The Status of the Packaged Retail and Insurance-based Investment Products Regulation
The Packaged Retail and Insurance-based Investment Products Regulation (Regulation (EU) No 1286/2014) (the PRIIPs Regulation) was due to take effect on 31 December 2016.
However, on 14 September 2016 the European Parliament voted to reject the delegated regulation proposed by the European Commission containing regulatory technical standards on the content of the key information document (KID). The Parliament gave a number of reasons as to why it had rejected the Level 2 measures, and stated that there was: “A risk that the rules set out in the delegated regulation go against the spirit and aim of the legislation.” The Parliament called on the Commission to postpone implementation of the PRIIPs Regulation to allow time for the Commission to propose new regulatory technical standards. On 19 September 2016 a majority of Member States at the European Council also voted for a one year delay to implementation.
The European Commission is understood to have agreed a 12-month delay in a meeting with a Council Working Group at the end of October, however this has yet to be announced. The Commission will formally discuss whether to delay the PRIIPs Regulation on 9 November 2016. There is a concern that the Commission will choose to rush through new Level 2 measures in attempt to meet the 31 December 2016 implementation date. However, the industry remains cautiously optimistic that the announcement of a delay to 1 January 2018 is imminent; the hope is that all will become clear later this week.
Background to the PRIIPS Regulation
The key requirements of the PRIIPs Regulation are as follows:
- Before a Packaged Retail and Insurance-based Investment Product (PRIIP) is made available to a retail investor, the PRIIP “manufacturer” must draw up a KID and publish the document on its website. The content of the KID is prescribed in the PRIIPs Regulation (and in now to be re-drafted regulatory technical standards); and
- A person advising on, or selling, a PRIIP shall provide retail investors with the KID in good time before those retail investors are bound by any contract or offer relating to the PRIIP.
The intention behind the PRIIPs Regulation is, according to the European Commission, to help retail investors compare products and make informed decisions in relation to investments.
What is a PRIIP?
The definition of a “PRIIP” is widely cast in the PRIIPs Regulation whereby a PRIIP is an investment where: “regardless of the legal form of the investment, the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the retail investor, or which is an insurance product that offers a maturity or surrender value that is wholly or partially exposed, directly or indirectly, to market fluctuations” (Article 4 PRIIPs Regulation).
In its Consultation Paper 16/18, the Financial Conduct Authority (FCA) helpfully confirmed that it considers the following investments to be PRIIPs, although the list is not exhaustive.
- Regulated collective investment schemes (CIS) that are:
- Non-UCITS retail schemes;
- Qualified investor schemes;
- Individually recognised overseas schemes (FSMA s272 recognised schemes);
- Unregulated CIS that are alternative investment funds (AIFs), including but not limited to:
- Some unauthorised unit trust schemes;
- Venture capital trusts;
- Private equity schemes;
- Unregulated CIS that are not AIFs;
- AIFs that are not CIS, including shares / securities in an investment trust that are held directly by the investor;
- Investment trust savings schemes that allow the shares / securities of investment trusts to be held in a managed account;
- European Social Entrepreneurship Funds and European Venture Capital Funds;
- Insurance-based investment products such as unit-linked policies, with-profit policies and Holloway sickness policies;
- Fluctuating return annuities (that are not pension products);
- Derivatives: options, futures and contracts for differences;
- Structured investment products;
- Structured deposits; and
- Securities issued by certain special purpose vehicles.
The FCA also clarifies that in considers the following not to be PRIIPs:
- Non-life insurance / general insurance and life insurance that only pays benefits on certain events;
- Assets held directly by the retail investor;
- Pension products (nb. the European Commission is mandated by the PRIIPs Regulation to assess by December 2018 whether or not to include such products); and
- Fixed annuities.
What is a KID?
The KID is a prescribed disclosure document that is intended to make it easier for retail investors to compare and contrast PRIIPs before making an investment. A KID must be no more than three pages of A4 and contains the following information in the following sequence:
- What is this product?
- What are the risks and what could I get in return?
- What happens if [manufacturer] is unable to pay out?
- What are the costs?
- How long should I hold it and can I take money out early?
- How can I complain?
- Other relevant information.
Who does the PRIIPs Regulation apply to?
The PRIIPs Regulation applies to two classes of entity:
- To “manufacturers” of PRIIPs. The word “manufacturer” is not defined in the PRIIPs Regulation which means that it may be difficult for some firms to establish whether or not they are managing PRIIPs, depending on their role in the chain. The FCA has also described PRIIPs “manufacturers” as the entity that “produces” the PRIIP. PRIIPs manufacturers must prepare a KIID for each PRIIP they “produce” and publish that KIID on their website; and
- To persons who advise on and/or sell PRIIPs. These persons must provide a KID for each PRIIP advised on or sold to retail investors in good time before they are bound. Note that where a distributor makes changes to a PRIIP, the requirement to prepare and publish the PRIIP will apply to the distributor rather than the initial manufacturer. The FCA have also confirmed that where a distributor rebrands or white labels a PRIIP in such a way as to change the PRIIPs’ risk / reward profile or the costs of the PRIIP, the distributor may be considered the manufacturer.
The FCA has confirmed that the PRIIPs Regulation (and supporting RTS) will apply to third country manufacturers of PRIIPs. Therefore non-EEA firms looking to design products for the EEA market will need to create a KID for each PRIIP and publish this on their website.