At the beginning of this year, the European Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation came into force, affecting a large number of investment and insurance products. For providers of investment products, such as banks, investment managers and insurers, PRIIPs has a significant impact and creates the necessary challenges.
03 Oct 2018
The PRIIPs regulations aim to ensure that retail investors have all the essential information to invest in PRIIPs related products in an informed manner. The European Union wants to increase the transparency of investment products in order to better protect retail investors.
Why do providers need to create the Key Information Document (KID)?
The KID is a standard and uniform document that applies to all PRIIP providers in the European Union. The KID enables investors to easily compare similar products from different providers. Based on this information, investors will be able to make better decisions on their purchase of investment products.
What information should be provided in the KID?
The KID contains important information about a Packaged Retail and Insurance-based Investment Product (PRIIP). The KID is a standardised document that informs retail investors about the components, risks, costs and potential return on investment of the product.
How to inform retail investors?
Providers of investment products and insurance products are required to provide the KID to potential clients. The most recent version of the KID should be published on the website and, when possible, be sent directly to the investor by e-mail.
What type of investment products are affected?
PRIIPs cover a range of investment products which, taken together, make up a market in Europe worth up to €10 trillion. Examples of products classified as PRIIPs are insurance-based investment products, non-UCITs retail schemes, foreign exchange transactions, Over-The-Counter derivatives, exchange traded derivatives, structured products and deposits.
What are the main challenges for PRIIP providers?
In meetings with our investment management clients, we noticed that they struggle with similar types of challenges on PRIIPs. We have summarised the main challenges:
- The first challenge for providers is to obtain the information and calculations on risk and return within the Regulatory Technical Standards (RTSs) framework. The risk section must include a visual summary of the risk indicator, consisting of seven risk classes, for which the RTS provides a standard template. For the performance scenarios, a format must be used for the presentation of the scenarios, including the stress scenario and the calculation requirements. A standard format has been made available for the calculation of the costs and deals with how the costs should be presented over time and of which components the costs consists.
- Publishing an annual update of the KID is also a challenge for many providers. When important changes occur, the KID must directly be adjusted and updated. This concerns a change in market or credit risk, a change in the expected return in a moderate scenario of more than 5%, and when the general information is no longer accurate. This requires considerable effort from providers to closely monitor every change and their possible impact on any aspect of the product.
- The PRIIP regulation requires that the KID is written in the official language of the country. For example, the AFM (the Dutch regulator of PRIIPs) has decided that PRIIPs distributed in the Netherlands must come with KIDs written in Dutch. Other EU member states also only allow the member state's official language as the required language for KIDs. This means that providers offering their products throughout Europe must offer KIDs in 23 languages. This is proving to be a major challenge, especially when the aforementioned changes occur, meaning that the KID must be renewed for all 23 different language versions.
Based on these challenges and the discussions with our clients, we have established a special PRIIPs team within KAS Lab. In collaboration with several clients, we are working out the possibilities to relieve banks, investment managers and insurers of the burden of complying with the PRIIP requirements.