Recent research has found that the Key Information Document – a requirement of the new PRIIPs regulation – has potential shortcomings when applied to investment trusts.
Here we look at what the KID is and what pitfalls you need to avoid when producing it to ensure that you don’t inadvertently mislead investors.
What is PRIIPs?
The Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products (PRIIPs) came into force on 1 January 2018.
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.
Read more about what PRIIPs regulation is and how to comply.
What are Key Information Documents?
From 1 January, under PRIIPs, all investment companies have to produce a Key Information Document (KID) if they want to make their shares available to retail investors.
KIDs for products that fall under PRIIPs must cover:
1. What is this product?
2. What are the risks and what could I get in return?
3. What happens if [the PRIIP manufacturer] is unable to pay out?
4. What are the costs?
5. How long should I hold it and can I take my money out early?
6. How can I complain?
7. Other relevant information
However, a Money Marketing article published last year claimed that many factsheets and Key Information Documents fail to hit the mark.
There are ways to make your KIDS more user-friendly – but if you market investment trusts, there may be some additional considerations you need to take into account.
Why could KIDs be misleading for investment trusts?
Analyst Numis Securities recently published research which claims that some of the content in investment trust KIDs could be misleading.
The issues flagged as being potential problematic are:
Performance scenarios. Performance that looks at potential share price returns over five years tend to make scenarios highly optimistic because the market performed well in the last five years.
Cost data. The analysis says that costs in the sector are calculated in an inconsistent way. Some trusts include stamp duty in the costs; others exclude finance costs or performance fees and some estimates of transaction costs show ‘huge differences’.
How are KIDs used?
Multi-managers have to use the KID when calculating their own costs. Private wealth managers are expected to use the cost data shown in the document when they demonstrate their costs to clients under MiFID II.
The discrepancies in the way these costs are calculated could lead to issues when it comes to selecting the most appropriate fund or investment trust.
According to an article in Money Marketing, the Numis research shows that ‘some wealth managers have already expressed a potential reluctance to buy investment companies that show high costs in the KID’.
If the challenges in presenting comparable costs are not resolved, this could have an impact on advisors’ ability to choose the most suitable investments for their clients. With suitability a huge focus for the FCA, this presents potential compliance challenges.
The article says that ‘Advisers must use common sense when selecting investment trusts through the new PRIIPs’ Key Information Document as it could be misleading for investors’.
Numis, meanwhile, say that they hope advisers will have ‘sufficient common sense to treat the performance scenarios with a ‘pinch of salt’’.
Tips for compliant and user-friendly KIDs
Aside from the issues flagged by the research, there are other steps you can take to make sure your Key Information Documents are clear and user-friendly:
- Ensure they meet the regulator’s requirements on suitability and disclosure
- Include accurate, up-to-date content – consider building a searchable library of pre-Compliance-approved wording, data and other content to save you time in producing documents and getting Compliance team sign off
- Make sure you follow FCA rules on prominence in terms of risk warnings, disclaimers and disclosures
- Understand the FCA’s objectives around desired consumer outcomes and make sure your documents achieve them
Following the FCA’s long-standing guidance on Treating Customers Fairly will give you a head start when it comes to preparing user-friendly, compliant client documents.
To read more on how you can meet the FCA’s expectations on Treating Customers Fairly, 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.