PRIIPs KID: European Commission adopts revised regulatory technical standards

The PRIIPs KID regulatory technical standards that were rejected by the European Parliament in September 2016 have been revised, adopted and published by the European Commission and submitted to the European Parliament and the Council for approval.

Recap – key changes:

• Performance scenarios – "stress" scenario: the option to provide a fourth performance scenario has been replaced by a mandatory requirement to provide an additional "stress" performance scenario. Firms will need to make changes to existing templates to incorporate related prescribed language.
• Performance scenarios – expected return: expected returns used to determine performance scenarios continue to be calibrated by reference to historical returns, rather than zero as the European Commission had previously proposed.
• MOPs: for multi-option products which have UCITS or non-UCITS funds as underlying investment options:

- until 31 December 2019 manufacturers can use a key investor information document prepared in accordance with the EU UCITS Directive to comply with their PRIIPs KID disclosure requirements for those investment options; 

- manufacturers can calculate costs for those investment options using the "estimation" methodology applicable to products which have been operating for less than three years;

- when calculating the summary cost indicator, the assumed 3% return applicable to exchange-traded derivatives also applies to these multi- option products; and

- where these funds are the only underlying investment options, costs disclosure can be based on charges as calculated under UCITS legislation, meaning that transaction costs will not need to be factored in.

• Comprehension alert: PRIIPs which are "complex products" under MiFID II will require a comprehension alert.

What happens next?

The European Parliament and the Council have a review period of three months (extendable by a further three months), but this is expected to be shortened by the adoption of early non-objection statements. Assuming that the revised regulatory technical standards are approved, they will apply from 1 January 2018, in line with the PRIIPs KID Regulation.

What has happened?

On 8 March 2017 the European Commission adopted and published its revised regulatory technical standards (RTS) under the EU regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs KID Regulation). The RTS are the detailed 'level 2' rules which, once in force, will supplement the PRIIPs KID Regulation.

In accordance with their mandate under Article 8(5) of the PRIIPs KID Regulation, in April 2016 the European Supervisory Authorities (ESAs)¹ prepared draft RTS (Draft RTS) for review by the European Commission, the European Parliament and the Council. In June 2016, the Draft RTS were endorsed by the European Commission. However, during the subsequent scrutiny period, the European Parliament objected to the Draft RTS on a number of grounds, including that the Draft RTS were not in line with the spirit and aim of the PRIIPs KID Regulation of providing clear, comparable, understandable and non-misleading information for retail investors (see 'European Parliament rejects PRIIPs KID regulatory technical standards').

In November 2016, by letter to the ESAs, the European Commission proposed certain amendments in order to address the European Parliament's objections. However, the ESAs were unable to collectively agree on these (see 'Further uncertainty for PRIIPs KID Implementation'). Accordingly, the European Commission decided to take the initiative forward itself, and has prepared and adopted amendments to the Draft RTS which have been submitted to the European Parliament and the Council for approval (Amended RTS).

What are the key changes to last year's Draft RTS?

1. Performance scenarios – mandatory "stress" scenario replaces optional fourth scenario: under the Draft RTS, firms had the option of providing an additional, fourth, performance scenario, if they felt that this was appropriate. However, it was unclear when and how this option was to be used, and this was considered unacceptable given that the "unfavourable" scenario was viewed as overly optimistic in many cases (as some capital at risk products which had historically returned a loss did not show any loss under the "unfavourable" scenario). This optional fourth scenario has therefore been removed, and an additional, mandatory, "stress" scenario has been introduced. The "stress" scenario must be modelled using a prescribed methodology which requires the selection of an extreme percentile of the simulated returns (in the relatively simpler case of Category 2 PRIIPs, this corresponds to 1% for the year 1 holding period and 5% for other holding periods). Firms will need to make amendments to their existing templates to reflect this new scenario and to incorporate new prescribed language.
2. Performance scenarios – assumption for expected return unchanged: under the Draft RTS, the performance scenarios were calibrated by reference to historical returns. The European Commission subsequently proposed that this be set at zero instead. However, the ESAs' emphatic feedback was that this was overly conservative and impractical. In the Amended RTS the European Commission has reverted to using historical returns.
3. Multi-option products - specific information: under the Draft RTS, manufacturers are required to provide specified information in respect of each of the investment options underlying a MOP. Where one or more of the underlying investment options is a UCITS or non-UCITS fund (a Fund), the European Commission proposed an amendment allowing this information to be disseminated, in respect of such Fund(s) only, by way of a key investor information document drawn up in accordance with the EU UCITS Directive² (a KIID). This provision has been incorporated into the Amended RTS and will apply until 31 December 2019.
4. MOPs - costs: the European Commission proposed that, where a KIID is used to provide specific information, the requirement to specify 'Costs over time' and 'Composition of costs' in the KID be replaced with a requirement to provide the information required under the EU regulation implementing the UCITS Directive³, being (i) entry and exit charges, (ii) ongoing annual charges, and (iii) performance fee. Under the Amended RTS this is still the case, but only where Funds are the only investment options underlying the MOP. This means that the costs disclosure in such cases can be based on charges as calculated for UCITS funds, potentially leading to these products being perceived as being cheaper, as there is no requirement to take transaction costs into consideration when performing the calculations.
   
   A further addition to this section allows (but does not oblige) manufacturers of MOPs with existing Funds as underlying investment options to use the costs rules applicable to products which have been operating for less than three years - i.e. the "estimation" methodology set out in point 21 of Annex VI. The effect of this is that actual transaction costs will not need to be used, which is likely to increase the complexity of cost disclosure for MOPs as methodologies will need to be agreed upfront, particularly with data providers and distributors.
5. MOPs – summary cost indicator: the Draft RTS assumed a 3% return for exchange-traded derivatives for the purposes of calculating the summary cost indicator under Annex VI of the Draft RTS. The Amended RTS have broadened this so that the assumed 3% performance also applies to MOPs with Funds as underlying investment options where a KIID is used.
6. Comprehension alert: the Amended RTS set out criteria establishing when a comprehension alert is required. This is done by way of cross-references to the Insurance Distribution Directive_⁴ and to MiFID II⁵: essentially, where a product is a PRIIP and is a "complex product" under MiFID II, a comprehension alert will be required. Previously, there was simply a general requirement to include a comprehension alert "where relevant".

What happens next?

The European Parliament and the Council have a scrutiny period of three months (extendable by a further three months) within which to object to the Amended RTS, but this is expected to be curtailed by the adoption of early non-objection statements. Assuming the Amended RTS are approved, they will apply from 1 January 2018 in line with the PRIIPs KID Regulation itself.

Further guidance

Level 3 guidance is expected to be provided after the Amended RTS have been adopted and published in the Official Journal of the European Union.

^{1.  The European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA).}

^{2.  EU Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities.}

^{3.  Article 10 of Commission Regulation (EU) No 583/2010.}

^{4.  Directive (EU) 2016/97 of the European Parliament and of the Council on insurance distribution (recast)}

^{5.  Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast)}