FCA provides final UK rules for PRIIPs KID Regulation implementation

The FCA has published its policy statement on the amendments to its disclosure rules in readiness for the application of the PRIIPs KID Regulation (PS17/6) on 1 January 2018. This paper follows its consultation in July last year in which it set out how the PRIIPs KID Regulation will change the UK disclosure regime for firms that manufacture, advise on or sell PRIIPs as well as setting out amendments to its existing disclosure provisions in the FCA Handbook.

The policy statement follows on from the European regulatory technical standards which have now been published in the Official Journal of the EU (which we covered in our newsflash here). The UK rules remain subject to potential European developments but will otherwise come into force at the same time as the PRIIPs KID Regulation on 1 January 2018.

This briefing summarises the FCA's final position and highlights some of the helpful clarifications and guidance provided by the regulator.

Background

The PRIIPs KID Regulation will apply to manufacturers and distributors of PRIIPs on 1 January 2018. The regulatory technical standards supporting the level 1 text have now been published in the Official Journal of the EU and for the most part the main provisions are settled. There are a few issues where the European Commission or the European Supervisory Authorities (ESAs) may issue future level 3 guidance and the FCA acknowledges that there is a risk in publishing its final position without such European guidance. However, the FCA has said that by taking this approach it hopes that firms will have sufficient clarity to progress their own change programmes.

The FCA has also said that it will consult separately on changes to its enforcement guide and decision procedures and penalties manual to reflect its approach to enforcement in relation to the PRIIPs KID Regulation.

General approach

The FCA proposed in its July consultation amending or deleting disclosure requirements that would duplicate or conflict with the PRIIPs KID Regulation, which approach respondents have agreed with. Respondents also acknowledged that there may be circumstances where firms will need to prepare and provide additional disclosure material to supplement the KID.

Like its approach to the recent Market Abuse Regulation, since the PRIIPs KID Regulation is directly applicable, the FCA will not transpose the PRIIPs KID requirements into the handbook but will refer directly to the EU sources.

List of PRIIPs and non-PRIIPs products

The FCA acknowledges that identifying products which may be PRIIPs is not always 'straightforward'. To help firms, the FCA set out in its July consultation a list of products which it considered either caught or not caught. The FCA is at pains to emphasise that the lists are not 'definitive' and ultimately the question would be a matter for the courts, but the lists will give some comfort to manufacturers and distributors for whom the category is not clear. This list has been updated in the policy statement to reflect some responses to the consultation and is set out at the end of this briefing for reference.

Some clarifications on certain products have been given by the FCA. In particular:

• For individual savings accounts (ISAs), the regulator does not believe these will be PRIIPs, instead being tax wrappers in which PRIIPs may be held. Where the products held in an ISA include PRIIPs, the ISA manager will need to provide the KID to the account holder.
• For debentures and other debt securities, the FCA believes these need to be considered on a case-by-case basis and the FCA has included these in both of its indicative lists to reflect this. The FCA believes that their categorisation will depend on whether the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the retail investor.
• The FCA believes that most venture capital trusts are likely to be PRIIPs.
• The FCA is clear that it does not believe that services undertaken by service providers, such as dealing and custody service providers or providers of discretionary managed portfolios, would be PRIIPs, except where they 'package' investments, in which case care needs to be taken.
• Alternative investment fund managers (AIFMs) were also discussed where the alternative investment fund (AIF) is itself a PRIIP. The FCA highlighted that although generally the AIFM will be the manufacturer there are some instances where the AIF may be the manufacturer and each case should be assessed on its own merits.

Secondary markets, top-ups to products and closed book products

The FCA has made it very clear that it is not willing to provide a response to whether the PRIIPs KID Regulation applies to secondary markets, top-ups for existing products and closed book products, although it does say that this position is 'for now'. The FCA, it says, will discuss these matters with the Commission and the ESAs and either comment separately or consult on guidance if appropriate.

Structured deposits

The FCA notes that it will amend its glossary definition of 'structured deposits' to bring it into line with the MiFID II definition as well as highlighting in its Banking Conduct of Business sourcebook the relevance of the PRIIPs KID Regulation for structured deposits. This will be a welcome signpost although the exact wording will be found in the proposed instrument that implements MiFID II rather than in the FCA's paper.

