PRIIPs developments in the EU: an update

Update - 26 October 2021

(a) The UCITS exemption
Recent soundings from the European Parliament’s ECON committee have given a fairly strong steer that the following will be agreed.

• an extension of the UCITS exemption to 31 December 2022; and
• a delay to the deadline for Member States to ensure that provision of a PRIIPs KID will be seen as compliant with the requirement to provide a KIID under the UCITS Directive, again, to 31 December 2022.

(b) Review of PRIIPs
On 21 October 2021, the ESAs published a call for evidence – see our summary here. Responses to the call for evidence will help inform the ESAs’ advice, which they must submit to the European Commission as part of the Commission’s work on the PRIIPs Review

The call for evidence closes on 16 December 2021.

PRIIPs developments in the EU: an update

The EU and the UK have both recently proposed changes to regulatory technical standards (RTS) which cover similar topics (performance scenarios and costs) under their own PRIIPs regime.

This note looks at the recent developments regarding the EU framework. For details of developments in the UK, see our separate note, here.

This note looks at where things stand in relation to the three main strands of work currently in progress in respect of PRIIPs:

• the UCITS exemption;
• changes to the UCITS Directive; and
• changes to the PRIIPS KID Delegated Regulation.

In addition, the Commission is still committed to undertaking a fuller review of the PRIIPs Regulation in general. We will be reporting on this in due course as the review develops.

A. The UCITS exemption (Article 32 of the PRIIPs Regulation)

The PRIIPs Regulation allows an exemption so UCITS managers don’t need to provide a PRIIPs KID as well as a KIID under the UCITS Directive.

The exemption has previously been extended but is due to expire on 31 December 2021.

On 15 July 2021, the Commission launched a consultation on a draft Regulation which would extend the UCITS exemption to 1 July 2022. The consultation closes on 9 September 2021.

B. The UCITS Directive

After the expiry of the UCITS exemption, after 1 July 2022, UCITS managers would have to provide a PRIIPs KID while, at the same time, being required to provide a KIID under the UCITS Directive.

To avoid this duplication, on 15 July 2021, the Commission also published a proposed Directive which would amend the UCITS Directive by requiring Member States to accept the PRIIPs KID as being compliant with the need for a KIID.

As with the UCITS exemption (and the RTS - unless the Commission has a major surprise in store for the industry), this change would come into force on 1 July 2022.

C. The PRIIPs KID – developing the RTS and where we have got to.

Level 2 measures on the presentation and content of the KID were set out in a Commission Delegated Regulation (the Delegated Regulation), which came into effect alongside the Level 1 text on 1 January 2018.

Since August 2018, the joint European Supervisory Authorities (ESAs) have been charged with putting forward changes to the Delegated Regulation in advance of the PRIIPs KID requirements being applied to UCITS.

However, in July 2020, the ESAs reported to the European Commission (the Commission) that they’d been unable to reach the required level of agreement on their proposals. As a result, the Final Report that they had published on 30 June 2020 was draft only (ie not approved).

In December 2020, the Commission wrote to ESAs giving them to the end of January 2021 to agree the draft RTS, failing which the Commission would take whatever steps it felt necessary to unblock the impasse.

As a result, on 3 February 2021, the ESAs confirmed that they had agreed the draft RTS and submitted a Final Report to the Commission in the same form as that published in draft the previous June.

The next step is for the Commission to publish (adopt) a set of draft RTS (either as submitted by the ESAs or as amended by the Commission) and for the European Parliament and Council of the EU to endorse these before the RTS are published in the OJ.

We expect the RTS to be adopted by the Commission in September 2021.

As things stand, the RTS are currently set to come into force on 1 January 2022 – however, there is a very high level of expectation that they will be put back to 1 July 2022 (and perhaps further), which would align them with the UCITS exemption and change to the UCITS Directive outlined above.

So, what do the draft RTS contain?

Bear in mind that the following looks at the draft RTS as submitted by the ESAs in their Final Report of 3 February 2021 - it is open to the Commission to adopt them as is, to amend them or even to reject them entirely (though this would be a surprise!)

