Many firms have swiftly resumed their PRIIPs programmes following the entry of the final Regulatory Technical Standards (RTS) on the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs) in the Official Journal of the European Union, on 12 April 2017. The Regulation requires the disclosure of Key Information Documents (KIDs) when PRIIP products (such as funds, insurance investment products, structured products and structured deposits) are sold to retail investors.
There is still much to do to get ready for PRIIPs, however, and
some firms are only starting their programmes now. A simultaneous
Market in Financial Instruments Directive II (MiFID II) deadline,
followed immediately by an Insurance Distribution Directive (IDD)
deadline, means firms' regulatory, technology, operations and
front office resources will be stretched at the time they are most
needed. Insurers and asset managers are still debating how to
implement the PRIIPs rules which, among other things, enable the
use of UCITS KIIDs as the underlying investment option (or specific
information) document. In particular, where both UCITS and
non-UCITS products are used in multi-option products, a significant
challenge is determining how to combine different methodologies for
risks and costs.
Now that the RTS have been finalised, we are expecting Level 3
guidance to be published shortly from the European Commission
and/or the European Supervisory Authorities (ESAs). This may
present an opportunity for further clarity on outstanding points,
following months of uncertainty. An earlier
draft of the PRIIPs RTS was rejected by the EU Parliament by an
overwhelming majority in September last year, resulting in
considerable uncertainty regarding the PRIIPs timeline and the
final shape of the rules. The finalisation of the RTS will have
provided some comfort that the saga was close to being resolved.
While the finalised RTS sought to address the Parliament's
concerns, they have not resolved all of the issues raised by the
industry – particularly the insurance and asset management
sectors (as noted above).
What changes have been made in the final RTS?
Performance scenarios - introduction of the fourth "stress scenario"
- The Parliament found that flaws in the methodology for the calculation of future performance scenarios could lead to investors receiving information that is not "accurate, fair, clear and not misleading". The previous RTS set out performance scenarios calculated across an unfavourable, moderate and favourable scenario as well as an additional scenario. Some of these were considered overly optimistic, showing positive returns even in the unfavourable scenario.
- The "additional" scenario has been amended and renamed the "stress scenario", to give information on the possible outcome of the PRIIP where extreme market conditions, not covered in the unfavourable scenario, materialise.
- The stress scenario changes affect both linear and non-linear products, under Cornish-Fisher (CF) expansion and bootstrapped VaR methodologies, respectively. For CF, the stressed scenario applies additional scaling ("stress") to volatility. This is in addition to selecting an even further percentile than for the unfavourable scenario in the CF expansion (99th or 95th depending on the holding period). The stressed volatility step adds further calculation complexity compared with the other scenarios. For structured products and over-the-counter derivatives under bootstrapped VaR, the stressed volatility is used to construct stressed historical returns. Similarly to CF, this is to add further "stress" in addition to the selection of a further percentile in returns distribution than in an unfavourable scenario.
- Insurance firms will also be aware of overlaps between PRIIPs and the IDD where EIOPA is developing similar guidelines on risks and returns for complex structures.
- There has been a concern in the industry that the proposed revised formulae results in the "moderate" returns for almost all funds being consistently very close to zero irrespective of investment strategy, and that this will still not present an accurate picture to investors. Many other market participants, such as asset managers, are concerned that the multi-option PRIIP (MOP) category of UCITS funds will appear more risky than PRIIPs products until the end of the transitional period in 2019, when PRIIPs will be adopted more widely.
MOPs - UCITS changes
- MOPs are products that offer a range of underlying investment options, and many include direct investments in UCITS (e.g. life insurance contracts linked to an investment product). Key changes introduced by the finalised RTS include:
- UCITS funds to continue to issue Key Investor Information Documents (KIIDs) and may provide this KIID as the underlying investment options document for the MOP Generic KID document.
- The MOP may aggregate risks and costs for UCITS and non-UCITS products in line with the UCITS methodology and presentation. For MOPs with both UCITS and non-UCITS, the risks categories from 1-7 may be combined.
These changes are likely to be supported by the industry, which had lobbied for this change for some time.
