The bumpy road of PRIIPs​

The experience gained during the first years of application of PRIIPs and its delegated regulation has shown the need to revise certain elements of presentation and content of key information documents (KID) to ensure that retail investors are provided with information that is understandable, not misleading, and relevant, irrespective of particular market circumstances such as sustained period of positive market performance. ​

Further to the submission of the agreed draft RTS by the Joint European Supervisory Authorities (ESAs) on 3 February 2021, the European Commission formally published on 7 September 2021 the delayed proposed Level 2 measures (RTS) under the PRIIPs Regulation on the content and format of the Key Information Document (KID). The Annexes to the RTS include the templates that the PRIIPs manufacturer would be required to use. ​

This proposed RTS follows very largely the 3 February 2021 draft submitted to the Commission by the ESAs and sets out:​

• new methodologies underpinning the calculation of appropriate performance scenarios and a revised presentation of these scenarios, to ensure that retail investors do not have inappropriate expectations about the potential return on investment they may receive. Performance scenario calculations will pose a challenge to manufacturer as this information should be published on a monthly basis, which would require a greater automation of processes to notably store and compare data over an extensive number of scenarios;​
• revised summary cost indicators and changes to the content and presentation of information on the costs of PRIIPs to help retail investors better understand the different types of cost structures, as well as to facilitate the use of this information by persons selling or advising about PRIIPs; ​
• a modified methodology underpinning the calculation of transaction costs to address practical challenges that have arisen when applying the existing rules and issues regarding the application to certain types of underlying investments; ​
• modified rules for PRIIPs that offer a range of options for investment to ensure more clarity of the information on their cost implications.​

The proposed RTS also lays down regulatory technical standards for information on past performance, which is to be provided by certain types of UCITS, AIFs, and insurance-based investment products in order to complement information provided by performance scenarios. Such past information has to be published by the PRIIPs manufacturer. History gaps would likely emerge from the need to collate at least 10 years of historical data (or the recommended holding period plus 5 years in the case of PRIIPs with a recommended holding period of more than 5 years). ​

Where relevant, manufacturers would need to define proxies for extending up to 10 years, notably by finding other products having similar characteristics and strategies. Data gathering will be key. Already checking the availability and completeness of data would be key to implement the new requirements on time.​

As anticipated, the European Commission proposed to postpone the application of this RTS by 6 months to 1 July 2022 instead of 1 January 2022 as originally intended. ​

This would synchronize the end of the existing exemption to provide a KID for UCITS managers under Article 32 of the PRIIPs Regulation and the amendment to the UCITS Directive to avoid UCITS management companies to provide both a Key Investor Information Document (KIID) and a PRIIPs KID (i.e. PRIIPs KIDs would be sufficient to satisfy the obligation to provide a KIID under the UCITS Directive).​

What is next?​

The proposed RTS has now to be reviewed by the European Parliament and the Council of the EU, which may bring changes to the text. It has to be noticed that, however, the proposed RTS only addressed part of the concerns about the content of the PRIIPs KID, the rest requiring profound policy changes through a revision of the PRIIPs Regulation itself as part of its review by the European Commission.​

PRIIPs manufacturers have to take pre-emptive actions to understand the proposed RTS, and develop the appropriate infrastructure, processes and controls, in order to be ready by 1 July 2022. Time and resources are needed to implement these new requirements. This notably involves various departments and competences to interpret the new requirements, gather new data, make changes to IT, and train the staff and distributors.​

Basak Demirel ​
Senior Manager Periclès Luxembourg​