By the end of 2017, banks, life insurers and fund managers must have prepared a PRIIP KID (or PRIIP KID-like information) for each of their products sold to retail investors.
The requirements in the Level 1 Regulation and the Level 2 Regulatory Technical Standards continue to give rise to a number of detailed practical questions as firms seek to draw up the KID information and design the systems and data gathering processes that must underpin it. In response to these questions, the European Supervisory Authorities (ESAs) have issued the first tranche of 72 Questions and Answers (PDF 292 KB). They have also submitted technical advice to the European Commission on the procedures to establish whether a PRIIP targets specific environmental or social objectives.
The 72 Questions and Answers (Q&As) issued by the ESAs on 4 July do not end discussions on the various detailed issues that arise in implementing the PRIIP KID. A further tranche of Q&As is expected at some point over the summer months, and more may follow.
Given the rapidly approaching deadline of the end of 2017, it is essential that firms take into account these Q&As as they seek to finalise their KID production. Moreover, if a PRIIP is invested in by another PRIIP (eg a unit-linked insurance contract with investment funds as the underlying investments), in order for the manufacturer of the investing PRIIP to meet its obligations by the deadline, it will need the KID information from the manufacturer of the first PRIIP two or three months ahead of that deadline. The tightness of the timetable is therefore an increasing concern.
The narrative that is prescribed for use in the KID appears in some cases to work in opposition to the principle that information should be fair, clear and not misleading, and therefore potentially not in investors’ interests. However, it is not the production of the document itself that is the main operational issue. The detailed, complex and external data-dependent calculations that underpin the numerical disclosures in the KID are causing the greatest concern.
The ESA Q&As seek to address a number of issues, covering market, credit and currency risks, performance scenarios, and the calculation of costs and the summary cost indicators. Each answer relates to a specific question and needs to be read in that context. Nevertheless, manufacturers are already spotting that some of the Q&As are unclear or give rise to follow-on questions.
Regarding the disclosure of costs, there is the added dimension for banking and fund products of the detailed requirements of MiFID II. They are connected but slightly different in some aspects, which is an additional operational issue.
It is not certain when the next tranche of Q&As will be released by the ESAs or whether the ESAs will modify those already released in the light of industry comments. Nevertheless, it is essential that firms continue to work towards meeting the end-2017 deadline, and the effective earlier deadline for PRIIPs invested in by other PRIIPs.
The manufacturers of PRIIPs with environmental or social objectives (“EOS PRIIPs”) are required to have in place specific governance measures to ensure those objectives are met on an ongoing basis and to demonstrate to retail investors, throughout the investment process, the relevance of those objectives. The ESAs’ advice to the Commission recommends that EOS PRIIP manufacturers be required:
The ESAs have concluded that at this time the establishment of specific and detailed standalone obligations for EOS PRIIPs would not be proportionate. They believe that existing sectoral measures already offer, or are in the process of putting in place, a sufficiently stringent and flexible basis for the sound regulation of EOS PRIIPs.