use a geeric KID for certai OTC derivatives (e.g. for FX optios). There is a precedet for treatig certai derivatives as a special case as the RTS provide a derogatio from the stadard KID requiremets for exchage traded derivatives. It was suggested durig the workshop that stadardised KIDs will be permissible, although it is ot clear what level of stadardisatio will be accepted. It seems that trade specific details will ot be required ad idicative pricig ca be used, however it is ot clear how either the existig requiremets or the proposed stadardised requiremets would be applied i practice, particularly give the overarchig requiremet that the KID is comprehesible, accurate ad ot misleadig, a challege that is further compouded by the madatory 3 page legth of the KID. Key questios Which products are i scope? For PRIIPs that are sold cross border, who is the relevat competet authority sice there is o host member state cocept? For KIDs for certai OTC derivatives what iformatio should be provided ad how should it be preseted? Who is the maufacturer? Clifford Chace, July 2016

3 Implemetig PRIIPs the ucertaity persists 3 Clearly, further guidace o how a KID should be produced for derivatives products is eeded. The Commissio has assured the market that it will co-operate closely with the ESAs to esure that guidace is provided as soo as possible. This is expected i the summer of 2016 ad is expected to relate to the techical methodologies icluded i the PRIIPs RTS o risk, rewards ad cost disclosure requiremets. Exchage-traded derivatives The RTS recogise certai exchage traded derivatives as a special case, by permittig geeric presetatio requiremets for these products, give their fast chagig risk ad performace characteristics. For example, performace scearios at recommeded holdig periods are show i the form of pay-off structure graphs; for all other PRIIPs, detailed calculatios ad simulatios are required. Revisio ad re-publicatio is required at least every 12 moths where there is a chage that sigificatly affects, or is likely to sigificatly affect, the iformatio i the KID. The corollary of this is that, for exchage-traded derivatives, KIDs would have to be updated o a cotiuous real-time basis. Therefore, for a exchage-traded derivative such as a stadardised future, call or put, the RTS cofirm that it is ot ecessary to cotiuously update the KID, as the iformatio required for these istrumets o their risks, rewards ad costs does ot fluctuate. That said, cosiderable challeges remai, particularly for market operators, sice uder the regime the exchage is the maufacturer (or co-maufacturer). It is ulikely that exchages, i their role as product maufacturers, will be willig (or have the capability) to prepare KIDs, ad there is therefore a risk that exchage-traded derivatives could become iaccessible to retail ivestors. Multiple optio products (MOPs) MOPs are also give special treatmet i the RTS because a KID caot be provided i the same format for PRIIPs that offer may uderlyig ivestmet optios, as each uderlyig ivestmet optio will have a specific risk, performace ad cost profile. Cosequetly, the ecessary iformatio caot be provided i a sigle, cocise ad stad-aloe documet. Therefore for MOPs, maufacturers may choose oe of two differet approaches: a separate KID is produced for each optio, cotaiig geeral iformatio about the PRIIP ad specific iformatio about the optio a sigle, geeric KID is produced, providig iformatio o the PRIIP ad specific iformatio is provided i a supplemetal documet explaiig details of the optios (icludig iformatio o their descriptio, risks ad rewards, ad their specific costs). It should be oted that the iformatio provided uder this secod approach must comply with the requiremets set out i Article 8(3) of the Regulatio, which specifies the cotets of the KID. However, the RTS clarify that there is o requiremet to reflect every possible combiatio of the uderlyig ivestmet optios so for example, of the particular combiatio of fuds chose to ivest i uder a life isurace policy. Such details of specific combiatios of uderlyig ivestmet optios is ot required because the KID is iteded to assist the retail ivestor i cosiderig ad comparig optios before they have made a ivestmet decisio ad ot i illustratig the ivestmet decisio they have