ESAs has finalised its draft RTS on the PRIIPs KID after consulting various interest groups. These final draft RTS provide clarity on the obligation that the PRIIPs Regulation imposes to provide for a key information document that should be easily understandable for consumers.
The Joint Committee of the European Supervisory Authorities (EBA, EIOPA and ESMA – collectively referred to as “ESAs”) has finalised the draft Regulatory Technical Standards (RTS) on the Key Information Document (KID) for the Packaged Retail and Insurance-based Investment Products Regulation (the PRIIPs Regulation). The RTS relate to three articles under the PRIIPs Regulation: (i) article 8(5) on the presentation and content of the KID, (ii) article 10(2) regarding the review, revision and publication of KIDs and (iii) article 13(5) on the conditions for fulfilling the requirement to provide the KID in good time.
The result is a document that is required for each packaged retail and insurance-based investment product (PRIIP) and which should enable retail investors across the EU to compare the investment products in the banking, insurance and securities sectors and to decide, on the basis of the simple and comparable information that the KID contains, which product is the best fit for them.
The idea of a document comprising all information of interest for investors in one document is not new in the European regulatory landscape. At this time, Undertakings for Collective Investment in Transferable Securities (UCITS) already have to provide a Key Investor Information Document (KIID).
However, the KID under the PRIIPs Regulation will be stricter than its equivalent under UCITS. The RTS contain a mandatory template, which will make sure that the structure of all KIDs is identical and that they contain all the necessary information in order for the retail investor to make an informed decision. Also the methods used for calculation of e.g. the performance scenarios are described in detail by the RTS.
The obligation to provide a KID is applicable to every manufacturer of packaged retail and insurance-based investment products. The KID should be provided in good time so that the retail investor has enough time to consider the document before being bound by any contract or offer relating to that PRIIP.
A KID will consist of nine sections, each of them tackling a different characteristic of the product. General product information is required in the sections “Purpose”, “Product”, “What happens if the manufacturer is unable to pay out”, “How long should I hold it and can I take money out early” and “How can I complain”. These sections will in most cases be rather stable. However, the KID also has two sections that can be highly dynamic: “What are the risks and what could I get in return” and “What are the costs”. Additionally, the last section of the KID gives the PRIIP manufacturer the possibility to disclose any additional information.
The section “What are the risks and what could I get in return” consists of two parts. The first part is the risk section. This has to contain a visual summary risk indicator comprising seven risk classes, for which the RTS also provide a template. The PRIIP manufacturer has to indicate which risk class is applicable for the product in accordance with the guidelines described in the RTS. The second section includes the performance scenarios. For this section, the RTS also contain a format that must be used for the presentation of the scenarios and requirements on the calculation.
For the section “What are the costs”, the RTS also provide for detailed methods for the measurements and calculations needed for completing the prescribed format for each PRIIP. Both the costs over time and the composition of the costs have to be mentioned in the KID.
The aim of the detailed measures taken for the dynamic sections is promoting effective comparability for retail investors between different PRIIPs and ensuring that the information provided is comprehensible for them as much as possible.
Since the RTS obliges the PRIIP manufacturer to perform, next to the mandatory yearly review and republication, ad hoc revisions to ensure that the KID is always up to date, the dynamic sections should be monitored closely, and this could become a heavy burden.
The Belgian legislator anticipated the regulations on European level with the Royal Decree of 25 April 2014 regarding certain information requirements when commercialising financial products with non-professional clients (Transversal RD). This Royal Decree contains, amongst other things, an obligation to provide for an information document that ensures that the non-professional client can easily compare the products offered. However, with the PRIIPs Regulation in the pipeline, the application of this part of the Transversal RD has been postponed.
Related links: Draft legislation Final draft regulatory technical standards