The EU regulation on Packaged Retail and Insurance-Based Investment Products (EU 1286/2014) (PRIIPs) imposes new pre-contractual disclosure requirements for the benefit of retail investors when they are considering the purchase of ‘packaged’ retail investment products or insurance based products.
PRIIPs include investment funds, insurance policies with an investment element, structured products and structured deposits. If a PRIIP is being made available to retail investors, the PRIIP manufacturer (e.g. fund manager in the case of an investment fund) must draw up a key information document (KID). A person advising on or selling a PRIIP must provide retail investors with a KID in good time before the retail investors are bound by any contract or offering relating to that PRIIP.
The KID must be a stand-alone document, completely separate from the marketing materials. It must be written in a concise manner and of a maximum of three sides of A4 size paper when printed, which promotes comparability and must focus on the key features. The PRIIPs Regulation specifies the formal content of KIDs and further details are set out in a draft delegated regulation (RTS) regarding the KID’s contents.
The KID must contain the following information:
PRIIP manufacturers must review the KID regularly and revise it where the review indicates that changes need to be made. The periodic review should take place at least every 12 months and it should also be reviewed where there is a change that significantly affects or is likely to significantly affect the information contained in it.
The PRIIP manufacturer shall not incur civil liability solely on the basis of the KID unless it is misleading, inaccurate or inconsistent with the relevant parts of legally binding pre-contractual and contractual documents. A retail investor who demonstrates loss resulting from reliance on the KID when making an investment into the PRIIP for which that KID document was produced may claim damages from the PRIIP manufacturer for the loss in accordance with national law.
Alternative investment funds (AIFs) marketing to retail investors must comply with the PRIIPs Regulation from 31 December 2016. UCITS are exempted from preparing a KID under the PRIIPs Regulation until 31 December 2019.
The European Commission must review the PRIIPs Regulation by 31 December 2018 including a consideration as to whether the exemption for UCITS should be prolonged past December 2019 or whether the existing requirement to produce a KIID under the UCITS Directive should be replaced by or considered equivalent to the KID under the PRIIPs Regulation.
A retail client for the purposes of the PRIIP’s regulation, and insofar as the funds industry is concerned, is any investor who is not a MiFID ‘professional client’. Irish domiciled retail AIFs and professional investor AIFs will typically fall within the definition of PRIIPs. Qualifying Investor AIFs (QIAIFs), which do not limit investor eligibility to MiFID professional clients, will also be caught by PRIIPs and will have to prepare a KID.
Examples of the types of investors in QIAIFs who would not be MiFID professional clients would be high net worth individuals and also corporate investors who are not regulated to operate in the financial markets or whose main activity is not investing in financial instruments. Fund promotors may thus have to consider whether or not to produce KIDs or to avoid doing so by limiting the offering of shares in the QIAIF to MiFID professional clients only.
It should also be noted that European investment management and insurance representative associations have lobbied extensively for a delay on the 31 December 2016 application date. On 1 September, at the ECON Committee Meeting the Commission’s delegated regulation on KIDs for PRIIPs was debated and it was resolved to reject it to and send the proposals back to the European Commission for revision.
The need to delay the implementation of the Level 1 Regulation so as to avoid its entry into force (and the associated obligations) without the Level 2 RTS being adopted in advance was also tabled. During the debate, ECON members stated their readiness to work with the European Commission and the European Supervisory Authorities to ensure that workable RTS enter into force together with Level 1 by 31 December 2016. However, they dismissed the suggestion that the PRIIPs Regulation could be implemented without RTS and acknowledged that a delay may now be required.
On 14 September 2016, the European Parliament (Parliament) voted to reject the RTS adopted by the European Commission in June 2016 in respect of the PRIIPs Regulation − the Parliament’s resolution supported a similar vote of the ECON Committee on 1 September 2016. The Parliament has called on the Commission to submit new draft RTS taking account of Parliament’s concerns and to consider the postponement of the 31 December 2016 implementation date.
Any amendment to the implementation date of the PRIIPS Regulation would need to be introduced by the Commission by way of a new regulation in accordance with the ordinary legislative procedure.
There are a number of controversial aspects to the contents of the KID, not least the requirement for future performance scenarios to be included, while excluding past performance metrics (a UCITS KIID, by contrast, requires disclosure of past performance only). Following the Parliament’s resolution, there is a possibility that the PRIIPs Regulation may enter into force on 31 December 2016 without the benefit of related RTS at that time or it may enter into force at a later date. In any event, whether or not the PRIIPs Regulation application date is delayed, sooner or later it will affect all AIF investment fund products whose offering is not limited to MiFID professional clients. Affected AIF promoters are strongly advised to start taking appropriate preparatory action now.