Existing disclosures to retail investors for PRIIPs do not help retail investors to compare different products, or understand their features. Consequently, retail investors have often made investments without understanding the associated risks and costs. Directive will improve disclosures relating to PRIIPs and help in rebuilding the trust of retail investors in the financial markets also by effectively regulated sales processes for those products.
Legal basis: IDD, PRIIPs
Deadline: 01.1.2018
Main effects of regulation
- Preparation of a special standardized KID for PRIIPs, which is different from existing KIID
- Uniform rules on delivery of a KID to the clients
- Attention needed how to prepare other marketing information
- The system for reviewing and auditing KIDs should be implemented
- Power of EIOPA to control investment based products (new)
- Local regulator may prohibit or restrict: the marketing, distribution or sale of insurance-based investment products and a certain type of financial activity or practice
- High penalties
Deadlines
| Final date of PRIIPs implementation | 1.1.2018 |
| Final date for project | 1.12.2017 |
| End of exemptions for UCITS | 31.12.2019 |
| Review legislation | 31.12.2018 |
| Market survey to determine whether online calculator tools which allow the retail investor to compute the aggregate costs and fees of PRIIPs are available | 31.12.2018 |
Overview of regulation
What are the objectives of PRIIPs’ Regulation
- Ensure the comparability between similar products
- Improve transparency of products
- Effectively regulated sales processes
- Restoring confidence of retail investors in financial markets
- Harmonize the framework of administrative and financial penalties on a Europe-wide basis
Regulatory technical Standard (L2)
On 12 April 2017, a delegated regulation with regulatory technical standards (RTS) was published on the outlook, content, review and audit of KID and the transmission of KID to clients.
RTS defines:
- template for the key information document (annex I)
- methodology for the presentation of risk (annex ii)
- presentation of sri (annex iii)
- performance scenarios (annex iv)
- methodology for the presentation of performance scenarios (annex v)
- methodology for the calculation of costs (annex vi)
- presentation of costs (annex vii)
Which products
Retail products defined as a PRIIP:
- insurance based investment products such as unit-linked policies, with-profits policies, index annuities
- classical endowment insurance
Not a PRIIP:
- non-life insurance/general insurance, and life insurance that only pays benefits on death or incapacity due to injury, sickness or infirmity pension products
- pensions that are recognized under national law as having the primary purpose of providing the investor with an income in retirement
- officially recognized occupational pension scheme
- individual pension products for which a financial contribution from the employer is required by national law
KID
Each KID will need to be no more than three pages long and contain specified information, presented in a pre-determined sequence. Company will need to give information about the PRIIP under sections entitled:
- What is this product?
- What are the risks and what could I get in return?
- What happens if [name of the PRIIP manufacturer] is unable to pay out?
- What are the costs?
- How long should I hold it and can I take money out early?
- How can I complain?
- Other relevant information.
The KID should be clearly distinguishable and separate from any marketing material.
Delivery of the key information document
The person advising on or selling a PRIIP shall provide the key information document sufficiently early so as to allow retail investors enough time to consider the document. Condition on good time does not include a cooling off period.
Conditions on good time depends on
- the knowledge and experience of the retail investor with the PRIIP
- the complexity of the PRIIP
- where the advice or sale is at the initiative of the retail investor, the urgency explicitly expressed by the retail investor of concluding the proposed contract or offer
Development of new PRIIP – process
Development of new PRIIP will have to follow new POG regulation. Main steps are listed below:
- the development of a new PRIIP (meeting the requirements of the PRIIP regulation and future POG regulation and the new local regulation based on IDD Directive)
- disclosure of commissions (if prescribed by local regulation)
- preparing a KID for a specific new PRIIP
- prior notification to the supervisory authority of the KID (if this is prescribed by the law)
- check the compliance of marketing material with the PRIIP Regulation and IDD
- publish new KID on the website
- adjust the declarations on the offer (and in the conditions)
- preparation of an need based form and implementation in the sales (if prescribed by local regulation)
- updating the sales protocol (assessment of suitability – according to the provisions of the local regulation)
- providing KID to the client
- a review of the KID after a minimum of 12 months and the revision and publication of the revised KID
Market monitoring and product intervention powers
EIOPA has power to monitor the market for insurance based investment products which are marketed, distributed or sold in the Union. EIOPA may, if conditions are fulfilled, temporarily prohibit or restrict in the Union
- the marketing, distribution or sale of certain insurance-based investment products
- specific sales practice
Administrative fines are very high:
- up to 5 mio EUR, or up to 3 % of the total annual turnover for legal entity
- up to 0.7 mio EUR for natural person
Detailed list of Project tasks
| CALCULATION ENGINE |
| Market risk assessment
– assign appropriate category to PRIIP (1,2,3 or 4) – determine MRM class according (depending on category and VaR-equivalent volatility) – if PRIIP is category 3 the distribution is obtained by simulating the price, with minimum number of simulations is 10 000 (based on bootstrapping) plus a principal component analysis (PCA) should be performed – Assessing credit risk – Assessing liquidity risk – Determine summary risk indicator (SRI) Performance scenarios – implement four plus one scenarios (based on cash flows) o a favourable scenario; o a moderate scenario; o an unfavourable scenario; o a stress scenario; o an additional scenario for insurance-based investment products – calculation for intermediate holding periods and RHP – future profit participation shall be taken into account – cumulative biometric risk premium calculation Cost calculations and cost ratios – disclosed costs (One-off costs, Recurring costs, other costs) – costs part of biometric risk premiums – summary cost indicator calculation – reduction of the yield (no insurance premium included) – calculation of the cost free scenario |
| KID DOCUMENT GENERATOR |
| – General information section
o general information on insurance company and product o a generic key information document if PRIIPs offering a range of options for investment – What is this product section o stating the objectives of the PRIIP and the means for achieving those objectives o description of the type of retail investor to whom the PRIIP is intended to be marketed o the details of insurance benefits o an estimation of the average biometric risk premium o the impact of the insurance premium payments o if PRIIPs offering a range of options for investment, a description of the types of underlying investment options – What are the risks and what could I get in return section o presentation of SRI with narrative explanation o currency risk o illiquid PRIIP o risk and reward profile o an indication of the possible maximum loss o value of insurance benefits o four plus one performance scenarios o if PRIIPs offering a range of options for investment, specifying the range of risk classes of all underlying investment options offered within the PRIIP by using a summary risk indicator – What happens if insurance company is unable to pay out section o explanation weather investor may face a financial loss due to the default of the PRIIP manufacturer – What are the costs section o the methodology for the calculation of costs o the Costs over time (as a single number in monetary and percentage terms for the different time periods) o Composition of the costs (any one-off costs, recurring costs, incidental costs) o if PRIIPs offering a range of options for investment it should be specified the range of costs for the PRIIP – How long should I hold it and can I take my money out early section o minimum required holding period o a description of the features of the disinvestment procedure o information about any fees and penalties – How can I complain section o complains procedure – Other relevant information’ section o any additional information documents that may be provided |
| REVIEW AND REVISION PROCESS |
| – the insurance company has to establish and maintain adequate processes for review and revision throughout the life of the PRIIP
– Review: main tasks o KID should be reviewed every time there is a change that significantly affects or is likely to significantly affect KID or at least every 12 months o review if the information contained in the KID is compliant with the general form o review whether the PRIIP’s market risk or credit risk measures have changed o review whether the mean return for the PRIIP’s moderate performance scenario has changed by more than 5% – Revision: main tasks o revise the key information document where a review concludes that changes to the KID need to be made o revised KID should be published on its website |