Goodbye to the UCITS KIID and hello to the PRIIPs KID for UCITS and retail AIFs. The European Parliament approved on Tuesday the legislation introducing the Packaged Retail Investment and Insurance-based Products Key Information Document (PRIIPs KID). What are the next steps for the fund and insurance industries?
The good news for the industry is that the Commission and Parliament agreed to extend the deadline for implementation by a year until 31 December 2022. But this is just 13 months away and there’s a much to achieve, both for UCITS and AIFs sold to retail investors who will need to produce a PRIIPs KID for the first time. This will also apply to non-UCITS providers who need to adapt their existing PRIIPs KIDs to the new rules. Retail funds have been supplying the key investor information document (KIID) since UCITS IV came into force in 2011.
More detailed data
“Assembling the data and focusing on acquiring new technology and new solutions will be a key challenge,” said Corinne Prinz, a partner in the investment management practice of Arendt & Medernach. The current UCITS KIID is a relatively simple document featuring the investment objective of the fund, with a relatively basic Synthetic Risk and Reward Indicator (SRRI) provided alongside cost and past performance indicators, as well as other relevant information like the depository used, and where to find the prospectus and annual reports.
“A much more detailed document is required now, particularly the future performance projections, which have to be calculated based either on benchmarks or with other available data,” Prinz said. Past and future performance projections need to be made available and updated monthly, either via a link or on a document, so storage and retrieval solutions will need to be deployed.
Providers of non-UCITS investment products have been calculating these figures since 2018, and there have been complaints that some of the future return projection calculation methodologies have resulted in outlandish, sometimes three-figure growth rates. Prinz warns that these problems have not necessarily been addressed fundamentally. “Previously there was a recommendation to add a disclaimer,” and this remains the broad approach.
Specific requirements
There are also a sets of requirements that apply specifically to retail AIFs, funds-of-funds and feeder UCITS funds. “So if you decide to produce these KIDs in-house you have to go through each of these requirements, as a one-size-fits-all approach doesn’t work,” Prinz noted. She said that it might prove more cost-effective to outsource these processes to a third party.
From the legal side, Prinz noted the concerns around liability regarding PRIIPs and the potential for severe regulatory sanction in the regulations of up to 3% of turnover or €5m. This could come into play if the document is not compliant or accurate nor is not available online.
These rules are only applicable to UCITS and retail AIFs made available (i.e. sold with advice or not) to retail investors in the EEA. Any investor which is not defined as being professional under MiFID rules will be deemed to be a retail client. Institutional clients do not need to receive a KID, however will still need to receive a UCITS KIID. Rules will be different in the UK, with the regulator maintaining the UK UCITS KIID until at least December 2026.