The main areas covered in the draft RTS are:

• performance scenarios - new calculation methodologies and revised presentation;
• summary cost indicators - revisions, including amended presentation;
• transaction costs - modification of the calculation methodology;
• MOPs - refinement of the rules relating to PRIIPs offering a range of options for investment;
• incorporation of existing provisions regarding investment funds into the PRIIPs framework (ie incorporating UCITS); and
• past performance - requirement for certain types of investment funds and insurance-based investment products to publish information (in a separate document) and refer to it within the KID

In this note we will focus on the changes for PRIIPs other than investment funds.

A. Performance Scenarios

On calculation

The draft RTS:

• keep the same approach for PRIIPs other than investment funds (Category 2) - however, where the PRIIP manufacturer considers that there is a material risk that these scenarios may provide retail investors with inappropriate expectations about the possible returns they may receive, they may use lower percentiles than those specified;
• retain the calculation of performance scenarios at a one year holding period;
• amend the requirement to show an intermediate holding period (IHP) to only those PRIIPs with a recommended holding period (RHP) over ten years (rather than three years); and
• require inclusion of information on the minimum return level results in the performance scenario table in the KID.

On presentation

The draft RTS:

• permit flexibility to use the terms “terminate” or “surrender” instead of “exit”, and “notional amount” (for derivatives); and
• include amended templates in respect of:
  • single investment/premium;
  • regular investments/premium; and
  • a new, separate table for autocallables.

On elements

The draft RTS:

• include revised wording for the Elements (although some remain the same but in a different order); and
• include a new Element E which allows 300 characters of free text which must include a “brief explanation of the scenarios shown”.

B. Costs

On calculation

The draft RTS include:

• adjustments made to the return assumption used – a net performance of zero is used to calculate costs for first year (or for the RHP if the RHP is less than one year) – this aligns with the regime under MiFID;
• costs calculations for other holding periods are still based on moderate scenarios;
• provision for cost figures in monetary amounts to be rounded to the nearest euro. The cost indicators in percentage terms are to be expressed to one decimal place;
• retention (in substance) of the exemption in Art 90 Annex VI although this has been tweaked. Costs may be shown at the end of the RHP only:
  • where a PRIIP does not allow exit before the RHP;
  • where it is considered not to have an alternative liquidity facility promoted by the PRIIP manufacturer or a third party;
  • where there is an absence of liquidity arrangements; or
  • for PRIIPs referred to in point 30 of Annex IV.

On presentation

Costs over time

The draft RTS provide for:

• a prominent warning to be included regarding additional costs that might be charged by distributors: “The person advising on or selling you this product may charge you other costs. If so, this person will provide you with information about these costs and how they affect your investment.”
• a simpler description of RIY (Annual cost impact); and
• a new, separate template for autocallables.

Composition of costs

The draft RTS include:

• new prescribed wording, with more narrative explanations; and
• a requirement to show the costs of exiting at one year (or at the RHP if the RHP is less than one year), rather than per year.

C. Other changes

Cross references

• the draft RTS inserts a new Article 17a into the RTS by which cross-references to other information are explicitly permitted (including the prospectus, annual and half-yearly reports and the website of the PRIIP manufacturer);
• cross references must be kept to a minimum; and
• the KID must still contain all the information for retail investor to understand essential elements of the investment

SRI

• the draft RTS inserts a new clause 52a in Annex II – if the manufacturer considers that the SRI does not adequately reflect the risks of the PRIIP, it can increase the SRI;
• the manufacturer must document their decision-making process in relation to this;
• for derivatives, the terminology used for the narratives accompanying the SRI can be adjusted to reflect, for example, that there is no initial investment amount.

Interaction with the UK’s revised RTS

As well as the ESAs’ proposed amendments above, the FCA has recently proposed changes to the RTS developed under the UK’s on-shored PRIIPs regime. Please see our note on these revised RTS here.

There is significant divergence between the UK and the EU in a number of areas including:

There are many additional points of divergence where there is no overlap between the two proposals (for example, the amendments to costs calculation methodologies or the fact that the EU are changing the requirements for when intermediate holding periods must be shown, while the FCA does not touch on that).

In conclusion, whilst both sets of regulators are working towards the same aim of improving established problems with the PRIIPs Regulation, there is significant divergence in their proposed approaches which looks to result in a situation where a “UK KID” will need to be provided to UK retail investors, and an “EU KID” to EU retail investors. It will be important for firms and trade associations to engage at this point in the hope of minimising divergence.

We anticipate that this divergence will prove costly to PRIIP manufacturers who will need to draw up two different KIDs for the same product distributed across the UK and Europe.