Under Priips, responsibility for creating a KID will lie with a product manufacturer, but the regulations also cover a ‘remanufactured’ Priip – one delegated to a third party other than the original provider. In that case, the remanufacturer must produce and update the KID as necessary.
Priips will also addresses the need to keep the KID up to date and how to make fresh information available to existing customers. The rules governing this are now subject to the RTS consultation.
Under Priips, the person advising on a product is responsible for providing the KID to the customer prior to any sale. In general, the KID must be in a ‘durable medium’, but if the customer consents it may be possible to provide the KID via a website, as long as it remains available for as long as a customer may need it.
Powering up
For the first time, Priips will give power to the regulator in a host member state and to the European Insurance and Occupational Pensions Authority to ban the sale of a product if they believe there is a threat to the integrity of the local market. This includes banning products prior to distribution.
It also gives power to regulators (both home and host) to apply fines and other sanctions to products that breach the Priips regulation. The sanctions are intended, in the words of the regulation, to be “effective, proportionate and dissuasive”. This means fines of up to €5m ($5.5m) or 3% of annual turnover for legal entities, and up to €700,000 for individuals.
So, what are the main challenges remaining for Priips? The most significant issue identified so far is how to produce a KID for products with multiple fund options – known under Priips as multiple option products (MOPs).
The challenge for MOPs is clear: how do you provide all the required detail for a product in three pages when that product may have hundreds of funds?
The problem is even greater when you consider open-architecture portfolio bonds where there may not even be a defined list available.
What about portfolio bonds where there is a discretionary fund manager appointed? The ESAs are well aware of this problem but so far have not concluded on a solution.
The leading candidates are either a generic KID with an average assumed fund, or a special MOPs KID that would then need to be supplemented with further KIDs for each fund.
Another potential challenge that arises for cross-border business comes from the requirement for local language of the member state where the sale or marketing occurs. Consider, for example, a UK expat living in Spain who may wish to invest in a UK fund he is familiar with.
Strictly speaking the adviser in this case would be required to provide the KID in Spanish – there does not appear to be any option in the regulation for the customer to agree to another language such as English in this case.
In a similar vein, we have the remanufacturing issue. Again, this could be a particular problem for cross-border life companies offering portfolio bonds.
It could be seen that by offering a fund via an insurance policy the life company is a remanufacturer in that case – it has essentially transformed the nature of the Priip (even if it has not altered the investment profile). Where the life company applies an additional fund fee, the case becomes clear cut and the life company would be responsible for the KID.
In search of a solution
There are other issues remaining to be solved for Priips – how the cost indicator should be calculated so as to be comparable across all products, how to treat fixed fees, different time horizons, exit fees, investment guarantees – not to mention how to treat insurance benefits and the associated costs.
Likewise for the summary risk indicator: how do we capture market risks, liquidity and counterparty risks in one simple indicator?
Finally, Priips does not replace the patchwork of regulations and local member state rules that it identified as a problem – it adds another layer to them.
Manufacturers and distributors must continue to comply with all the existing local general good rules and add Priips on top. With the rules still being drafted, there is not much time left before Priips becomes reality.
