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As of January 1, 2018, the PRIIPs Regulation (EU) 1286/2014 introduces a mandatory key information document (“PRIIPs KID”) for packaged retail and insurance-based investment products (“PRIIPs”), including investment funds, which are made available to retail investors in the EEA.
As part of the next phase of the PRIIPs regime, UCITS will soon be required to produce and provide retail clients with a PRIIPs KID. This note covers some common questions that UCITS management companies ask themselves on the occasion of the entry into force of this new regime.
What is a KID PRIIPs?
A PRIIPs KID is a short pre-sale information document aimed at providing retail investors with the information needed to make an informed investment decision.
In accordance with Commission Delegated Regulation (EU) 2021/2268 (“PRIIPs KID Delegated Regulation”), a PRIIPs KID must contain specific key information about an investment product in a prescribed manner and in a standard format that makes it simple for retail investors to evaluate and compare products.
Key information to be disclosed in the PRIIPs KID includes: (i) the nature and characteristics of the product, including whether there is a possibility of capital loss; (ii) the costs and risk profile of the product; and (iii) relevant performance information.
The entity in charge of developing a PRIIPs KID is referred to as the “PRIIP manufacturer” (which for a UCITS will be the management company of the UCITS).
Key points to note
UCITS are currently exempt from the PRIIP KIID requirement and can therefore continue to issue a key investor information document (“UCITS KIID”) in accordance with the UCITS Directive.1.
According to the current schedule, UCITS made available to retail investors in the EU will have to be able to provide a PRIIPs KID from 1 January 2023.
The European Union (Undertakings for Collective Investment in Transferable Securities) (Amendment) Regulations 2022provide that the production of a PRIIPs KIID by a UCITS will satisfy the obligation to produce a UCITS KIID, thus avoiding duplication.
If a UCITS is not available to EU retail investors, it can still produce only a UCITS KIID.
If a UCITS operates as a reference/underlying investment to another investment product made available to retail investors in the EU (e.g. a unit-linked insurance contract), the The obligation to provide a PRIIPs KID rests with the manufacturer of the product sold directly to retail investors. In practice, the initiator of the product may need assistance or information on the UCITS to produce it.
UCITS KIID vs PRIIPs KID Requirements
While there are parallels to be drawn between the UCITS KIID and PRIIPs KID schemes, there are some key differences that should be considered when producing PRIIPs KIDs. This includes, in particular, information relating to performance data and costs and charges.
While UCITS KIIDs disclose up to 10 years of past performance, with a risk caveat as to its limited value as a guide to future performance, a PRIIPs KID must include projected returns based on historical performance. Using historical product performance, projected returns should be presented based on performance scenarios within a range of: (a) favorable; (b) moderate; (c) adverse; and (d) stress.
Similar to the “Fees” section of the UCITS KIID, the PRIIPs KIID must include fee information in the “Composition of Fees” section. However, additional data will be required for the PRIIPs KID, including “portfolio transaction costs” which are not currently reflected in the UCITS KIID fee disclosure.
Other diet changes
Recognizing the somewhat flawed nature of the existing framework, the European Supervisory Authorities (“ESAs”, i.e. EIOPA, ESMA and EBA) have called for changes to the PRIIPs scheme in April 2022.
The proposed changes include facilitating flexibility in the nature of the information to be published in the performance section of the PRIIPs KID and replacing the current requirement for “appropriate performance scenarios” to be presented for all products with the formulation “appropriate performance information”. The ESAs also recommend that the opportunities offered by digital disclosure be exploited by the European Commission and co-legislators and bring the PRIIPs framework into the digital age. However, these changes will require amendments to the PRIIPs regulation and should therefore not have an impact on UCITS before January 1, 2023.
How can we help?
The Maples Group assists UCITS and their managers in their transitional arrangements for the implementation of KID PRIIPs.
We continue to monitor the above developments and assist our customers by:
- advice on the application of the technical requirements of the PRIIPs regulation;
- help analyze whether or not a PRIIPs KID will be needed and plan the transition to enable production of PRIIPs by January 1, 2023;
- prepare the information needed to produce the KIDs of the PRIIPs;
- assist in the implementation of appropriate governance and oversight frameworks for the production and maintenance of KID PRIIPs on an ongoing basis; and
- provide support in transition projects, including consideration of implications for UCITS registered in other EU Member States and translation requirements.
1 In accordance with a quick fix Commission Delegated Regulation C(2022) 1541 final which was published on March 17, 2022, it is proposed to postpone the application of the level 2 RTS of the PRIIPs which are defined in the PRIIPs KID delegated regulation from July 1, 2022 to January 1, 2023. This is not yet in force , but the European Parliament and the Council of the EU should approve this proposal.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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