However you voted in the EU Brexit referendum, there will always be some legislation that is to the benefit of the consumer that is to be welcomed by all sides of the debate and these are PRIIPS.
The rules on packaged retail and insurance-based investment products (PRIIPS) come into force as at December 2016. So, these rules will cover investment platforms and insurance bonds among other packages sold to EU investors. The rules will compel the PRIIPS to provide a KID ( Key Information Document) to consumers that buy certain investment products.
KIDs will be uniform disclosure documents providing standardised information about PRIIPS in a way that is designed to give retail investors sufficiently clear, comparable information on the range of products available. This is good for competition and increases transparency for investors. It will allow consumers to compare products throughout the EU; surely a good thing.
It is clear that regulators will be on the lookout for non-compliant behaviour. However, many firms ( such as those in the UK) already operate in a similar environment and provide KIDs to retail investors. This gives adviser firms , as opposed to sales firms, an opportunity to stand out from the crowd by providing clear transparent information about any fund recommendation. EU PRIIPS will cover-
- Investment funds, including UCITs following a five-year transitional period
- Insurance investment products
- Structured products, such as deposits and securities
Directly-held shares and bonds will not be subject to the rules.
While this EU PRIIPS rule may be popular with consumers, there are some in the investment industry that are opposed to these changes. Perhaps if we look at what must be covered by the EU PRIIPS rules we can see why some advisers and insurance companies are not too happy.
Each KID must contain mandatory content and sections and be limited to ONLY three A4 pages to make it easy to follow. The EU PRIIPS rules state the KID must include-
- Information on the manufacture of the product and its regulator
- An explanation of the product’s objectives and the means of achieving them
- A risk/reward section, including a risk indicator composed of seven simple classes for risk and a reward section that outlines three “performance scenarios”— unfavorable, moderate, and favorable
- Information costs must also be disclosed and are broken into two categories: “Costs over time,” a figure that summarises the total costs of the PRIIP
- “Composition of costs,” which breaks down costs such as those resulting from portfolio transactions
- A comprehension alert for complex products, including derivatives and structured products governed by the current Markets in Financial Instruments Directive (MiFID) regime
- A section headed ‘What are the risks and what could I get in return?’, setting out the risk-reward profile of the product using prescribed information
- A section headed ‘What happens if the PRIIP manufacturer is unable to pay out?’, containing details of guarantee schemes or other cover
- A section headed ‘How long should I hold it and can I take money out early?’, containing details of recommended holding periods and the consequences of cashing in early
- Complaint redress information
- A section headed ‘Other relevant information’, detailing other information documents required from the investor.
I have been looking at an example of a “Capital Protected Product” often sold as low risk. Under the EU PRIIPS rules, the KID would make it clear the risk is above average, giving reasons. Such a KID may prevent the investor from making an uninformed decision based on poor advice.
Transparent platforms should have no great difficulty in applying the EU PRIIPS rules and our view is that advisers with an investment licence will welcome this new development.
We all know the story of King Canute, trying to turn back the tide. Well, some in the offshore insurance sector may hope to turn back the tide on this new EU PRIIPS rule that is surely for the benefit of consumers. We all know what happened to King Canute.
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