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PRIIPs: The ESAs' challenging proposals for KIDs

 

18 November 2015

​On 11th November 2015 the European Supervisory Agencies published a Consultation Paper setting out draft Regulatory and Technical Standards for the PRIIPs regime. These RTS are the main work item the European Supervisory Agencies are required to prepare and as expected the methodology for the preparation of Key Information Documents or KIDs is both complex and detailed. Issuers of retail structured products and other manufacturers of packaged retail and insurance-based investment products will need to review this in detail to ensure that it will provide a workable regime.

Background and timing
 
As discussed in our previous bulletins of April 2014 and February 2015, the EU wide short-form disclosure regime for Packaged Retail and Insurance-based Investment Products (PRIIPs) goes live on 1st January 2017. Due to the wide range of PRIIPs in scope, ESMA, EBA and EIOPA act as the three European Supervisory Agencies (ESAs) responsible for preparing Regulatory Technical Standards (RTS) for the regime. The consultation timetable for PRIIPs has already slipped and there is a concern PRIIPs manufacturers may have insufficient time to adapt their issuance processes as necessary to meet the requirements of the regime.
 
The Joint Consultation Paper (CP) published on 11th November and setting out the draft RTS can be found on the EBA website at:
 
The ESAs have called an open hearing on 9th December in Frankfurt to explain the CP. Responses to the CP are invited by 29th January 2016.  Allen & Overy will be working with industry participants to assess the CP.  The RTS are to be submitted for endorsement to the European Commission by 31st March 2016.
 
The draft RTS
  • The draft RTS contain a template for the KID. Unfortunately this adds little to what was already set out in the Level 1 PRIIPs Regulation.
  • The draft RTS require a single summary risk indicator (SRI) to be included in a KID on a 1-7 scale, 7 being the most risky. The SRI in turn requires manufacturers to calculate a market risk measure and make a credit risk assessment. The methodology for these is complex. The credit risk assessment relies heavily on external credit ratings of the PRIIP manufacturer and will need to be looked at very carefully, particularly as regards products issued by unrated entities.
  • It is helpful that liquidity risk requires a separate narrative explanation rather than being a significant part of the SRI as it was feared this could disadvantage many products.
  • The draft RTS also contain requirements for determining and presenting performance scenarios in KIDs. It will be important for manufacturers to apply these to its PRIIPs products.
  • The methodology for calculation of costs is detailed. These are split into one-off costs, recurring costs and incidental costs giving a total costs figure. It is also necessary to include a reduction in yield (RIY) figure. RIY shows the impact total costs have on the return from the product.
  • The draft RTS deal with review and republication requirements for the KID. There should be at least an annual review, but also ad hoc reviews. Some guidance is given in the explanatory text that an ad hoc review should only be required in case of significant changes impacting the information in the KID but there is no explicit guidance in the body of the RTS. It is potentially helpful that the review requirement does not apply during a period where the PRIIP is “not available” to retail investors, but it will be vital to know precisely what this means, particularly for existing PRIIPs products.
  • The draft RTS fail to address a number of uncertain points in the regime previously highlighted by the industry, including the position of existing products, specific characteristics of SPVs, in/out scope questions for borderline products and non-EU territoriality issues (see our previous bulletins).
Next steps
 
The PRIIPs regime is a significant challenge for issuers of retail structured products and other PRIIP manufacturers.  Much documentation, translation and systems work will need to be done by manufacturers, including on the interaction with new requirements introduced by MiFID 2, if PRIIPs KIDs are to be ready for the go live date.  Getting workable RTS is crucial and manufacturers need to engage with the draft RTS to ensure they are fit for purpose and give feedback on all uncertainties and difficulties.  As far as possible the RTS must provide objective methodology to reduce the risk of a KID being found to be at fault when judged retrospectively.
 
The nature of KID disclosure is product specific and challenging. It goes beyond summary disclosure requirements and the regime carries substantial risk for PRIIP manufacturers.
 
Allen & Overy is working with product manufacturers that are already preparing for the regime, including developing multilingual automated drafting solutions. Please contact your usual A&O contact or any of those listed below to discuss how we can help you.

For more information please see our ePublication.

 

 

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