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PRIIPs KID regulation: new challenges for asset managersPromoting an inclusive entrepreneurial mindset and attitude charts new territories with transformative power.
During the last years, the variety of financial products on the market has been growing hugely in terms of numerosity and complexity because of the packaging of different insurance-based products, making hard for the investors to understand the potential risks carried out by this new kind of instruments.
Moreover, technological advances have been deeply impacting the distribution models, making protection of retail consumers against misconduct, scams and fraud crucial to maintain trust and confidence in markets.
This brand-new context has produced a joint effort by the European Union to converge on common protection measures for customers, resulted in the entry into force of the following regulations:
2018: MIFID II (Markets in Financial Instruments Directive).
2018: IDD (Insurance Distribution Directive).
2014: Regulation (EU) N° 1286/2014, aka PRIIPs KID Regulation.
The first two regulations are addressed to the financial and insurance sector respectively, and they are aimed at strengthening investor protection and improving the functioning of financial markets making them more efficient, resilient and transparent, as well as ensuring that distributors take responsibility for consumer outcomes and that the products sold meet consumers’ needs.
On the other hand, the PRIIPs KID legislative framework concerns the introduction of a new standardized Key Information Document (KID) for the Packaged Retail and Insurance-based Investment Products (PRIIPs) and its objective is to provide essential and standardized information to investors to allow them to make an informed investment decision.
The adoption of this regulation mainly involves:
Manufacturers of the PRIIPs, who are required to draft and distribute the KID.
Advice providers or sellers of the PRIIPs, who are required to distribute the KID.
History of PRIIPs KID regulation
As aforementioned, the Regulation was issued on 2014, followed by the publication of the Regulatory Technical Standards (RTS) developed by the European Supervisory Authorities (ESAs) in March 2016 and revised by the European Commission on March 2017. The RTS regards the presentation, content, review and provision of the KID, including the methodologies underpinning the risk, reward and costs information.
Between October 2019 and January 2020, the ESAs held the first public consultation to modify RTS for improving presentation of KID content to retail investors (for example, providing graphics, tables and various kinds of accessible visual representations within the KID).
The Commission and the European Authorities also discussed – as early as 2019 – about the term of the exemption from the obligation to prepare the KID for the suppliers of Undertakings for Collective Investment in Transferable Securities (UCITS), in order to concede more time to management/investment companies for the transition from the production of the Key Information for Investor document (KID) required by Directive 2009/65 / EU (“UCITS IV Directive”) and that of the KID required by the new PRIIPs Regulation.
The term of the above exemption was initially defined for year-end 2019, to be subsequently postponed to year-end 2021.
In the most recent consultations, the Authorities have approved an extension of the deadline for the entry into force of the PRIIPs KID: fund managers are now obligated to comply to the regulation by 1st January 2023.
The UK PRIIPs regime
Following Brexit, UK has adopted a special regime for the compliance to the EU PRIIPs Regulation, dictated by amendments made by the Financial Conduct Authority (FCA).
On 25 March 2022, the FCA published a policy statement (PS22/2) setting out final guidelines to the UK PRIIPs regime and stating the extending of the exemption from PRIIPs requirements for UCITS until year-end 2026.
Main challenges from PRIIPs KID legislation
The impact of the PRIIPs KID Regulation on financial market is disruptive and several changes carried out by the new legislation are still under discussion in the Fund Asset Management community. In fact, the Regulation is subjected to different interpretations and for this reason, a group of experts, coming from European associations members of EFAMA, is working on a document collecting questions and answers on the trickiest aspects of the Regulation.
Basing on our point of view on the ongoing discussions, the development of the following topics of the Regulation should be taken in stronger consideration:
Presentation of distribution fees.
Structure of past performance documents, to be provided via a link in the KID.
Summary Risk Indicator and the Performance scenarios computation.
Methodology for the integration of gaps in historical timeseries for share classes with insufficient data.
Presentation of the narrative sections within the KID.
In addition, compliance to the regulatory program requires the involvement of a wide variety of stakeholders, the management of multiple workstreams and communication with different responsible functions.
KID production requires a very time-consuming static/historical data collection, for which it is necessary to involve multiple functions/external providers for retrieving all the needed information.
Moreover, once KIDs are produced, validation of the various sections is needed, focusing on computation of summary risk indicator and performance scenarios, as well as formal validation of narrative texts.
How BIP can help you?
Basing on our strong skills and experience in Capital Markets sector, BIP has set up a regulatory transformation program which aims at ensuring – in the short run- compliance with the regulation, up to an evolution – in the long run – of the operating model providing for industrialization of the processes
BIP’s team provides advisory services to its clients focusing on their needs and supporting them in a end-to-end manner.
In the context of the strategic vision showed above, the two phases designed to support the compliance program are articulated in the following offering:
BIP operates through multidisciplinary teams of experienced professionals qualified in Risk and Compliance that working together with Data Management experts coming from our Centers of Excellence (COE), to develop an integrated and connected offering aimed at generating long-lasting benefits for our clients.