PRIIPs KID: ESAs publish level 3 Q&A guidance; European Commission publishes additional guidelines
What has happened?On 4 July 2017, the Joint Committee of the European Supervisory Authorities published level 3 guidance on the PRIIPs KID in Q&A format and the European Commission issued a draft communication containing guidelines to facilitate interpretation of the PRIIPs Regulation. Areas covered by the Q&A guidanceThe Q&A guidance relates to (amongst other things):
Areas covered by the European Commission communicationThe draft communication from the European Commission includes interpretive guidance relating to:
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Background
On 4 July 2017, the Joint Committee of the European Supervisory Authorities (ESAs) published much-anticipated level 3 guidance (Guidance) in relation to the key information documents (KIDs) to be provided in accordance with the EU packaged retail and insurance-based investment products regulation (PRIIPs Regulation). As expected, the Guidance has been provided in question and answer format and covers a variety of issues.
Relatedly, on the same day the European Commission (Commission) published a draft communication (EC Communication) containing a number of interpretive clarifications relating to the PRIIPs Regulation.
Key points from the Guidance and the EC Communication are explained below.
ESAs' Q&A Guidance
The Guidance supplements the level 1 regulation and the related level 2 technical standards and has been developed by the ESAs partially in response to the collaborative lobbying efforts of various trade associations and other parties.
OTC Derivatives: "No" to pay-off graphs and hypothetical data, but "yes" to representative KIDsIn the Guidance, the ESAs have confirmed that manufacturers of OTC derivatives may not adopt any of the lighter-touch approaches permitted for certain exchange-traded derivatives. Therefore, for example, the performance scenarios for OTC derivatives may not be presented by way of pay-off structure graphs. Also, it is not permissible for manufacturers of OTC derivatives to rely on KIDs which contain hypothetical, non-market data. However, the ESAs have confirmed that, for OTC derivatives, "bespoke" KIDs are not required, and that it is permissible to publish and rely upon a KID that does not include the actual data of the relevant OTC derivative, but instead includes data which is "representative for the market conditions applicable as long as the OTC derivative contract is made available to retail investors". This approach deals with the issue that key pricing information for OTC derivatives is not known whilst the product is being "made available" to retail investors and is not known until the moment the product is finally traded. Following on from that position, the ESAs further explain that this approach means that a single KID may be prepared for a class or group of OTC derivative products. Taken together, this means that standardised or "representative" KIDs are permissible for OTC derivatives. The freedom to group products in a "representative" KID is limited by the requirement of the PRIIPs Regulation that the KID be accurate, fair, clear and not misleading, and consistent with the binding contractual documentation. The Guidance elaborates that this should be considered by comparing the content of the standardised KID with that of the equivalent bespoke KID. It somewhat vaguely specifies that such differences should be "less than the reasonably expected margin of uncertainty on these figures in general". This raises the issue of where firms will draw the line. In this context, the Guidance considers tenor, and suggests that if, for example, a standardised KID is expressed to include derivatives with a maturity of up to three months (with perhaps a separate KID for 3-6 months), it may be appropriate for the cost and performance scenario figures to reflect the worst outcome covered by that range. Practically speaking, this could mean that the cost and performance scenario calculations would need to be prepared for multiple tenors within that range in order to make the comparison. In summary, after much industry lobbying, the concept of a standardised or "representative" KID has now been formally blessed. However, difficult issues in interpretation remain as to (i) which data to use and how often to update it, and (ii) the granularity with which OTC derivative products may be grouped together. |
Use of pay-off structure graph for "quasi" ETDs: a pay-off structure graph can be used for exchange-traded derivatives (ETDs). The ESAs have widened this to cover call options, put options and futures that are traded on a trading venue and have the same relevant characteristics as exchange-traded call options, put options and futures. However, this is only the case where certain, prescribed, conditions are met – including that the trading venue in question has non-discretionary rules, the costs of trading are fixed by the trading venue, and the contract is cleared through a central clearing counterparty. Supplementary information may be provided to the investor to aid comprehension.
