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The EU Packaged Retail Investment and Insurance Products (Priips) regulation is set to take effect across the EU from January, requiring the production of a paper-based Key Investor Document (KID) for all products sold to European retail investors. The UK, meanwhile, has started to explore a new digital retail disclosure system.

The new EU requirements, which have taken more than seven years of heated discussions between policymakers and the industry, directly applies to the thousands of retail funds that have a legal home in Luxembourg. The Priips KID framework will replace the current system of Ucits KIDs from next month.

The Priips regulation is designed to protect EU-based retail investors by providing them with clear and concise information about the risks and rewards associated with these products. The three-page KID serves as a standardised document that must be provided to all retail investors before they purchase such an investment product.

Manufacturers of investment products are now required to make additional disclosures. Instead of past performance data only, they now also need to project forward-looking returns under various scenarios. They also need to provide additional info on costs and charges.

Sanctions 

Luxembourg’s financial supervisor CSSF on 16 December made clear that firms that produce Luxembourg Ucits need to have in place a Priips KID from 1 January 2023. The supervisor however added that filings of such documents can be done until 31 January at the latest. Non-compliance with this deadline will be considered a breach, and CSSF “may impose sanctions accordingly”.

The Priips regulation in recent years has been met with some controversy, with some industry players, including Luxembourg’s fund management association Alfi, arguing that the requirements are too burdensome and could discourage the sale of Priips to retail investors. However, proponents of the regulation argue that it is necessary to protect retail investors and ensure that they are fully informed about the products they are purchasing.

The European Commission last year agreed to postpone the starting date of the Priips regulation by six months to January 2023. 

Informed decisions

Overall, the Priips regulation is an important step in ensuring that retail investors have the information they need to make informed decisions about their investments. The KID will play a critical role in this by providing a standardised source of information that is easy for retail investors to understand.

One criticism of the KID is that it can be difficult for retail investors to understand. The KID is intended to provide clear and concise information about the risks and rewards associated with investment products, but some critics argue that the language used in the document can be technical and confusing. This could make it difficult for retail investors to fully understand the implications of investing in a Priip.

Another criticism of the KID is that it may not always provide a complete or accurate picture of the risks associated with the product. Some critics argue that the KID may not be an effective way to protect retail investors from risky or complex financial products.

UK seeks ‘more flexible and agile approach’

Firms offering funds to retail investors both in the UK and EU now face the prospect of having to deal with two types of disclosures. In recent weeks, it has become clear that the UK wants to overhaul its approach towards “retail disclosure” for investment products and the UK government revoked the Priiips regulation that was initiated when it still was an EU member. The UK Treasury this month launched a consultation in which it lays out plans for a digital type of information disclosure.

“Having left the EU, the UK’s expert regulators will once again be empowered to set appropriate retail disclosure requirements that work for the UK’s dynamic capital markets. This is a more flexible and agile approach,” UK Chancellor Jeremy Hunt said in the UK paper.

“Once the UK has freed its mind from the concept of retail disclosure being ‘correct’, there is no limit,” said Atillio Veneziano, a London-based legal advisor to fund managers, in a LinkedIn post. “It is fair to say that digitisation of financial services is way ahead in the UK than the rest of Europe, so it makes sense to look at transitioning from paper-based to digital retail disclosures.”

The UK consultation closes 3 March.

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