already made. Plai vailla bods Market cosesus ad recet commetary from the Commissio ad the ESAs suggests that fixed ad floatig rate otes Cofirmatio from the Commissio that oly PRIIPs sold to EU retail ivestors are i scope is welcomed. are out of scope. However, the positio i respect of otes with features such as puts/calls, caps, collars ad certai coversio features remais uclear. Territorial scope Uder the Level 1 text, the territorial impact of the Regulatio is uclear. It has subsequetly bee cofirmed that the requiremets apply wheever a PRIIP is sold by a etity to a EU retail ivestor (retail ivestors are defied by referece to MiFID2); a KID is ot required where the retail ivestors are situated outside of the EU. It was reiterated durig the workshop that the domicile of the retail ivestor is ot a determiig factor ad the trigger is whether the retail ivestor is i the EU. It should be oted that, although the Regulatio is a adopted EU legal act marked as EEA relevat by the EU, it is curretly uder scrutiy for icorporatio ito the EEA agreemet by Icelad, Lichtestei ad Norway. This relates to the ogoig issue i respect of the icorporatio of the regulatios establishig the three ESAs which have ot yet bee adopted by the EEA Joit Committee. Cosequetly, it is ot yet certai whe the Regulatio will apply to the EEA. Gradfatherig ad secodary market tradig Gradfatherig of existig trades There are o gradfatherig provisios i the Regulatio, ad the Commissio has cofirmed that this meas that PRIIPs offered to retail ivestors as at the date of applicatio of the Regulatio require a KID, regardless of whether they are ew or existig products. Clifford Chace, July 2016

4 4 Implemetig PRIIPs the ucertaity persists This has caused cocer i the idustry due to the sigificat costs ivolved for maufacturers i complyig with the Regulatio i relatio to pre-existig products, particularly because the costs would ot have bee take ito accout whe pricig the product. I additio to cocers about costs, implemetatio plas will be sigificatly impacted. More time will be eeded to implemet the Regulatio, as further chages to iteral systems ad procedures will be required. The Commissio has idicated that it is aware of the challeges ad complexity surroudig existig products ad will provide additioal clarity. However, aside from idicatig that a practical approach will be adopted, o further guidace has bee forthcomig, so this remais a area of ucertaity. Secodary market tradig There is ucertaity aroud whether the Regulatio applies to secodary market tradig. It is clear that maufacturers must produce a KID for a PRIIP that is made available to retail ivestors, but it is uclear what this meas i practice: should a PRIIP traded o a secodary market automatically be regarded as beig made available to retail ivestors ad therefore trigger the requiremet to provide a KID? May i the idustry argue that the Regulatio should ot automatically apply to secodary market tradig, ad should istead be triggered oly where a PRIIP is actually bought or sold o a secodary market, o the basis of firm two-way pricig from the maufacturer (actig as a market maker) o a exchage. Despite calls for clarificatio, cocers aroud secodary market tradig remai ad could pose sigificat cosequeces for market liquidity: a origiator of a PRIIP may stop makig a two-way market for existig products ad limit activity to bid-oly trasactios, so that maufacturers are effectively buyig back PRIIPs, i order to avoid the burde of producig a KID. Light at the ed of the PRIIPs tuel? Followig the workshop, although the positio is reserved, some clarity was forthcomig: For listed products with a bid oly price, o KID is required. There is o obligatio to provide a KID if a PRIIP is offered to professioal ivestors. There is o obligatio to provide a KID i the case of discretioary madates, therefore for PRIIPs bought ad sold by portfolio maagers, icludig i the ame ad for the accout of a retail cliet, o KID is required. I respect of territoriality, KIDs offered to retail ivestors outside of the EU are ot i scope. Discretioary ivestmet maagers The applicatio of the Regulatio to the situatio where there is a discretioary ivestmet maager has caused some cofusio. Sice a KID is iteded to iform a decisio to purchase a ivestmet, it clearly performs