Compliance Blog

Concerns about PRIIPs and KIDs continue to make headlines

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This week, there has been no shortage of news about PRIIPs and in particular, the requirements for new Key Information Documents (KIDs).

What is PRIIPs and what are KIDs?

The Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products (PRIIPs) came into force on 1 January 2018. Read more about how what PRIIPs is and how to comply.

It applies to a wide range of firms including banks, insurers, and investment managers. The aim of the new legislation is to extend the standards of consumer protection introduced by MiFID II to insurance-based investment products.

One of its core requirements is the need for investment companies to produce a Key Information Document (KID) if they want to sell to retail investors. These have to include certain information, in a prescribed format.

What is the issue with KIDs?

These KIDs have been the subject of discussion (to put it mildly) recently.

Or, as a citywire.co.uk article this week said slightly more robustly:  ‘The problem is that a key component of the new rules is proving to be fundamentally flawed’.

In a letter to the FCA, former director of policy at Fidelity International, Philip Warland, described the new rules as ‘the worst piece of financial regulation ever in Europe’.

The problem lies in the performance information KIDs are required to include. Our blog on avoiding the pitfalls in preparing PRIIPs documents has more on this.

On 24 January, the FCA issued a statement designed to clarify what is needed in the KID. It said that:

‘We understand some firms are concerned that, for a minority of PRIIPs, the ‘performance scenario’ information required in the KID may appear too optimistic and so has the potential to mislead consumers. There may a number of reasons for this: the strong past performance of certain markets, the way the calculations in the RTSs must be carried out, or calculation errors.

‘Where a PRIIP manufacturer is concerned that performance scenarios in their KID are too optimistic, such that they may mislead investors, we are comfortable with them providing explanatory materials to put the calculation in context and to set out their concerns for investors to consider.

‘Where firms selling or advising on PRIIPs have concerns that the performance scenarios in a particular KID may mislead their clients, they should consider how to address this, for example by providing additional explanation as part of their communications with clients.’

Read more on the FCA statement and its implications for firms trying to comply with PRIIPs in our blog, FCA clarifies expectations on PRIIPs communications.

Continued confusion on new requirements

The Citywire article claims that, in spite of (or perhaps partly due to) the FCA advice that firms can provide additional explanation: ‘No-one knows exactly what to do. The only thing certain is that these new rules damage investment suitability and credibility, instead of making things better’.

Suitability is a big focus for the FCA, so anything that hinders providers’ ability to deliver when it comes to appropriate advice or products is a worry.

With asset managers and analysts raising concerns about the potential for KIDs to mislead investors, it doesn’t look as if the issues around performance and the other question marks over KID content are going away any time soon.

How should Compliance teams respond?

Our blog on avoiding the pitfalls when preparing PRIIPs documents and how to make your fund factsheets and KIDs more user-friendly have general advice on producing compliant and client-focused documents.

But when it comes to the specific issues around performance of investments, the best advice is to keep an eye on the FCA website for any more statements or clarification on what exactly is required.  Watch this space…

Following the regulator’s Treating Customers Fairly guidance is always a good way to get a head start on producing compliant documentation. To read more about the expectations around TCF, you can download a copy of our TCF FAQs. They include information and tips on:

  • What the TCF rules comprise
  • Expectations of firms
  • Evidencing TCF (management information)
  • Getting the culture right
  • Rules for providers and distributors

The FAQs are free and you can read them here.

Nothing in this document should be treated as an authoritative statement of the law. Action should not be taken as a result of this document alone. We make no warranty and accept no responsibility for consequences arising from relying on this document.

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