ETDs and generic KIDs: the ESAs have confirmed that, for ETDs, the granularity of a KID may be such that it covers multiple products grouped according to the type of derivative and underlying. In any such grouping, the key product characteristics which determine the presentation of risks and costs must be the same. Examples given include a KID for long call options on shares, and a KID for short put options on indices.
Categories: manufacturers are not able to select the category into which a product falls – the appropriate categorisation analysis must be undertaken in each case, and this will determine which is the applicable category. Where a product meets the criteria for both category 1 and another category, it must be categorised as category 1.
Currency risk: the Guidance re-affirms that currency risk need only be included where the product currency differs from the currency of the member state of the investor. Different KIDs may therefore be required where a product is distributed into a country which uses the Euro and a country which does not.
Costs table: when preparing a KID, the "costs" rows relating to funds may be removed where not applicable.
EC Communication
Geographic scope: the Commission had previously clarified that, where a PRIIP is offered to a non-EU retail investor by a European manufacturer via an intermediary established in a non-EU country, the PRIIPs Regulation does not apply. The EC Communication has clarified further, stating that, where a PRIIP is only made available to investors outside the EU, a KID does not need to be provided.
Lack of payment: in a further clarification of scope, the EC Communication states that PRIIPs the acquisition of which does not require any payment (i.e. no initial payment is required and there is no risk to the investor of any future financial commitments) are not considered an "investment" under the PRIIPs Regulation, meaning that no KID need be provided.
Transitional provisions: there are no specific transitional provisions in the PRIIPs Regulation for PRIIPs that are made available to retail investors prior to the application of the PRIIPs Regulation on 1 January 2018. However, the EC Communication confirms that, where (i) a PRIIP is no longer made available to retail investors as of 1 January 2018, and (ii) changes to the existing commitments are only subject to the contractual terms and conditions agreed before that date, a KID is not required.
Similarly, where those contractual terms and conditions allow the investor to exit the product, and the product is no longer made available to other retail investors after 1 January 2018, a KID is not required.
No adaptation of KID format: the EC Communication states clearly that no deviations from the KID format are permitted, including changes to titles and the order of the sections.
Translation of KIDs: under the PRIIPs Regulation, each KID must be translated into the language(s) of each member state in which the PRIIP is being distributed. The EC Communication helpfully clarifies that the mere fact that a relevant website can be accessed from a particular member state does not automatically trigger a requirement to provide a KID in the language(s) of that member state. Each translated KID must be available on the website of the manufacturer, which is ultimately responsible for the accuracy of each translation.
"PRIIP manufacturer" – entity which lists a PRIIP on a secondary market: the definition of "PRIIP manufacturer" includes "any entity that makes changes to an existing PRIIP including […] altering its risk and reward profile or the costs associated with an investment in a PRIIP". The EC Communication provides that listing an existing product on a secondary market "may not automatically imply a change which alters its risk and reward profile or the costs associated with that PRIIP". Query whether this "clarification" has introduced more uncertainty on this point.
Products acquired on investor's initiative: the EC Communication clarifies that there is no exemption from the requirement to produce a KID for PRIIPs sold without advice or on the investor's initiative – all PRIIPs sold to retail investors must have a KID.
Manufacturer responsibility: the EC Communication clarifies that it is the manufacturer's responsibility to determine which of its products must comply with the PRIIPs Regulation. Where a PRIIP is sold exclusively by persons other than the manufacturer, it is nonetheless still the manufacturer who is responsible for preparing the KID and publishing it on its website.
MOPs: under the PRIIPs Regulation, when issuing multi-option products (MOPs) in respect of which all of the required information cannot be provided in a single document, manufacturers are permitted to deviate from the KID format. However, the EC Communication states that, notwithstanding this, all other provisions of the PRIIPs Regulation must be complied with, including those relating to the timing and method of its publication.
For more information on the PRIIPs KID Regulation see our PRIIPs KID portal.
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