Another KID on the way!
The European Parliament is proposing another key information document (KID) for retail investment products which includes investment funds, retail structured products and certain types of insurance contracts used for investment purposes. Such products are essential for investors to build up savings and investments however such investors often are confronted with confusing and overly complex information, especially in relation to the risks and costs involved with such investments.
The Packaged Retail Investment Products proposed regulation (PRIPs) has been drafted to protect retail investors and to provide them with all the necessary information to make an appropriate investment decision in a format that is understandable and to ensure that there is a fair comparability across product providers.
PRIPs will specifically put the onus of compliance onto the 'investment product manufacturer', defined as the person who produces an investment product, but also a person who changes the risk or cost structure of an existing product, such as combining other products.
The EU has already implemented a similar regulation for Unitised Collective Investment Trusts (UCITS) with the 'key investor information document, KIID'. The two documents are similar in their respective goals; to have a standardized 'look and feel' with content that is focussed on key information presented in a common way, so as to promote comparability of information and its comprehension by retail investors. The document must be short, written in a concise manner, in non-technical language that avoids jargon, drawn up in a common format and must be a stand-alone document.
Some of the content of the two documents is similar as they both have to include the nature and main features of the product, its risk and reward profile, costs and past performance. But the devil is in the detail and the differences become apparent.
With the PRIPs KID, the following sections and headings should be used and presented in the following order:
- What is this investment?
- Could I lose money?
- What is it for?
- What are the risks and what might I get back?
- What are the costs?
- How has it done in the past?
- What might I get when I retire? (for pension products)
Within each section, the content of the PRIPs KID will most probably differ further from the UCITS KIID, given the nature of the products covered. For example, with PRIPs and structured products, risk might be measured taking into account different outcomes at maturity and as risk may change over the product life cycle, this may need to be captured and presented as well. For life insurance products, the costs over different time horizons may need to be disclosed in monetary terms. The proposed regulation sets out some prescriptive content that will require due care and attention and there are other prescriptive elements in relation to the document heading and notes to take into consideration.
Another important difference with the PRIPs KID is that it MUST be provided to the retail investor BEFORE an investment decision is taken and not merely be available for review.
It is worth noting that some investment products are excluded from PRIPs, including deposits with a rate of return that is determined in relation to an interest rate or insurance products which do not offer a surrender value (or where the surrender value is not exposed to market fluctuations). There are others, so it is worth defining the product set before embarking on the compliance route.
PRIPs are due to come into effect by the end of 2014 and as such, preparation should start now to be ready in time. It will take some work as a straight 'piggy-back' on the any existing UCITS KIID process will not cover all the requirements. Failure to comply can lead to some damaging consequences as all Member State regulatory authorities can prohibit or suspend the marketing of an investment product. They can also issue a warning to the investment product manufacturer and make this warning public! A retail investor that has relied on the key information can claim damages for any loss that is incurred as a result of a KID that is not in full compliance of the regulations; so it's worth spending the time to get it right!
As the debate continues and as the proposal becomes law, ISC will continue to monitor the impact on investment product providers and will be well placed to add value for our clients.