Comprehension alert
- PRIIPs requires that KIDs products, which may be difficult for retail investors to understand, contain a comprehension alert flagged by the manufacturer that could prompt investors and advisers to consider whether a less complex product could be more appropriate.
- The final RTS now clarifies that that manufacturers must include the comprehension alert when a PRIIP is an insurance-based investment product which is deemed "complex", and for which the exemptions established under the IDD do not apply. A comprehension alert is also required when a PRIIP is an investment product that does not adhere to the requirements of Article 25(4) of MiFID II. By way of example, products deemed "complex" under MiFID II could include certain structured deposits. The alignment with the IDD and MiFID II should help provide some clarity and help firms determine when to include the comprehension alert.
Presentation of administrative costs in relation to biometric components of insurance-based investment products
- The final RTS amends certain disclosures in relation to the biometric components of insurance-based investment products in the KID, simplifying the presentation of administrative costs in relation to biometric components of insurance-based products.
- For the insurance sector, separating the full biometric risk premium from the investment costs provides a more meaningful comparison for investors, as including premiums in costs would make it seem as though insurance products have higher costs than other investment products.
What are the next steps?
Clients now have reasonable certainty regarding implementation of PRIIPs, such that they can now focus on establishing and initiating their implementation programmes. Further guidance from the Commission and/or ESAs is expected shortly. There is still some uncertainty as to what topics the guidance will cover, but further clarity is likely to be welcomed by industry.
Overview of key PRIIPs developments
.
| Date | Development |
|---|---|
| 14 September 2016 | The EU Parliament voted to reject the EU Commission's previous RTS on PRIIPs. (See our blog of 20 September for further detail on the Parliament's rejection of the RTS.) |
| 20 September 2016 | In a vote of the Competitiveness Council of the EU, 24 Member States in the Council expressed concerns on the RTS and recommend the delay of the PRIIPs application date |
| 9 November 2016 | The Commission published a legislative proposal to extend the application date of PRIIPs by one year. (See our blog of 17 November for further detail on the Parliament's legislative delay proposal.) |
| 10 November 2016 | The Commission sent amended draft RTS to the European Supervisory Authorities (ESAs), asking them to provide an opinion. The opinion was intended to inform the Commission's final draft RTS. |
| 22 December 2016 | The ESAs responded to the Commission's request, announcing that they could not agree on an opinion in support of the RTS. While an opinion had been adopted by the EBA and ESMA Boards, it did not receive the support of a qualified majority from the EIPOA Board owing to differing views on the treatment of MOPs, the criteria to determine whether a comprehension alert should be included in a KID and the provisions in the RTS on the credit risk mitigation factors for insurers. The Commission was therefore left to finalise its amended draft RTS without an opinion agreed by all three ESAs. |
| 22 December 2016 | After receiving legislative approval, on 22 December, the delay proposal entered the Official Journal, delaying the application date of PRIIPs to 1 January 2018. |
| 7 March 2017 | Commission published revised RTS. |
| 12 April 2017 | RTS entered into Official Journal of the EU. |
| 2 May 2017 | UK Financial Conduct Authority publishes policy statement on disclosure rules following application of PRIIPs Regulation, which sets out guidance on the scope and practical impact of the regulation on firms. The FCA has noted that its views may be revised in the light of any guidance provided by the Commission and/or ESAs. |
| June 2017(expected) | Guidance from European Commission and/or ESAs to be published. |
| 1 January 2018 | Application date of PRIIPs. |
Footnotes
Deloitte's regulatory and investor reporting managed service
Deloitte's managed service and technology solutions include any combination of the following components:
- Investor reporting such as PRIIPs KIDs, marketing factsheets, Solvency II;
- Regulatory reports such as AIFMD Annex IV , Form PF and Form CPO-PQR;
- Fund registrations for Alternative Investment Funds (AIFs), Undertakings for Collective Investments in Transferable Securities (UCITS) and offshore funds with local regulators;
- Investor tax reporting and advisory;
- Risk reporting – stress testing, VaR, model validation, portfolio risk reporting, FRTB.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
