What are PRIIPs, and how do they impact your business?

Published on November 3, 2021 by Sachith Vijayaraghavan

Packaged retail and insurance-based investment products (PRIIPs) are a type of financial asset available to consumers in the EU as an alternative to savings accounts. It is defined as “an investment product or insurance-based product where the invested amount is subject to fluctuation because of its exposure to the performance of underlying assets not directly purchased by the investor”. PRIIPs are offered by product manufacturers to clients who want to save for the future, for example, to purchase a house, and facilitate a well-organised allocation of savings.

PRIIPs cover a range of packaged and publicly marketed financial products such as options, derivatives, closed- and open-ended investment funds, and special-purpose vehicles (SPVs). However, many retail investors considered them to be complicated, as they often lack transparency. The Financial Conduct Authority (FCA) is responsible for supervising compliance of with PRIIPs-related regulations.

The PRIIPs regulation (EU) 1286/2014 came into effect on 1 January 2018 lays down rules for product manufacturers and intermediaries who advise/sell. It stipulates that a key information document (KID) be made available to retail investors within the EU. The responsibility for creating the KID lies with the manufacturer, who must provide for their product a standard three-page KID (according to regulation EU 2017/653) and publish it on their website. The KID has to be fair, clear and not misleading, and it needs to be provided as a document separate from all marketing materials.

The KID should provide the following information:

• details about the product and the producer

• who the intended investors are

• the risks involved and possible rewards

• unlikely events that may occur

• costs that the investor may incur and other relevant information

The purpose of the KID is to help an investor make an informed decision after understanding the risks and comparing features.

There have been concerns relating to PRIIPs over the years. Many firms have also been excluding retail investors from their offering largely due to uncertainty in terms whether corporate bonds fall within the scope of PRIIPs. Corporate bonds are assets held directly by investors and should not fall within the scope of PRIIPs regulation, but there is a lot of confusion due to commonly used terms and conditions.

The FCA agrees that the regulation does not clearly define the products to which it applies. The regulation applies to the following:

1) Packaged retail investment products (PRIPs): these are structured financial products that contain an element of packaging an underlying investment opportunity, which may include shares bonds or other financial assets. These products enable retail investors to gain exposure

2) Insurance-based investment products: these are contracts of insurance exposed to market fluctuations and offer a maturity or surrender value, e.g., life insurance contracts and pension products.

UCITS and PRIIPS

Undertakings for collective investment in transferable securities (UCITS) fall within the definition of PRIIPs; however, UCITS funds are exempt from compliance with PRIIPs regulation. This exemption implies that, according to the requirements of the UCITS directive, the providers must produce a key investor information document (KIID) instead of a KID. This exemption expires on 31 December 2021, but HM Treasury announced on 1 June 2021 a five-year extension until 2026. The intention behind the extension is to have a fully functioning PRIIPs framework in place before UCITS are included within the definition of PRIIPs and to maintain the reputation of UCITS.

Recent updates

On 20 July 2021, the FCA published a consultation paper (CPI 21/23) proposing changes to regulations likely to harm consumers the most, as a KID has the potential to provide misleading or confusing information on certain products. The proposal aims to provide more clarity by making amendments which address concerns raised on the lack of clarity on PRIIPs scope, risk indicators, confusing performance scenarios, and transaction cost calculation methodology. From an investor’s perspective this will help make better decisions with more information about the products, how much risk is involved and possible future performance. This will also give the firms the flexibility to provide information and guidance without complicated jargon that is incomprehensible to the consumers.

The proposal is as follows:

1) Change the rules to provide more clarity on the scope of PRIIPs regulation relating to corporate bonds; although these share certain features with other instruments, it does not necessarily mean they are covered by the regulation

2) Provide guidance to make clear the meaning of the language a PRIIP to be “made available” to retail investors, as currently there is no definition and the interpretation of this term is very broad

3) Amend regulation (EU)2017/653 pertaining to regulatory technical standards (RTS):

a. to provide narrative information on performance in the KID

b. to overcome the likelihood of PRIIPs being assigned an inappropriately low summary risk indicator in the KID

c. to address apprehension regarding the application of slippage methodology when calculating transaction costs

How Acuity Knowledge Partners can help

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Sources:

https://www.fca.org.uk/firms/priips-disclosure-key-information-documents

https://www.fca.org.uk/news/press-releases/fca-consults-post-brexit-divergence-priips-regulation

https://www.fca.org.uk/publication/consultation/cp21-23.pdf

https://www.handbook.fca.org.uk/handbook/glossary

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