Aimed to address the inadequacies and loopholes highlighted by the 2008 recession, there has been a momentous pressure for an increase in the regulation and supervision of the financial sector. Enhanced consumer protection and rebuilding confidence in financial markets has been one of the top priorities in the EU. As a result, there has been a requirement for heavy regulation popular financial products like investment funds, structured products and insurance based products. The regulation governing PRIIPs seeks to do this by enhancing transparency and comparability through greater disclosure to clients.
What are packaged retail investment and insurance products?
Packaged Retail Investment and Insurance Products (PRIIPs) are at the core of the retail investment market. They are investment products that banks typically offer to consumers, for example, when they want to save for an explicit aim such as a house purchase or for a student’s loans. PRIIPs cover a range of investment products which, taken together, make up a market in Europe worth up to €10 trillion.
Despite their latent benefits for retail investors, PRIIPs are often viewed as complicated products which lack transparency. The information which institutions make available to investors when selling these products can be overly complex. They often contain too much jargon and can be difficult to use for comparisons between different investment products. Since institutions selling these products often also play a role in advising investors, conflicts of interest may arise producing advice which may not be in the investor’s best interests.
Scope and Definition
The text of the regulation states that a PRIIP is a dual term definition, where a PRIIP is a product that is one or both of the following:
- a Packaged Retail Investment Product (PRIP)
- an Insurance-based Investment Product (IIP).
The regulation clarifies that a PRIP means an “investment, including instruments issued by special purpose vehicles where, regardless of the legal form of the investment, the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the retail investor”.
In addition, an IIP means an “insurance product which offers a maturity or surrender value and where that maturity or surrender value is wholly or partially exposed, directly or indirectly, to market fluctuation”.
|Products in scope||Products out of scope|
|Investment funds||Corporate shares held directly|
|Structured products||Sovereign bonds held directly|
|Insurance products||Non-life insurance|
|Derivative instruments||Pension products|
|Structured deposits||Certain life insurance products|
PRIIPs is applicable to?
Regulation covering PRIIPS impacts all manufacturers and distributors or financial intermediaries who issue PRIIPs, which are invested in by retail clients.
More specifically, the responsibility of preparing the (Key Information Documents) KID lies with the product manufacturer, whereas the responsibility of providing the KID lies with the entity advising or selling the PRIIP. It has been stressed that the KID must be provided to retail investors and not just ‘made available’.
Key information documents for PRIIPs
In order to tackle these shortcomings, the EU has adopted a regulation on PRIIPs, which obliges those who produce or sell investment products to provide investors with key information documents (KIDs).
KIDs should be a maximum of 3 pages and provide clear information on investment products.
KIDs should include the following information
- the name of the product and the identity of the producer
- the types of investors for whom it is intended
- the risk and reward profile of the product, which includes a summary risk indicator, the possible maximum loss of invested capital and appropriate performance scenarios of the product
- the costs investors have to bear when investing in the product
- information about how and to whom an investor can make a complaint in case there is a problem with the product or the person producing, advising on or selling the product
PRIIPs & MiFID II
The common driver for both regulations is investor protection and they both discuss the delivery of short and succinct information documents for prospective and existing investors to enable them to compare different products and acquire a better understanding of risks and potential returns behind them. However, MiFID II has a broader scope and “applies to firms providing investment services and firms that manufacturer or distribute financial instruments,” whereas PRIIPs focuses on “unit-linked funds, structured products and retail investment products.” Therefore, it is important to consider that:
- PRIIPs and MiFID II are similar but not the same
- It is imperative for the industry response groups have teams looking at the overlap and exploring operation efficiency for the industry
- MIFID II is broader, while PRIIPs is narrower but more prescriptive
- Disclosure requirements in both are very much aligned
- Uncertainty exists with both regulations, although this is expected to be fixed
- There is opportunity for the regulator to reduce industry burden by issuing specific written guidance on the overlap areas
Please get in touch for details on our latest PRIIPs workshops.