The EU Commission has published its legislative proposals for the application of the principles of the UCITS KIID regime to all other retail investment products. These products are collectively referred to by the Commission as Packaged Retail Investment Products (PRIPs). The Commission considers that PRIPs can be categorised into four groups; investment funds, insurance-based investment products, retail structured securities (such as certificates and notes), structured term deposits and private pensions.
The aims of the Commissions’s proposal are as follows: (a) to achieve consistent and effective standards for investor protection across a wide range of retail investment products through enhanced product disclosure; (b) to ensure that there is a level-playing field for distributors and providers of these products; (c) to ensure that the features of different retail investment products are easily comparable; and (d) to ensure that the key features and risks of retail investment products can be easily understood by retail investors.
Background
To protect investors, sectoral measures that require defined information to be provided to retail investors have been developed over time. However, the existing measures have proven in some cases ineffective – requirements vary according to the legal form of investment products, not their economic nature or risks. This lack of standardisation makes it more difficult for retail investors to compare products and properly understand product features. In its April 2009 Communication on PRIPs, the Commission concluded that such failings could be traced (amongst other things) to the lack of a common framework and approach to product disclosures at the European level, which could only be addressed by legislative change at the European level.
Key Provisions
The Commission’s proposal requires that each PRIP be accompanied by a standard information sheet (‘key information document’ or KID), providing clear and comparable information, set out in the same format for all PRIPs so that retail investors are able to compare different investment products. The KID should be written in a concise manner, in non-technical language and that avoids jargon so as to be understandable by the average or typical retail investor.
The proposal specifies the essential elements of the investment product which should be described in the KID: the identity of the product and its manufacturer, the nature and the main features of the product, including whether investors might lose capital, its risk and reward profile, costs, and past performance as appropriate. Other information may be included for specific products, and information about possible future outcomes should be provided for private pension products. The proposal sets out a common format and sequence of sections to promote comparability.
The KID will differ from the UCITS KIID on a number of points:
– While the KIID is only two pages long, it is intended that the KID will be “no more than a few pages long”
– A KID will be expected to contain answers to a set of “standard” questions and these may include: “What is the investment? Can I lose money? What are the risks and what might I get back? What are the costs?”
– KID will contain risk information, a risk indicator directly comparable with that for UCITS, and information on the real costs of different products, “so they can be compared in a neutral and objective way”
KIIDs, by contrast, include only investment objectives, a risk and reward synthetic indicator, past performance and charges.
The Commission has concluded that investment products caught under PRIPs legislation are designed differently than UCITS, which is why an identical KIID model could not be adopted. It has stated that KIIDs contain information that is not relevant for some of the other investment products being sold in Europe; and, in some cases, other investment products have features not found in UCITS – such as insurance benefits or fixed investment terms. In addition, the kinds of risks these products have can also be different.
It is expected that the KID will replace the key investor information documents (KIIDs) for UCITS following a 5-year transitional period commencing on the entry into force of the Commision’s KID proposal as outlined above.
Implementation
The Commission’s proposal will now be presented to the European Parliament and the Council for their consideration under the co-decision procedure. Once an agreement on the text is reached, detailed work will be done by the Commission with the input of experts, consumers and stakeholders on the implementing measures. The full proposal could be expected to be in place by the end of 2014.
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