The “Regulation on key information documents for packaged retail and insurance-based investment products” (PRIIPs) introduces a standardised, easy to understand “Key Information Document (KID)” for PRIIPs, which should facilitate comparison between different products. It will apply as of 31 December 2016 but stakeholders, including BIPAR, are calling for a delay of the application.
The legal instrument of the Regulation was chosen to ensure a true harmonisation of the new rules in the EU. Contrary to a Directive that leaves the national authorities the choice of form and methods of implementation, a Regulation is binding in its entirety and directly applicable in all Member States.
Key issues for intermediaries/financial advisers
BIPAR agreed, from the outset, that for all products which include an investment risk, specific, proportional and relevant pre-contractual information should be available. It, therefore, supported the rationale behind the European Commission’s proposal, i.e. to have a key information document for the consumer, which is produced by one party (if not, there would be legal uncertainty) - the product manufacturer (who is best placed for this) - which deals with the investment product and which can be handed over to the client by the intermediary/person selling. BIPAR requested clear confirmation about who is responsible for the KID and throughout the legislative process BIPAR opposed any additions to the KID with regard to information on the person selling the product, which is already adequately addressed in the specific Regulations such as MiFID and IMD.
Intermediaries have responsibilities when they potentially make changes to an existing PRIIP (in this respect see the definition of the manufacturer). Intermediaries have responsibilities also in terms of handing over the KID to the client and in terms of information about costs.
Subject matter and scope
The Regulation applies to packaged retail investment products, insurance-based investment products and packaged retail and insurance-based investment products, which are, broadly speaking, products where the amount repayable, or the maturity or surrender value is subject to fluctuations. It does not apply to non-life insurance or to life insurance contracts where the benefits under the contract are payable only on death or in respect of incapacity due to injury, sickness or infirmity. It does not apply either to “simple” deposits, certain securities and pensions (for pensions, the Commission shall assess the situation by December 2018).
The Regulation only aims at the protection of retail investors (i.e. client as defined in MiFID II or customer as defined in IMD I where that customer would not qualify as a professional client as defined in MiFID II).
Responsibilities of the manufacturer/person selling
The manufacturer is defined as "any entity that manufactures PRIIPs and any entity that makes changes to an existing PRIIP including, but not limited to, altering its risk and reward profile or the costs associated with an investment in a PRIIP".
The person selling a PRIIP is defined as "a person offering or concluding a PRIIP contract with a retail investor".
The product manufacturer - before making a PRIIP available to retail investors - draws up the KID and publishes it on his website. The person advising or selling has to provide the KID to the investor for free and in good time before the latter is bound by any contract or offer.
The Regulation also contains a reference to persons advising or selling, along with the manufacturers, regarding the establishment of appropriate procedures and arrangements that ensure that retail investors have an effective way of submitting a complaint against the manufacturer, that they receive a substantive reply in a timely and proper manner and that procedures are also available in case of cross-border disputes.
Form and content of the Key Information Document
The KID is a maximum of 3 pages long, has to be clear and understandable/readable and is intended to provide information on the nature, risks, costs, potential gains and losses of the product and help comparison with other products.
It contains information on the manufacturer and supervisor, the date, if needed a comprehension alert warning the investor that the product is not simple, the nature and main features of the product (type, objectives and means for achieving them, description of the type of retail investor to whom the PRIIP is intended to be marketed, details of insurance benefits, if any, terms of the PRIIP); the risk-reward profile; the consequences of default of the manufacturer, the costs (summary indicators of costs and total aggregate costs) - reference to distribution costs to be provided by the advisors, distributors or any other person advising on or selling the PRIIP.
Level 2 - ESAs' Consultations and BIPAR responses
Level 1 of PRIIPs Regulation foresees the development of regulatory technical standards (RTS) to develop in more detail the content and presentation of the KID, including the calculation of costs; the review/revision of the KID; and the provision of the KID. In this respect, the three European Supervisory Authorities (EIOPA, EBA and ESMA) organised three rounds of consultations in which BIPAR took part and they hosted a public hearing on the KID in Frankfurt on 9 December 2015, which BIPAR attended.
Throughout this lengthy consultation process, BIPAR continued to recall that information on the person selling the product is already adequately addressed in the specific legislative instruments such as MiFID and IMD. BIPAR also stressed the need to recognize the specificity of insurance-based investment products, where the biometric risk premium should not be included in the cost section of the KID since the costs are not linked to the costs of the investment element and policyholders get an insurance benefit in return. BIPAR also did not agree that complaints regarding the conduct of the distributor should be referred to in detail in a KID.
