PRIIPs complexity remains despite uncertainty in the implementation deadline
Robert Jeanbart is division CEO SIX Financial Information.
With 10 weeks to go before PRIIPs is slated to enter in force, the financial industry must continue with compliance preparations in the face of uncertainty about the implementation timetable.
While recent votes by the European Parliament raised the possibility of postponement, the regulation has so far not been formally delayed by the European Commission.
Moreover, regardless of any delay, the regulation’s fundamental obligation has not changed. Firms must still prepare to produce and hand out KIDs for PRIIPs that are sold in the European Economic Area.
PRIIPs are packaged retail and insurance-based investment products. Typically marketed to private individuals, this type of investment combines exposures to multiple underlying assets and entail a degree of investment risk and costs.
Firms will need to invest significant effort to establish the partners, data connections and processes that will allow them to be compliant with PRIIPs’ investor protection obligations. Meanwhile, preparation for MiFID ll regulation will also demand resources in 2017.
1. Background to PRIIPs: the regulatory context and recent developments
The regulation for Packed Retail and Insurance-based Investment Products (PRIIPs) is the first hurdle in the European Union’s investor protection calendar.
The regulation aims to help retail investors better understand and compare investment products. PRIIPs affects institutions across the financial industry, including banks, wealth management firms, portfolio managers and insurance institutions.
PRIIPs is intended to lead to greater transparency in a market that is estimated by the European Commission to generate up to 10 trillion euros annually in the EEA.
However, it adds complexity to an industry already undergoing significant restructuring from the all-encompassing MiFID II package of reforms.
The PRIIPs Level 1 law is formally scheduled to enter in force on 31 December 2016. However, on 14 September the European Parliament rejected draft Regulatory Technical Standards proposed by the European Commission, i.e. the detailed Level 2 legislation that outlines how the law should be implemented.
The rejection vote means that the RTS as currently drafted will not enter into force, introducing uncertainty into the ‘how’ and ‘when’ of the PRIIPs timetable.
Many industry voices are calling for postponement. As yet, the European Commission has not enacted the legislative procedure that would formally delay PRIIPs.
For the time being, firms must still prepare for compliance by 31 December 2016, subject to other developments.
The unusual legislative situation makes it difficult to predict what will happen in terms of the ‘how’ and the ‘when’ of the legislation. The ‘what’ (to improve transparency for retail investors) is undisputed, however, underlining the regulation’s importance on the European Union’s legislative agenda.
Postponement therefore offers little prospect of breathing space – firms who delay preparations would risk having to prepare simultaneously for PRIIPs and MiFID II during 2017 and a delay would not significantly alter the fundamental obligations of the regulation.
2. The scope and obligations of PRIIP: what does compliance look like?
Under PRIIPs rules, institutions (including non-EU domiciled banks, derivative exchanges and insurance companies) that sell retail investment products to any retail investor domiciled in an EEA country will be required to ensure that consumers receive a 3-page document, the Key Information Document (KID), that outlines the investment’s risks and costs.
The Key Information Document (KID) must be made available to a retail investor before a sale can take place.
Acting as a kind of quick reference guide to the PRIIP, KIDs must follow strict design and content guidelines, be produced using correct legal terminology in at least one official language of each country where the product is marketed and be regularly reviewed and updated.
The responsibility for creating and maintaining the document lies with the product manufacturer or issuer.