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Making PRIIPs Regulation Work Is Easier Than You Think

Our recommendations to improve Key Information Documents

Andy Pettit

 

The European Union has been in an uproar. A resolution has been proposed. Sounds like Brexit, you might think. No, I'm actually referring to an issue much more specific to European investors and the manufacturers of investment products built for them.

The Packaged Retail Investment and Insurance-linked Product Regulation, or PRIIPs, took effect in January 2018—a year later than planned. Its principal requirement is for most retail investment products to come with a three-page Key Information Document, or KID, that investors must attest to having seen before they can buy the product. That key information includes the type of product, whom it’s intended for, its risk, what investors could get in return, and its associated costs.

Investors across the European Union should get to see the same information, in the same format, about any packaged investment they are considering, thanks to PRIIPs. 

While this is indisputably a laudable aim, the measure has become one of the most contentious pieces of European Union financial regulation in recent times. We took a closer look at this regulation in a newly published whitepaper.

Understanding PRIIPs regulation in practice

The challenges of calculating and presenting similar data for different types of investment products are many. For example, a closed-end fund has different features to an insurance-linked investment bond, and a structured product is different again. Adding 35,000-plus open-end Undertakings for Collective Investment in Transferable Securities, or UCITS, funds into the mix is a prospect that has in large part brought the oft-justified rumblings of discontent across a broad spectrum of industry participants to a head.

Originally a review of PRIIPs was scheduled to happen during 2018, before ratifying the intent to add UCITS to the regime in 2020. UCITS currently have to produce a visually similar Key Investor Information Document, or KIID. The content, though, is not comparable with a KID.

Neither is perfect. And changing from one to the other or, even worse, producing both side by side will not help investors.

Common concerns about Key Information Documents

Myriad concerns have been voiced by many parties as whether KIDs actually help investors, or worse, actively mislead them. Prominent amongst them are:

  • The replacement of any past performance data with future-looking performance scenarios.

  • The disclosure of more cost and fee information, but not in the most informative way for investors.
  • The new KID risk indicator showing many products as lower-risk than when measured by the old KIID indicator.

The full range of issues is explored in a new Morningstar Policy Research paper, drawing upon our collection of PRIIPs data for around 50,000 investments. From it, we propose a focused set of recommendations toward making KIDs useful to investors.

What’s next for PRIIPs regulation?

Reassuringly, the regulators are listening. The European Supervisory Authorities have opened a public consultation and the UK Financial Conduct Authority is currently reviewing feedback to an earlier Call for Evidence. However, both the open consultation period and the subsequent review and next steps have been condensed to focus on what the regulator considers the highest-priority aspects.

The worst case, or, in PRIIPs terminology, stress, scenario is that partial changes, untested and unsupported, are hurried through to beat European Parliamentary changes next May to avoid defaulting into a situation where UCITS are compelled to produce the current version of a KID alongside KIIDs on the second anniversary of the PRIIPs regulation.

Download the full research paper “Your KID’s First-Term Report.”

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