The Packaged Retail & Insurance-based Investment Products (PRIIPS) is an EU regulation that came into effect in January 2018. As from 1 January 2023, the regulation also became applicable to any funds which qualify as UCITS, and not just for unit-linked insurance products. The regulation requires every products manufacturer and distributor to provide retail investors with a Key Information Document (KID) in order to strengthen investors ‘investment decisions and selection process. In essence, a retail investor is any investor which does not fall within the definition of a “professional client” under MiFID II rules. As a result, a UCITS which is marketed exclusively to entities regulated as banks, investment firms, asset managers, insurance companies or other funds (including pension funds) in EEA countries or under equivalent third country rules or to high-net-worth individuals who meet certain qualitative or quantitative requirements will not be required to prepare a PRIIPS KID on the basis that the UCITS is not marketed to “retail clients” within the EEA region.
In essence, the PRIIP KID is the successor of the UCITS Key Investor Information Document (KIID), and just like its predecessor, it is designed to help investors understand investment products behaviour and support comparison with other similar investment products. Just like the UCITS KIID, the PRIIPS KID is to be prepared for any UCITS which can be marketed to EU and EEA retail investors. There are a few differences from the previous document, such as that a PRIIPS KID must include forward looking performance scenarios which provide an indication of expected performance of the UCITS in four different scenarios, namely a favourable scenario, a moderate scenario, an unfavourable scenario and a stress scenario. Also, the PRIIPS KID uses a different cost methodology and disclosure to explain the fee structure and impact of same on the returns of the UCITS
If we are to delve deeper into the enhancements made under the PRIIPS KID, one would note that a UCITS KIID had to disclose detailed information on the past performance of the relevant UCITS. The PRIIPS KID is not required to contain past performance information, however it obliges UCITS funds to disclose not only forward-looking performance scenarios (based on past scenarios) but to also include a link to the website to provide access to information on the past performance of the UCITS. This is following significant pressure from a number of regulatory bodies, including ESMA, which publicly expressed the view, back in October 2020, that any PRIIPS KID which did not contain past performance information would be “detrimental to retail investors”.
Other changes are in the Risk and Reward disclosures. The UCITS KIID had to disclose the potential risks and rewards associated with investing in the UCITS using a synthetic indicator as well as a narrative explanation of the indicator, its main limitations and of material risks which are not covered by the indicator. The summary risk and reward indicator (SRRI) ranged from 1-7 according to the increasing level of volatility/risk-reward profile. The calculation of the summary risk indicator of the PRIIPS KID differs significantly from the calculation methodology which UCITS funds used to calculate their risk and reward indicator, given that the SRI calculation includes a credit risk dimension, as well as an assessment of market risk using a different market risk measure to that which had been required to be used for UCITS KIIDS, with the market risk measure being used depending on the class of market risk measure to which the UCITS is assigned. As per the UCITS KIID, the summary risk indicator disclosed in the PRIIPS KID ranges from 1-7, however, a PRIIPS KID must also disclose that the investor could lose all invested capital in the UCITS. Because of the fundamental difference in calculation methodology used, the SRI disclosed for a UCITS in its PRIIPS KID will differ from the SRRI figure disclosed by that same UCITS in its UCITS KIID. This does not mean that the UCITS is less or more risky than it was pre 1 January 2023 as the number is simply as a result of the different calculation methodology being used. While the UCITS KIID rules require the SRRI to be calculated using returns from the previous five years, the PRIIPS KID SRI must be calculated using returns for the previous five years.
Other new features were also introduced, such as the Complaints section, whereby an investor is given information on how to lodge a complaint, as well as what happens if the PRIIPS manufacturer is unable to pay out and thus the retail investor suffers a financial loss as a result of the default of the PRIIPS manufacturer or any other entity, and the recommended holding period for the UCITS, together with information on any consequences of redeeming from the fund before the recommended holding period has expired must be disclosed. The PRIIPS KID Must also include a description of the type of retail investor to whom the UCITS is intended to be marketed, taking into account needs, characteristics and objectives of the type of investor the UCITS is suitable for. There were no significant changes in other areas of the document, such as the Investment Objective and Policy section, which section is still to include disclosures relating to the main categories of eligible financial instruments, redemption frequency, any specific market sector target of the UCITS and whether the UCITS is being managed in reference to a benchmark.
Overall, the PRIIPs regulation has many similarities and overlaps with MiFID II but the big difference is that PRIIPs is specifically intended for retail investors, thus strengthening the protection offered to retail investors under both the UCITS and the MiFID II regimes.
Avalon Abela, Head of Compliance, BOV Asset Management Limited
The writer and the company have obtained the information contained in this document from sources they believe to be reliable, but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The writer and the Company make no guarantees, representations or warranties and accept no responsibility or liability as to the accuracy or completeness of the information contained in this document. They have no obligation to update, modify or amend this article or to otherwise notify a reader thereof if any matter stated therein, or any opinion, projection, forecast or estimate set for the herein changes or subsequently becomes inaccurate. If you invest in this product, you may lose some or all of the money you invest. The value of the investment may go down as well as up. BOV Asset Management Limited is licensed to conduct investment services in Malta under the Investment Services Act by the Malta Financial Services Authority. Issued by BOV Asset Management Limited, registered address 58, Triq San ¯akkarija, Il-Belt Valletta, VLT 1130, Malta. Tel: 2122 7311, Fax: 2275 5661, E-mail: [email protected], Website: www.bovassetmanagement.com. Source: BOV Asset Management Limited.