PRIIPs disclosure: Key Information Documents

PRIIPs Regulation and related RTSs

The aim of the PRIIPs Regulation[1] is to encourage efficient EU markets by helping investors to better understand and compare the key features, risk, rewards and costs of different PRIIPs, through access to a short and consumer-friendly Key Information Document (KID). How information in the KID should be calculated and presented is set out in the PRIIPs Regulatory Technical Standards (RTSs)[2].

PRIIPs: who it affects 

The Regulation applies to persons who:

• manufacture PRIIPs
• advise on or sell PRIIPs

A PRIIP manufacturer (or any other person who changes an existing PRIIP, such as a distributor) is required to:

• prepare a KID for each PRIIP that they produce
• publish each KID on their website

A person who advises a retail investor on a PRIIP or sells a PRIIP to a retail investor must provide the retail investor with a KID in good time before any transaction is concluded.  In addition to advisers, this will impact intermediaries such as distributors.

Where the retail investor initiates the transaction by means of distance communications, the KID may be provided after the conclusion of the transaction, as long as it is not possible to provide the KID in advance and the retail investor consents. The retail investor must be told that it is not possible to provide the KID in advance, and that they can delay the transaction in order to receive and read the KID before concluding the transaction. 

We expect the Regulation to apply to:

• retail investment product providers
• life companies
• discretionary investment management firms
• firms providing services in relation to insurance-based investments
• fund managers
• stockbrokers and other firms that provide advice to retail clients on funds, structured products and derivatives
• financial advisers
• firms operating retail distribution platforms

The Regulation and related RTSs also apply to persons outside the FCA’s regulatory remit, such as those who are exempt from the need to obtain FCA authorisation.

The Regulation only applies if the PRIIP is made available to retail investors. Retail investors are defined as: 

• retail clients defined in the Markets in Financial Instrument Directive (MiFID[3]), or 
• customers as referred to in the Insurance Distribution Directive (IDD), where they would not qualify as professional clients under MiFID 

PRIIP definition 

A PRIIP is defined as: an investment where, regardless of its legal form, 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 that are not directly purchased by the retail investor; or an insurance-based investment product which offers a maturity or surrender value that is wholly or partially exposed, directly or indirectly, to market fluctuations.

Identifying whether a particular product is a PRIIP may not be straightforward as the concept of ‘exposure to reference values’ is wide. In some cases, you will need to consider the specific terms of a product before determining whether or not it is a PRIIP.

Retail products defined as a PRIIP 

We consider that these retail products (some overlap) would fall within the PRIIPs definition:

• regulated collective investment schemes including:
  
  • non-UCITS retail schemes (authorised unit trusts, authorised open-ended investment companies (ICVCs) and authorised contractual schemes)
  • qualified investor schemes (authorised unit trusts, authorised open-ended investment companies (ICVCs) and authorised contractual schemes)
  • individually recognised overseas schemes (FSMA s272 recognised schemes)
• unregulated collective investment schemes that are alternative investment funds, including but not limited to:
  
  • some unauthorised unit trust schemes
  • private equity schemes
• unregulated collective investment schemes that are not alternative investment funds
• alternative investment funds that are not collective investment schemes, including shares or units in:
  • an investment company or investment trust
  • venture capital investments
  • European Social Entrepreneurship Funds (EuSEFs)
  • European Venture Capital Funds (EuVECAs)
• insurance based investment products, such as unit-linked policies, with-profits policies and Holloway sickness policies
• fluctuating return annuities (that are not pension products) with features that result in fluctuating amounts being paid to the annuitant because of exposure to reference values (such as indices) or to the performance of one or more assets which are not directly purchased by the annuitant (e.g. purchased life annuities with variable returns)
• derivatives (including options, futures, and contracts for differences)
• structured investment products (whatever their form); for example, these may be structured as unregulated CISs, convertible securities, insurance policies or instruments issued by special purpose vehicles (SPVs)
• structured deposits (as defined in MiFID Article 4(1) point (43)[3])
• securities issued by certain special purpose vehicles (SPVs) or special purpose entities (SPEs) with variable returns
• debt securities (bonds, notes or debentures) where the amount repayable 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 investor

This list is intended to be indicative only and is not exhaustive. New product types may also fall within the scope of the PRIIPs definition. 

