Paul North, head of product management EMEA at BNY Mellon, looks at how requirements for the new PRIIPS Key Investor Documents and MiFID 2 may overlap.
Last month the European Supervisory Authorities (ESAs) published the final draft regulatory technical standards for the marketing of PRIIPS (Packaged Retail and Insurance-based Investment Products), clarifying key components which have been under consultation for some time.
PRIIPS scope is broad, covering banking products, insurance products and collective investment funds. The legislation’s objective is to better inform and protect retail investors – therefore UCITS and AIFS distributed to retail investors also fall under the regime.
PRIIPS requires a new form of Key Investor Document (KID), which will inform the investor through three principal components: performance scenarios, summary risk indicator and costs. While the compliance time-line for retail AIFS (1 January 2017) will in itself provide a hurdle (UCITS will be exempt till 31 December 2019), it is the detail in these components which will likely challenge both sides of the fund industry.
In the final standards the ESAs have determined hypothetical performance scenarios, rather than actual performance track records, will hold the most value for investor transparency. This proposal has been drafted despite lobbying from the industry and the new calculation techniques will likely lead to further operational and technology changes for the UCITS manufacturers.
With this approach the regulator appears to be aiming for consistency between the fund’s risk management process and the expected performance scenarios. For leveraged funds the management companies will now need to utilise a value-at-risk (VaR) approach across their KID and UCITS risk management process – risk officers may need to review their risk processes to ensure an alignment. Standards for risk modelling techniques in PRIIPS are more prescriptive than the legacy guidelines under AIFMD/UCITS and it is unlikely duplicitous models will be desired.
In the third component, the final RTS explains the decision to present the overall cost to the investor through a “Reduction in Yield” measure and, describes a portfolio turnover approach to determine transaction cost estimates for new products where no cost history is available.
There is an interesting overlap here with Article 46 of MiFiD which clearly articulates the requirement for investment firms to provide sufficient information to clients on the costs of an instrument provided under UCITS or PRIIPS KIDS, along with an overriding caveat that further pertinent costs not captured under these regimes should also be shared. This appears to set the precedent that investment firms will be required to capture, calculate and document this cost data ahead of the PRIIPS 2019 time-frame. While PRIIPS concentrates on providing the investor with product information “in good time” there could be further work for firms to provide cost data on a more regular basis through MiFiD obligations on an ex-post basis.
The detailed requirements for PRIIPS KIDS have now been presented to the industry and there are practical hurdles to overcome. It will be interesting to see how the grandfathering of the UCITS KID plays out practically. While the exemption through 2019 provides a buffer, there may be calls on the manufacturers to support these requirements – formally, through the cross over with MiFiD, or informally where their funds are utilised in other PRIIPS products. Manufacturers could see a repeat of their involvement and experience under Solvency II where the insurers have an obligation, but the management companies have had to play a role in providing the inputs and data to support compliance.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute investment advice, or any other business, tax or legal advice, and should not be relied upon as such.
Paul North is Head of Product Management EMEA at BNY Mellon
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