Current Regulatory Status

Transcription

1 PRIIPs regulation overview June 2016

2 PRIIPs is an acronym for Packaged Retail Investment and Insurance Products. It represents a cross sector regulatory initiative, affecting asset managers, insurance companies and banks, aimed at creating a new standard common disclosure document for retail investors; the Key Information Document or KID. The premise of the regulation, besides supporting the European single market, is to enhance comparability between UCITs funds and PRIIPs to create an overall comprehensibility of these financial products for retail investors - as highlighted in the explanatory works to the proposal of the European Commission - through a standard pre-contractual disclosure that is the same across the various sectors and product types. The PRIIPs regime was created through a regulatory regime, which dates from already 2014, as well as regulatory technical standards. Current Regulatory Status As it stands today, the final draft of proposal for the regulatory technical standards, containing detailed rules on the actual structure and content of the KID document, has been released by the Joint Committee of the European Supervisory Authorities this year in April. This will be subject to adoption and finalisation by the European Commission, which is expected this summer, with Level 3 and possibly a Q&A document to follow thereafter. The regulatory standards, prepared by the Joint Committee of the European Supervisory Authorities, concentrate on three main areas under the PRIIPs regulation. These are: a) the presentation and contents of the KID, including methodologies for calculation and presentation of risks, rewards and costs; b) review and republication of the KID; and c) fulfilment of the conditions for the delivery in good time of the KID Feedback from industry participants on this draft has been varied, with some fund associations voicing various concerns as we will see further down in this article. 1

3 What is a PRIIP and who is affected by the initiative? The definition of a PRIIP encompasses two sets of different products: a) the Packaged Retail Investment Product, which is any product, irrespective of the legal form, where the repayment can fluctuate due to its linkage to reference values or the performance of underlying assets, not directly purchased by the retail investor; as well as b) insurance-based investment products. The production of KIDs are the responsibility of both manufacturers and distributors It is noteworthy that the regulation only applies in conjunction with products sold to retail investors; hence products offered only to institutional investors are not covered by the regulation. The regulation and the production of the PRIIPS KID are the responsibility of the manufacturers, who either create the PRIIP or make any changes to a PRIIP that may alter the risk and reward profile, as well as the costs of the investment, as well as the distributors. As we have seen very frequently in the recent years with new regulations within financial services, existing concepts, already in place and applied for years to certain products, are adapted constantly to new scenarios, so as to capitalize and leverage on the proven success in pursuing the aims of the European Union. This is not only for the sake of regulatory convergence, but also to facilitate an improvement of existing approaches and create synergies which is the case with the PRIIPS KID as it shares major similarities with the UCITS KIID. 2

4 Impact on the UCITS KIID The inevitable correlation between the PRIIPs KID and the UCITS KIID there might be situations where a UCITS could be required to have a allows the PRIIPs regulation to PRIIPS KID before the grandfathering incorporate, from the outset, a few of the issues that were successfully is over. In fact, if we consider the case where UCITs are sold via unit dealt with already linked insurances, with the UCITS KIID. As such, there are provisions related to periodical update of the PRIIPS KID, translation as well as notification UCITS have been exempted from being required to produce the PRIIPs KID until December 2019 for instance, there will be an obligation to produce a KID for PRIIPS also for the underlying investment, the UCITS fund in this requirements for host state case. So there will be cases where regulators, unless these are eased as part of the pursuit of a Capital Markets Union. Whilst the PRIIPs KID is to be UCITs funds must produce both a KIID and a KID. Some local jurisdictions, such as Denmark, have granted UCITs funds considered as a pre-contractual offered via unit linked solutions an document, the regulation does exemption from producing a KID. however introduce a concept of In the UK, instead, good time where the retail investor no real exemption must receive the document in is being granted, advance. This is a rather vague especially to nonindication, as it was also dealt with in UCITS retail scheme the regulatory technical standards, NURS which as and will most probably receive at today will have to produce a PRIIPs further specification by the ESMA in KID by the December 2016 deadline, the Level 3 regulation and Q&A. unless this is either pushed back or As many of you know already, UCITS also fall under the definition of PRIIPs, but have been grandfathered from being required to produce the the FCA decides to extend to all NURS the requirements of the NURS key investor information, which is similar to the UCITS KIID, thus PRIIPs KID until December enabling them to avail of the However, whilst there is currently no option for UCITs opting into the KID grandfathering period provided for UCITS KIIDs. for PRIIPS regime prior to this date, 3

5 Will the implementation be pushed back? Whilst PRIIPs regulation was initially conceived to enter into force by the end of 2016, rumours have it now that a delay of one year might very likely be in the cards, similarly to what happened with MiFID II directive. Given that the two initiatives are deeply intertwined in some respects and that product manufacturers as well as distributors, who are the ones in charge of producing the KID, are faced with one more operational and compliance dilemma, we believe it might be appropriate approach the one to align the timeline of both initiatives. EFAMA, the European Fund and Asset Management Association, has already, on different occasions now, expressed its scepticism about the process of implementation of the PRIIPs regulation being currently followed and its foreseeable results in the short term. In a first statement, dating back to February this year, EFAMA advocated in support of a delay of the implementation of the PRIIPs directive, and to push back the December 2016 deadline, so as to allow for sufficient time to implement the regulation. Also, in a later statement released immediately after the final draft of the regulatory technical standards, EFAMA has again manifested perplexity on the success of the initiative on some respects. A delay of one year might very likely be in the cards EFAMA advocates in support of a delay of the implementation of the directive EFAMA is using a comparative approach with the UCITS KIID regulation and consequently is focussing on a few of the lessons that can be learnt from there. More specifically, EFAMA believes, for instance, that the methodology proposed to present costs, will fail in allowing investors to effectively compare different investments in the manner it is proposed to be implemented. In fact, EFAMA maintains that currently costs in the PRIIPs KID are shown only in their compound effect of each cost component and subsequently not as summary indicator. This approach will not allow investors to compare the real costs of the investment at each stage, where they enter, hold and/or exit. 4

6 An entry charge cost, for instance, of 3% will be indicated as 0.62% over the recommended 5 year holding period, thus frustrating the main aim of the regulation to enhance comparability amongst PRIIPs, UCITS included (where the cost figure is not adjusted per the recommended holding period). All stakeholders involved or influenced by the new regulatory regime are preparing based on the information that is available and time will tell if new developments or modifications occur. This update is a joint message by Veneziano & Partners Ltd and FundConnect A/S. The Authors FundConnect A/S is a European data infrastructure working within the areas of automated document production and distribution, web solutions and customized data and document collection for financial institutions. Anthony Miranti am@fundconnect.com Veneziano & Partners Ltd is an international consulting boutique specialised in European regulatory affairs for the asset management and hedge fund business and provides a number of services within this area, including assisting in the evaluation of which products are in scope for PRIIPS, content and translation management, and notification/distribution services. Attilio Veneziano attilio@venezianoandpartners.co.uk 5