Investor protection is a cornerstone element of Regulation within the financial services industry. The safeguarding of retail clients, in particular, was certainly on top of the agenda for the European Supervisory Authorities (“ESAs”) whilst planning the regulatory retail investment strategy aimed at giving EU citizens the necessary tools and the required confidence to invest in the capital markets. This is certainly an important consideration for investors themselves.
Investors will feel more confident investing, if they feel that they are adequately safeguarded by as many components of the financial eco-system as possible. Several works have been undertaken on this front but in this article, we focus on Regulation 1286/2014/EU of the European Parliament and of the Council of 26 November 2014 and the Commission Delegated Regulation 2017/653 of 8th March 2017, also known as the PRIIPs Regulation.
Background to the Regulation
The PRIIPs Regulation established a European legal framework to encourage European Union (“EU”) jurisdictions to be more efficient by helping investors to better understand and compare the key features, risk, rewards and costs of different Packaged Retail and Insurance-Based Investment Products (“PRIIPs”). This is aimed to be achieved by ensuring that investors have access to a concise, standardised and consumer-friendly information document known as Key Information Document (or “KID”), which must be no longer than three pages.
The Regulation was devised with the retail investor in mind with, ensuring that the comparability and comprehensibility of information being provided to such investors is improved with the ultimate aim of offering them greater protection.
What were and continue to be the challenges of this Regulation?
The benefits of this Regulation become amply apparent when considering it from the point of view of a retail investor, who would need to process an avalanche of investment-related information before deciding on how to deploy his hard-earned savings into the capital markets.
On the other side of the coin, this created several challenges to the different parties involved in the process of creating the KID. In essence, a KID provides three main types of data: i) Static Data, which is data that remains usually unchanged with every document refresh, including Product ISIN, Product Manufacturer Details, Product Investment Objective ii) Disclosures, which are specifically inputted to warn the potential investor about risks that the PRIIP in question can expose them to, and iii) Numerical Data, which gives investors information on the possible performance scenarios of the PRIIP in question and the related costs and charges associated with the investment.
Without any doubt, it is the Numerical Data aspect that proved to be the most challenging when product manufacturers had to devise new processes to produce KIDs. This is mainly because to obtain such data, numerous data extraction tools, usually from different service providers of the product, must be used to retrieve historical information (which might not be necessarily-readily available). Following that, such data must be paired for it to co-exist and eventually inputted in number-crunching computer programmes that process the numbers according to the methodologies, as set out in the Regulation.
Different parties involved in a PRIIP KID Production:
Source: European Fund and Asset Management Association “EFAMA”
The above challenges must be coupled with the different interpretations to methodologies and different deliverables for the same Product (in the scenario that an investment product is sold as a Multi Option Product) through an insurance wrapper. Fund management companies also had to deal with different implementation deadlines, predominantly for those having their funds classified as Undertakings for the Collective Investment in Transferable Securities (“UCITS”), since the PRIIP KID is meant to be the successor of the existing UCITS Key Investor Information Document (KIID).
What are the upcoming changes?
The revised EU PRIIPs KID Regulatory Technical Standard “RTS” (Level 2) was published in the Official Journal in December 2021. An important ‘quick-fix’ to the RTS here was to align the RTS application date from 1 July 2022 with the UCITS transition period ending 31 December 2022. In essence, the legislation extended the much-desired transitional arrangement exempting fund management companies from the requirement to provide retail investors with a PRIIPs KID until 31 December 2022.
Following this, and more recently as part of the ongoing work on the EU retail investment strategy, the European Commission proposed a review of EU PRIIPs Regulation. To this effect, ESAs published a technical advice document in May 2022, that went the extra mile by incorporating the appropriate consumer testing before formulating proposals for changes, following a call for evidence from the industry.
The key ESA proposals are in essence to pursue the quest of making the PRIIPs KID more consumer friendly, whilst aiming to improve the presentation of information provided to consumers and to make it easier for them to compare different products. The proposals include considerations for: Digital KID adaptation, New Sections to contain disclosures for products embracing sustainable objectives, disclosure of past performance in PRIIPs KID (new concept), modified rules for multi-option insurance products (to better facilitate comparison between different investments) and most importantly clarifications on the transitioning on current UCITS notification obligation.
Overarchingly in the KIID / KID production scenario, the Fund Industry has to deal with the below two scenarios:
Why should you prepare? / What are the implications?
For those manufacturers already producing a PRIIP KID the implication emanating from the new updates can be addressed in the form of a Gap Analysis from the current state to what needs to be achieved to satisfy the updated requirements. The latter include the new outputs such as European PRIIPs Template ‘EPT’ & Comfort European PRIIPs Template ‘CEPT’ 2.0, Past Performance Document ‘PPD’ and Previous Performance Scenario Calculations Report ‘PCR’.
From experience, this is by no means an easy feat and would most probably need to be managed as a ‘mini project’ in itself, if timely and successful outcomes are desired. One key question for product manufacturers in this position to answer is for them to know if they can produce the updated PRIIPs KID and related output documents via the same technology, process and service providers (if any) they currently have. In this regard, it is paramount for manufacturers to consider the ability of their data management systems to allow for both UCITS- and PRIIPs-related data to be stored and co-exist accordingly. This should be coupled with maintaining ongoing reviews of the content and monitoring thresholds to ensure compliance with the respective regulatory requirements.
On the other hand, those manufacturers aiming to switch from UCTIS KIID to PRIIPS KID, hence producing the PRIIP KID for the very first time, would need to be addressing a wider spectrum of implications through their project plan. Knowing the requirements under the new RTS and validating the availability of the required raw data (which would also include a number of historical data points) is of paramount importance to ensure a solution in place that can accommodate all the regulatory requirements.
Another major operational challenge will undoubtedly lie in designing the required process flows to be able to publish past performance scenarios and related data. Whilst the preferred route product manufacturers are taking to satisfy these requirements is not yet clear, they would in essence need to decide whether to use a separate document annexed to the KID or produce a digital publication on their website which could prove to be a more cost effective and environmentally friendly solution.
How can we help?
The asset management industry must comply with multidisciplinary PRIIPs requirements while maximizing operational efficiency. That’s why KPMG has developed a holistic business solution supported powered by an experienced team of multidisciplinary experts (including regulatory, risk, technology, data and actuarial specialists) to cope with all angles of PRIIPs complexity in a streamlined manner.
We are here to help! Get in touch with our team to learn more about KPMG’s value proposition.