o useful fuctio ad should ot be required where the ivestmet decisio is take by a professioal ivestmet maager actig with discretio. Durig the workshop it was cofirmed that a KID is ot required whe a professioal ivestor has a discretioary madate ad acts i the ame of ad for the accout of a retail ivestor. It is ot etirely clear what the positio is where a ivestor is actig o the basis of ivestmet advice received from a professioal ivestmet adviser. I this situatio it is arguable that the KID should still be provided to the ivestor, sice it is he or she who ultimately makes the decisio. It seems likely that this is the situatio which Article 13(2) of the Regulatio is iteded to address. This article provides a alterative route to the ormal KID distributio requiremet, so that the requiremet to provide the retail ivestor with a KID may be satisfied by providig the KID to a perso with writte authority to make ivestmet decisios o behalf of the retail ivestor i respect of trasactios cocluded uder that authority. O the face of it this Article is a osese, sice it provides a mechaism for delivery of a KID i circumstaces where a KID is ot required. However, it is possible to evisage circumstaces i which it might apply for example where a maufacturer deals with a ivestor through a itermediary, but the specific sale cocered is ot executed withi the itermediary s discretioary madate. As a result the maufacturer, although dealig with the itermediary, is subject to a obligatio to deliver a KID to a ivestor. I this case, the effect of Art 13(2) is that the maufacturer ca discharge ay such obligatio by deliverig the KID to the itermediary. This could be useful where the itermediary is ot prepared to idetify the specific ivestors for whom he is actig to the maufacturer, but is prepared to demostrate that he is actig o their writte authority. Iterestigly, followig the workshop, certai Europea associatios have writte to the Commissio, the Europea Parliamet ad the Coucil otig that the proposal to address some of these outstadig issues i Level 3 measures such as Q&A will ot provide the ecessary certaity ad the relevat issues should be addressed i the RTS. To the extet that the cosequece of the cofirmatio i respect of discretioary Clifford Chace, July 2016

5 Implemetig PRIIPs the ucertaity persists 5 madates is that the requiremets i Article 13(2) do ot apply, this should be formerly clarified by way of amedmet to the Level 1 Regulatio. Implemetatio challeges The RTS are likely to be published i the Official Joural i the fourth quarter of This will give product maufacturers ad distributors aroud 3 moths to meet the 31 December 2016 implemetatio date. Give the sigificat umber of outstadig issues that eed to be resolved prior to implemetatio it is hoped the Level 3 guidace will be published promptly ad will provide sufficietly clarity o the issues that have bee raised by stakeholders. Despite these challeges ad the hurdles that remai, the market has bee workig hard to prepare for implemetatio of the Regulatio, largely due to the scale of systems ad techological chages ecessary to implemet the regime, such as the developmet ad testig of automatio tools for product maufacturers. Possible delay i implemetatio? Cocers about meetig the December 2016 deadlie have led idustry represetatives to seek a delay i implemetatio. They have poited to the oe year delay i the implemetatio of MiFID2 ad have argued that the factors listed by the Commissio i explaiig the eed for that delay complexity ad the eed to avoid legal ucertaity ad market disruptio are the same reasos that justify a delay i the implemetatio date for the PRIIPs regime. However as yet there is o idicatio that the Europea authorities are willig to delay the implemetatio of PRIIPs, so the idustry must assume that the Regulatio will apply from 31 December Next steps i the Europea process Level 2 measures O 30 Jue 2016, the Commissio adopted RTS specifyig the exact cotets of the KID, icludig the risks, rewards ad costs of the product. The ext step is for the RTS to be approved by the Europea Parliamet ad PRIIPs Timelie Sprig 2015 ESAs Discussio paper for RTS Article 8 (Cotet, presetatio ad calculatio of iformatio i KID) 14 July 2016 The Commissio adopts delegated acts uder Articles 16(8) ad 17(7) (Product