KID is sufficient

Current UK rules require a key feature document (KFD) and key features illustration (KFI) for packaged products, which may include products that fall within the definition of a PRIIP. After 1 January 2018, the FCA has confirmed that PRIIPs will not need a KFD and KFI, just the PRIIPs KID. This includes structured products, which are PRIIPs, and COBS 13.1.3R(3)(d) requiring a KFI will therefore be removed.

For AIFs, the process has also been simplified and for those AIFs that are PRIIPs, the KID is sufficient.

Personalised projections

In its July consultation the FCA considered the current COBS requirement for 'standardised deterministic projections' which are either generic or personal projections. The FCA was of the view that personalised projections were outside the requirements of the KID. Following responses, the FCA is parking the issue and will consult on its approach later this year.

Colour documents

One provision of the PRIIPs KID Regulation which the FCA consulted on rolling out to all disclosure requirements is in relation to firms' use of colour. The PRIIPs KID Regulation requires firms to use colours that do not diminish the comprehensibility of a document if it is printed in black and white. This, it seems, is sensible to the regulator and so the requirement has been extended to cover a wider range of products (PRIIPs and non-PRIIP packaged products) in respect of disclosure requirements.

Conclusion

Clearly there is a risk that some of the issues considered by the UK's regulator will change depending on level 3 guidance from Europe or any publication from the Commission.

Annex

Products which are likely to be PRIIPs

1. Regulated collective investment schemes (CISs) that are:
• non-UCITS retail schemes (NURSs) (authorised unit trusts, open-ended investment companies and authorised contractual schemes)
• qualified investor schemes (QISs) (same types as (a))
• individually recognised overseas schemes (FSMA s272 recognised schemes)
2. Unregulated CISs that are alternative investment funds, including, but not limited to:
• some unauthorised unit trust schemes
• private equity schemes
3. Unregulated CISs that are not alternative investment funds
4. Alternative investment funds that are not CISs, including shares or units in:
• an investment company or an investment trust
• venture capital investments
• European Social Entrepreneurship Funds (EuSEFs)
• European Venture Capital Funds (EuVECAs)
5. Insurance-based investment products such as unit-linked policies, with-profits policies and Holloway sickness policies
6. Fluctuating return annuities (that are not pension products) with features that result in fluctuating amounts being paid to the annuitant because of exposure to reference values (such as indices) or to the performance of one or more assets which are not directly purchased by the annuitant (e.g. purchased life annuities with variable returns)
7. Derivatives: options, futures, and contracts for differences
8. Structured investment products (whatever their form); for example, these may be structured as unregulated CISs, convertible securities, insurance policies or instruments issued by special purpose vehicles (SPVs)
9. Structured deposits (as defined in MiFID II, Article 4(1)(43))
10. Securities issued by certain special purpose vehicles (SPVs) or special purpose entities (SPEs) with variable returns (e.g. convertible securities that may convert from equity to debt securities)
11. Debt securities (bonds, notes or debentures) where the amount repayable is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the investor

Products which are not likely to be PRIIPs

1. Non-life insurance/general insurance, and life insurance that only pays benefits on death or incapacity due to injury sickness or infirmity (i.e. products that have no surrender value, or a surrender value that does not depend on fluctuations in the performance of one or more underlying assets or reference values)
2. Deposits (other than structured deposits as defined in MiFID II)
3. Assets that are held directly by the retail investor, such as corporate shares or sovereign bonds
4. Pension products – pensions that are recognised under national law as having the primary purpose of providing the investor with an income in retirement (including pension annuities purchased using monies from a pension product recognised under UK law), occupational pension schemes, and individual pension products for which a financial contribution from the employer is required by national law and where the employer or the employee has no choice as to the pension product or provider
5. Fixed annuities (that are not pension products) where the amount payable to the annuitant does not fluctuate (e.g. a purchased life annuity that pays a fixed amount of income for life or an annuity that pays a fixed income for a specified term)
6. Debentures and other debt securities where amount repayable to the retail investor is fixed
7. Certain securities such as, subject to certain conditions, securities issued by Member States, their regional or local authorities, central banks, public international bodies, non-profit making bodies or credit institutions
8. Investment trust savings schemes that are dealing services dedicated to the securities of one of more investment trusts
9. ISA (individual savings accounts) wrappers (although investments held within an ISA wrapper may be PRIIPs for which a KID is required).