After a number of false-starts and reworking, PRIIPs KID Regulatory Technical Standards (RTS) will come into effect in January 2018, now just seven months away, meaning that PRIIPs (packaged retail and insurance-based investment products) providers urgently need to address how they will produce the required key information documents (KIDs).
PRIIPs Regulation (Regulation 1286/2014) was due to come into effect from 31 December 2016, but in September 2016, the European Parliament objected to Regulatory Technical Standards (RTS) and on 8 December 2016, the Council delayed the introduction of PRIIPs regulation by 12 months.
The year-long delay should have enabled the industry to adapt to the new rules, whilst the Regulatory Technical Standards were being redefined, and commenting on the decision to delay the regulation, director of regulation at the Association of British Insurers’, Hugh Savill said the delay would: ‘Give insurers the much-needed time to implement the complex requirements’ and that the ‘The ABI welcomed [that they have recognised] the need for a delay’. However, this time has not been used wisely, and in a recent webinar poll conducted by Financial Risk Solutions, 53% of industry respondents said they did not know what their organisation’s solution for PRIIPs regulation would be. When asked to estimate the calculation volumes involved in KID production, just 16% answered correctly.
Following on from the adoption by the European Commission of the revised Regulatory Technical Standards*, PRIIP providers will require a systematic solution, either through in-house/group systems or by out-sourcing, each requiring specialist vendor technology. Now is the time to ensure your organisation will be PRIIPs-ready by January 2018 – We can’t overstate the importance of the January 2018 date for PRIIPs manufacturers – if they can’t produce KIDs, they can’t write business.
What is PRIIPs Regulation?
According to the Financial Conduct Authority, the aim of the PRIIPs Regulation 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)’. PRIIPs regulation will ensure that PRIIPs manufacturers (or anyone who changes an existing PRIIP, such as a distributor) is required to:
- Prepare a Key Information Document (KID) for each PRIIP that they produce
- Publish each KID on their website
KIDs can be up to a maximum of three sides of A4-sized paper and the KID for each investment product must be provided in good time, before the consumer is bound by any financial decision and must clearly outline to consumers:
- Key features
- Risk
- Rewards
Costs
While the KIDs will be clear and easy to read for consumers (and in a pre-described format, bringing uniformity to the investment industry), the compilation of the KID will be greatly complex for PRIIPs manufacturers. Each KID will need to contain the following information, presented in a pre-determined sequence of sections, as follows:
- 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
Each KID also requires regular updates based on the previous five years’ unit prices calculations using different positions holding data, and the KID also needs to demonstrate four performance scenarios showing the range of possible returns:
(a) A stress scenario
(b) An unfavourable scenario
(c) A moderate scenario
(d) A favourable scenario
More than a regulatory requirement
From our research we have found that industry unpreparedness for PRIIPs regulation can be attributed to regulatory fatigue, with many organisations struggling under the weight of regulation. The deadline delay has also resulted in issues around confidence and complications for projects working to the original timeframe and deadline. However, KIDs are much more than a regulatory requirement to provide some ‘additional documents’, they will be a key component of point of sales illustration material.
Furthermore, PRIIPs providers could be exposed to civil liability risk in respect of KIDs that are misleading, inaccurate or inconsistent with the relevant parts of legally binding pre-contractual and contractual documents or with the requirements laid down in Article 8 of the Directive. For PRIIPS providers with a fund of funds business model, the performance scenarios and cost metrics of their asset managers become increasingly important – these now feed directly into the product providers point of sale material.
Key Issues for PRIIP providers
- The 1/1/2018 implementation date for PRIIPs is a show-stopper for PRIIP manufacturers, if they can’t produce KIDs, they can’t write business
- PRIIP providers will require a systematic solution, either through in-house/group systems or by out-sourcing each using specialist vendor technology
- Key information documents are much more than a regulatory requirement to provide some additional documents, they will be a key component of point of sales illustration material. PRIIPs providers could be exposed to civil liability risk in respect of KIDs that are misleading, inaccurate or inconsistent with the relevant parts of legally binding pre-contractual and contractual documents or with the requirements laid down in Article 8 of the directive
Open architecture and charges in the PRIIPs world
International life company wealth management products typically promote open architecture structures, which bring added complexity to the preparation of KIDs. The calculations are complex and require a PRIIPs technology solution and oversight from the finance team at the PRIIP manufacturer. One positive outcome from PRIIPs regulations is a potential end to redress claims from portfolio bond holders who have changed risk profile based on an advisor’s investment recommendations and lost money.
With timely KID production, this is less likely to happen in the future as the change in risk profile is ‘called out to the investor’ to use that awful corporate idiom. This clearly requires analyaing holdings at individual portfolio bond level and updating KIDs in a timely fashion and therein lies the complexity.
For unit linked products the calculation process is set out below. The data items required are a list of PRIIPs products, their associated product charges, a schedule of permissible fund links for each PRIIP, the five-year unit price histories of the funds, details of the fund charges and the current asset mix of funds with flexible investment in multiple asset classes and five-year price history of those asset classes.
Frank Carr is the chief marketing officer at Financial Risk Solutions (www.frsltd.com).
Financial Risk Solutions (FRS) was founded in 1999 by actuaries and IT specialists. Invest|Pro™ is leading software for unit pricing, portfolio bond valuation, investment administration, asset reporting and compliance oversight specifically designed for the Life Assurance industry. Invest|GRC™ empowers insurers and asset managers to automate PRIIPs and KID production. In addition it is used to meet Pillar III asset reporting standards in the Solvency II world via a single, analytics-driven database, combining data from internal and external sources.