itervetio) 18 July 2016 FCA cosults o chages to the Hadbook Cosultatio closes 19 September December 2016 Regulatio begis to apply Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 H1 H2 H1 H2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 H1 H2 H1 H2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 29 December 2014 Regulatio came ito force Summer 2015 ESAs discussio paper for RTS Articles 10 (KID revisio ad review) ad 13 (Provisio of KID timig/delivery) November 2015 ESAs cosultatio paper o draft RTS uder Articles 8(5), 10(2) ad 13(5) 30 Jue 2016 Fial RTS uder Articles 8(5), 10(2) ad 13(5) adopted by the Commissio Summer 2016 ESAs expected to publish Q&A to supplemet the RTS o the KID 31 December 2018 Deadlie for the Commissio to review the Regulatio 29 December 2019 Ed of trasitioal period for UCITS Regulatio i force Regulatio implemeted Level 2 measures/further work by Commissio Cosultatios ad Discussio Papers Clifford Chace, July 2016

6 6 Implemetig PRIIPs the ucertaity persists the Coucil of the EU. They usually have a two moth period i which to object to the RTS, which they may exted for a further moth, ad there is a possibility that this may happe, as o 11 July 2016 COREPER was ivited to ask the Coucil to exted the objectio period util 30 September 2016, although this extesio has ot yet bee cofirmed. Oce approved, the RTS will eter ito force o the twetieth day after publicatio i the Official Joural ad will apply from 31 December Additioally, the Commissio adopted the Delegated Regulatio regardig product itervetio o 14 July 2016, which is ow beig cosidered by the Parliamet ad the Coucil. If either of them objects, it will eter ito force 20 days after it is published i the Official Joural ad will also apply from 31 December Level 3 guidace The Commissio ad the ESAs are focused o developig guidace to aid implemetatio ad supervisio by the atioal competet authorities. It is likely that the Europea Commissio will publish at the ed of this moth guidace o the key questios such as scope, territoriality ad the meaig of made available. The ESAs are i the process of fialisig Q&As that will address i the mai, the techical requiremets i the RTS o risks, rewards ad costs disclosures however it is uclear whe these will published sice the RTS are still uder scrutiy by the Europea Parliamet ad the Coucil. Give the request that the objectio period be exteded to the ed of September 2016, the ESAs may eed to cosider alteratives for sigallig their resposes. UK implemetatio The Fiacial Coduct Authority (FCA) issued a cosultatio paper o 18 July 2016 o amedmets to disclosure requiremets i the FCA Hadbook to reflect the itroductio of the Regulatio. Although UK legislatio is ot required to traspose directly effective provisios i a EU Regulatio, the UK must still make sure that the domestic law is compatible with EU Regulatios ad, if ecessary, amed existig law. The FCA will therefore eed to review the provisios of the FCA Hadbook to esure compliace with the Regulatio ad to esure that the UK does ot have ay domestic rules that overlap or coflict with the Regulatio. The disclosure requiremets i the Coduct of Busiess chapter of the FCA Hadbook will therefore eed to be re-evaluated. Where certai disclosure requiremets are required by other Europea directives these will remai, however it is likely that the key facts documet requiremets will be cut back to apply to those sellig products which are ot caught by the Regulatio. The cosultatio period eds o 19 September Clifford Chace, July 2016

7 Implemetig PRIIPs the ucertaity persists 7 Cotacts Adrew Coats Parter Lodo T: E: adrew.coats@ Simo Gleeso Parter Lodo T: E: simo.gleeso@ Moica Sah Parter Lodo T: E: moica.sah@ Gregor Evekamp Parter Frakfurt T: E: gregor.evekamp@ Owe Lysak Seior Associate Lodo T: E: owe.lysak@ Giselle Latief Associate Lodo T: E: giselle.latief@ Louia Czupper Parter Brussels T: E: louia.czupper@ Sophie Delwaide Lawyer Brussels T: E: sophie.delwaide@ Jurge va der Meer Parter Amsterdam T: E: jurge.vadermeer@ Esther Griffioe Seior Associate Amsterdam T: E: esther.griffioe@ Lucio Boavitacola Parter Mila T: E: lucio.boavitacola@ Riccardo Coassi Seior Lawyer Mila T: E: riccardo.coassi@ Clifford Chace, July 2016

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