Packaged Retail & Insurance-based Investment Products (PRIIPS) Regulation

Packaged Retail and Insurance-based Investment Products (PRIIPS) Regulation has been adopted but is not yet implemented. The regulation would be effective from 31st December 2016.

PRIIPS is a horizontal group of products. It could take various forms (funds, structured deposits, certain pensions and insurance products).

However, they fulfil complementary actions: capital accumulation over a medium-to-long period at over the risk-free rate, where the investor doesn’t hold assets directly, but through certain types of "wrapper" (a legitimately mandatory financial contract between a client and a financial institution such as an investment bank).

The Regulation was part of a comprehensive statutory package on such products, including The Insurance Distribution Directive (IDD) and undertakings for collective investment in transferable securities (UCITS V).

The objective of the PRIIPs Regulation is to boost effective EU markets by enabling investors to better comprehend and relate the critical features, risk, rewards, and costs of various PRIIPs.

The Regulation is for those individuals who manufacture PRIIPs, instruct on PRIIPs or sell PRIIPs.

The regulation on key information documents requires that intermediaries deliver retail clients with a succinct, basic form Key Information Document (KID) before they make an investment in any packaged retail and insurance-based investment products (PRIIPS, formerly PRIPs).

If the retail investor commences the transaction through distance communications, the KID could be delivered after the end of the transaction, provided it is not feasible to deliver the KID beforehand and the retail investor permits.

The retail investor can defer the order in order to get and interpret the KID before closing the transaction.

The Regulation would apply to:

Retail investment product providers.

Life firms.

Flexible investment management companies.

Fund Managers.

Stockbrokers and other companies that advice retail clients on funds, structured products, and derivatives.

Companies managing retail distribution platforms.

The Regulations would also apply to individuals’ external to the FCA’s regulatory concern such as those who are exempt from the requirement to secure FCA authorization.

The Regulation would only apply if the PRIIP is provided to retail investors. Retail investors could either be client described in the Markets in Financial Instrument Directive (MiFID) or clients as denoted to in the Insurance Mediation Directive (IMD).

Retail Products that can be categorized as a PRIIP

Structured collective investment schemes.

Unstructured collective investment schemes.

Investment trusts.

Insurance-based investment products.

Derivatives.

Structured deposits.

Securities provided by some SPVs.

Annuities.

Retail Products that cannot be categorized as a PRIIP

Non-life insurance/general insurance, and life insurance that provides benefits on death, physical inability due to injury, and illness.

Any deposits provided they are not structured deposits.

Investment funds provided to institutional investors are not included.

Corporate shares and bonds that are held directly.

Pension products.

Annuities (provided they are not pension products).

Some securities.

A critical challenge for PRIIP manufacturers would be the huge quantity of KIDS that would have to be created.

Manufacturers would have to establish an inventory of all the PRIIPs, identify all non-UCITS that are in line with the PRIIP description and are sold to retail investors.

They would have to source and gather correct and latest data about every PRIIP, from the concerned department in the company, to populate the KID.

This could be difficult with regard to the computations of risk and costs. The KID would have to be presented in a user-friendly manner.

The manufacturer would not be in a position to view the KID in isolation, as it would have to be consistent with any mandatory documents.

Additionally, the manufacturer would have to contemplate any similarities with other EU disclosure documents.

It is vital to ensure the KID is correct, as manufacturers would be liable if any harm is suffered by the retail investor due to dependence on a KID that is misleading or inconsistent either with pre-contractual or contractual documentation.

Firms would require a streamlined process, with strong governance measures to ensure the KID is correct. They would have to establish a team for managing and documenting the KID life cycle.

Though PRIIPs would result in substantial operational challenges, especially for firms that emphasize non-UCITS PRIIPs, firms must look at the PRIIP execution as more than just a compliance program.

PRIIPs is not the only initiative looking to strengthen investor safeguard. MiFID II would introduce comprehensive product governance guidelines and an interpretation of independent investment advice.

There would also be robust stimulus rules and improved disclosure on products and services.

The KID would enable retail investors and independent advisers to easily and efficiently measure the relative value of products from various manufacturers, and also across sectors and nations, thereby increasing competition.

Behavioural economics indicate that individuals are less likely to select products that have extreme outcomes in the summary risk and cost indicators.

It could take some time before the final version of the KID is known. Considering the narrow execution time for companies, execution plans should look at how much can be done prior to the finalised requirements.

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Christine is an experienced freelance business and finance writer. Currently writing for Academy of Financial Trading reviews.