Products that are not PRIIPs 

We consider that these products do not fall within the PRIIPs definition:

• non-life insurance/general insurance, and life insurance that only pays benefits on death or incapacity due to injury, sickness or infirmity (i.e. have no surrender value, or a surrender value that does not depend on fluctuations in the performance of one or more underlying assets or reference values)
• deposits (other than structured deposits as defined in MiFID II)
• assets that are held directly by the retail investor, such as corporate shares or sovereign bonds
• pension products − pensions that are recognised under national law as having the primary purpose of providing the investor with an income in retirement (including pension annuities purchased using monies from a pension product recognised under UK law) occupational pension schemes and individual pension products for which a financial contribution from the employer is required by national law and where the employer or the employee has no choice as to the pension product or provider
• fixed annuities (that are not pension products) where the amount payable to the annuitant does not fluctuate (e.g. a purchased life annuity that pays a fixed amount of income for life or an annuity that pays a fixed income for a specified term)
• debentures and other debt securities where the amount repayable to the retail investor is fixed
• certain securities such as, subject to certain conditions, securities issued by Member States, their regional or local authorities, central banks, public international bodies, non-profit making bodies or credit institutions
• investment trust savings schemes that are dealing services dedicated to the securities of one or more investment trusts
• ISA (individual savings accounts) wrappers (although investments held within an ISA wrapper may be PRIIPs for which a KID is required)
• dealing/custody services which allow retail investors to purchase, hold and sell investments as legal or beneficial owner

UCITS schemes and EEA UCITS schemes 

Although UCITS schemes and EEA UCITS schemes are PRIIPs, the requirements in the PRIIPs Regulation will not apply to such schemes until 31 December 2019, due to exemptions detailed in the PRIIPs Regulation Article 32 and recital 35. For these schemes, firms will need to apply the existing key investor information document (KIID) requirements in the Conduct of Business sourcebook (COBS)[4] and the Collective investment schemes sourcebook (COLL)[5]. (Firms also need to take account of the UCITS KIID technical requirements in the EU KII Regulation 583/2010, specifying the form and contents of key investor information (see text in COLL Appendix 1EU)).

Key Information Documents required under the PRIIPs Regulation

The PRIIPs Regulation requires that a KID is a stand-alone, standardised document prepared for each investment. A KID can be up to a maximum of 3 sides of A4-sized paper and may refer to other documents such as a prospectus if the cross-reference is related to the information required to be included in the KID, or refer to where detailed information can be found. A KID may also provide information about underlying options for one product (such as a life policy) within one document.

Each KID will need to contain the following information, presented in a pre-determined sequence of sections. The sections are:

• What is this product?
• What are the risks and what could I get in return?
• What happens if [name of the PRIIP 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

The Regulation outlines the layout of the KID. The RTSs contains detailed rules on:

• the content and presentation of the KID
• how to calculate some of the information in the KID
• the review, revision and republication of the KID
• the timing of delivery of the KID

Disclosure requirements in the FCA Handbook

As the requirements relating to PRIIPs are contained in an EU Regulation, the requirement to prepare and provide a KID for each PRIIP will apply directly to persons affected. The FCA is required to supervise compliance with the Regulation.

Where disclosure rules in the FCA Handbook that implement EU legislation, such as MiFID or Solvency II, co-exist with the PRIIPs Regulation, these rules will continue to apply to firms. For certain products, the KID will not be the only document or information consumers need to receive.

Separately, we commented on communications in relation to PRIIPs in a Public Statement published on 24 January 2018[6].