On 7 April 2016, the ESAs published their joint final draft RTS in the form of a Delegated Regulation and submitted this to the European Commission for endorsement.
The ESAs' final draft RTS contain:
The mandatory template to be used, including certain mandatory texts, can be found in Annex I of the Delegated Regulation.
BIPAR is of the opinion that the ESAs' draft RTS do not recognize the specificity of insurance-based investment products. The way in which they represent the risk and include various references, also in the costs heading of the KID, to the biometric risk premium, make IBIPs seem less interesting/riskier than investment products without an insurance element, BIPAR believes. With regard to complaints on the conduct of the distributor, the ESAs’ RTS state that information on the steps to be followed for lodging a complaint has to be given in summary format.
With regards the delivery of the KID to the retail investor, BIPAR had commented that delivery of the KID “in good time” should be interpreted as “during the pre-contractual phase”. The final RTS are, however, quite detailed and require the distributor to take account of the investor’s knowledge and experience with the PRIIP (or a similar PRIIP), the complexity of the PRIIP and the urgency of the situation in deciding the “good time”.
The draft RTS were endorsed (adopted) by the Commission on 30 June 2016 and the Commission and ESAs organised a workshop on the implementation of the PRIIPs framework on 11 July, which BIPAR attended.
The Regulation also contains Delegated Acts on the details of procedures to establish if a PRIIP targets specific environmental or social objectives and on the EIOPA powers regarding product intervention. In this respect in November 2014, EIOPA published a Consultation Paper on Guidelines on Product Intervention Powers under the PRIIPs Regulation. The aim for EIOPA was “to provide technical advice on measures specifying the criteria and factors to be taken into account by National Competent Authorities (NCAs) and EIOPA in determining when there is a significant investor protection concern or a threat to the orderly functioning and integrity of financial markets or to the stability of the whole or part of the financial system of the Union or to the stability of the financial system within at least one Member State”. BIPAR stated that the intervention of the NCAs or of EIOPA, in exceptional cases, must be limited to the circumstances clearly described in the PRIIPs Regulation and must not be used as a pre-approval tool. BIPAR also highlighted the fact that the criteria list must be as complete and precise as possible since the intervention powers may have a detrimental effect on investors.
In its technical advice of 29 June 2015, EIOPA stated that “specifying an exhaustive list of criteria and factors to be taken into account by EIOPA in determining in which cases there is a significant investor protection concern or a threat to the orderly functioning and integrity of financial markets or the stability of the financial system of the Union would clearly delineate the powers of intervention available to EIOPA in a transparent manner”. The criteria and factors include, amongst others, the degree of complexity of the IBIP, the pricing and associated costs, the selling practices associated with the IBIP, etc. EIOPA also stated that it “believes that the PRIIPs Regulation gives NCAs the necessary flexibility to carry out the market monitoring in an appropriate way” and that it “distinguishes these monitoring competences from the product intervention powers, which are aimed at identifying whether certain criteria and factors are complied with for particular insurance-based investment products”.µ
Following the delivery of this technical advice, the European Commission issued on 14 July 2016 a Delegated Regulation supporting the Regulation with regard to product intervention. This Delegated Regulation "sets out criteria and factors to be taken into account by the national competent authorities and EIOPA when intending to use their product intervention powers in case of significant investor protection concern or threat to the orderly functioning and integrity of financial markets or to the stability of the whole or part of the financial system of the Union or respectively of at least one Member State". It includes a list of the main criteria and factors to be taken into account when determining the threats and concerns.
The European Parliament and the Council of the EU have a right to object (until 30 September 2016). The Regulation should apply as of 31 December 2016. There have however been calls from various (industry) stakeholders – including BIPAR - for a delay of the application of PRIIPs since there will be very little time for manufacturers to create the KIDs between the publication of the final RTS and the application date of PRIIPs.
The Commission shall review the Regulation by 31 December 2018. This review consists of various surveys. The Commission also has to carry out a market survey on national online fund calculators by 31 December 2018.
The ESAs also plan to develop detailed guidance (level 3) on the methods to follow for the calculation of the SRI (Summary Risk Indicator), the performance scenarios, and the cost information to be included in the KID. The ESAs also plan to issue detailed ‘FAQs’ to aid in interpretation, and to develop supporting level 3 guidelines and guidance where this is needed in view of supervisory convergence and easing implementation.
BIPAR will continue to monitor the developments at levels 2 and 3.
Last update 25/07/2016
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