PRIIPs – the new frontiers of disclosure
The PRIIPs Regulation (the Regulation)1 was published in the Official Journal on 9 December 2014 and will apply to EU retail structured products from 31 December 2016.
The Regulation introduces a new short form disclosure document (a key information document or KID) to be provided to retail investors before they purchase a packaged retail and insurance-based investment product or PRIIP.
A PRIIP manufacturer (eg a structured note issuer) is required to draw up a KID in accordance with the Regulation for each product and to publish the document on its website prior to a PRIIP being made available to any retail investors. The Regulation does not exempt the distribution of products to a small number of retail investors; a KID will, therefore, need to be drawn up even if a PRIIP is only made available to a single retail investor. The manufacturer is required to review and update the KID regularly and to publish a revised version promptly where the review indicates that changes need to be made.
A person selling or advising on a sale of a PRIIP must ensure that the KID is provided to retail investors “in good time” prior to a sale of the PRIIP.The definition of PRIIP is wide and is likely to include (among other things) most structured retail products, many insurance-based investment products, structured deposits, derivatives and, possibly, asset-backed securities, in each case where these are made available to retail investors. Given this wide product scope, it will be important for all the affected/potentially affected business lines to understand the detail of the Regulation, to consider their plans for operational aspects of the new regime and to start to implement appropriate compliance arrangements.
The Regulation does not apply until 31 December 2016; however, there is a risk that if market participants do not engage with Level 2 work now, the final form of the disclosure requirements may be unworkable.
On 17 November 2014, the European Supervisory Authorities published a Discussion Paper2 on KIDs for PRIIPs in relation to the regulatory technical standards (RTS) to be published at Level 2. These RTS will dictate key matters, including, for example, details on the presentation of risk and reward, such as the form of the required performance scenarios and the form of the summary risk indicator; presentation, content and methodologies for calculation of costs; details around when a comprehension alert is required; and requirements around when the KID should be reviewed, revised and updated. It is likely that these matters will have operational, commercial and cost implications for firms and it is, therefore, essential that they ensure their views are voiced in response to this Discussion Paper. There will be further consultations on the Regulation in 2015; however, we believe now is the best opportunity to try to shape the final outcome of the RTS as, once drafts have been published, there may be little scope for any significant change.
It is also key for the industry to engage in lobbying on the Regulation as there are a number of fundamental areas where the Level 1 text is not clear. These include the scope of the definition of PRIIP (and hence the range of products the Regulation will apply to), the extraterritorial scope of the Regulation and whether or not there will be any grandfathering of existing products. In the absence of grandfathering provisions, market participants will want to give consideration to implementing appropriate operational and documentation controls now in order to ensure that they do not fall foul of the Regulation when applied to pre-existing products after 31 December 2016.
- Regulation (EU) No 1286/2014.