The UK PRIIPs regime – final rules from 1 January 2023

The FCA's Policy Statement PS 22/2, "PRIIPs - Scope Rules and amendments to Regulatory Technical Standards" (the PS) was published on 25 March 2022.

The PS sets out the  final rules for the UK's version of the  PRIIPs regime and follows on from the FCA's consultation under CP 21/23 (the CP), which ran from July to September 2021.

Whilst the EU is making changes to the EU PRIIPs RTS with effect from 1 January 2023 and has recently begun a fuller review of the EU PRIIPs regime, the UK has been looking to separately develop its own PRIIPs regime that it considers suits the UK market better (although the UK has already departed from the EU PRIIPs regime by extending the exemption for UCITS and NURS from preparing PRIIPs KIDs by five years, to 31 December 2026).

The CP set out proposals to amend the UK PRIIPs regime and which are intended to:

• address what the FCA referred to as "the areas of the [EU's PRIIPs] Regulation that pose the most harm to consumers"

• deal with the perceived lack of clarity on the scope of PRIIPs and

• consider options for tackling concerns with performance scenarios, summary risk indicators and elements of the transaction costs methodology.

For our summary of the CP, please see here.

Looking at the main points included in the final rules as contained in the PS:

Timing

The rules came into force on 25 March 2022 but include a transitional period for implementation until 31 December 2022. This is in line with the changes to the EU version of the PRIIPs RTS -see our report here.

Whilst the FCA seems to have appreciated that firms needed more time to implement these changes, this timeline may still be quite demanding for some.

Key impacts on PRIIPs KID manufacturers

• Performance scenarios

The FCA will be changing to narrative information on performance instead of performance scenarios. This is in our view the biggest change suggested in the PS. The FCA has offered little guidance as to what should go into the narratives. There is no indication of word/character limit, for example. It will be interesting to see how firms approach this. We think there is definitely a case for some industry group work on aligning these narratives and we will be looking to help with that where we can.

• SRI

There will be an obligation for the manufacturer to upgrade the SRI if the current SRI underestimates the level of risk, but there is no longer a requirement for the manufacturer to notify FCA if they do so.

In our view, this will put some onus on manufacturers to assess the SRI for each product and consider whether it needs upgrading, which could be a significant uplift.

Summary of changes

Scope

In line with the proposals in the CP, the rules set out certain features of debt securities and whether or not they make a product a PRIP (and, therefore, a PRIIP). The following features are listed as not causing a debt security to meet the PRIP definition:

• A fixed coupon rate

• A floating or variable coupon

• A put option at a predetermined price

• A call option at a price higher than or equal to par

• A perpetual or indefinite term

• Subordination

Whilst the FCA states that it does not have the power to include/exclude products from scope - it does make statements in the PS on several product types including:

• FX forwards: "FX Forwards, and FX Swaps, are derivatives. As outlined in FS 19/01, and explained on our website, we consider that derivatives, if offered to retail investors, would fall within the definition of PRIIPs."
• SPACs: "Generally, we would not consider a SPAC to fall in scope of the PRIIPs Regulation where it is publicly listed and follows the traditional model where the investor can either swap their shares in the SPAC for shares of the merged company or redeem once the acquisition is completed. However, it is the responsibility of the manufacturer to consider the features of a SPAC, particularly an unlisted entity, and determine whether it could constitute a PRIIP."
• REITs: "As outlined in FS 19/01, it is the responsibility of the manufacturer of REITs to determine whether the REIT is a PRIIP or not, on a case-by-case basis."
• Listed Investment Companies: "As outlined in FS 19/01, we maintain our view that if a collective investment undertaking falls within the definition of an 'alternative investment fund,' and is made available to the retail market, then it should be considered a PRIIP. A listed investment company would fall under that definition, notwithstanding that it is also a body corporate."

US ETFs: "As outlined in CP 16/18, a third-country manufacturer or distributor of a PRIIP to retail clients in the UK will be required to prepare and produce a KID".

'Made available'

As per the proposals in the CP, the new rules contain guidance that a security which is not a PRIIP is not "made available" where:

1) marketing materials for the financial instrument (including the prospectus) make it clear that it is being offered only to professional clients or ECPs and that it is not intended for retail investors;

2) the marketing and distribution strategy for the PRIIP is, in fact, targeted at professionals and ECPs and not retail clients; and

3) the financial instrument is issued at a minimum denomination value of £100,000 (or the equivalent sum in a non-sterling currency).

Narrative information on performance instead of performance scenarios

As proposed in the CP, the FCA has decided to move to narrative information on performance instead of performance scenarios.

Annex IV of the PRIIPs RTS has been deleted in its entirety and replaced with a new Annex 4A.

The FCA has offered little guidance as to what should go into the narratives, with the reasoning being that this will provide manufacturers sufficient flexibility to include accurate disclosures. However, the guidance does not even include any indication of word/character limit, for example.

As per the CP, the PRIIP manufacturer must ensure the performance information is:

a) accurate, fair, clear, non-misleading and likely to be understood by the retail investors to whom the PRIIP may be offered;

b) compatible with the information stating the objectives of the PRIIP disclosed in accordance with article 2(2);

c) likely to be useful to retail investors in assessing the prospects for future returns of investment in the PRIIP as well as comparing it with other PRIIPs; and

d) supported by objective data.

Item d) is new in the PS (i.e., wasn't included in the CP).

As per the CP, the information must, as a minimum, include the following elements:

a) a description of the main factors likely to affect future returns for the investor, identifying those most likely to determine the outcome of the investment and other factors which could have a material impact on performance;

b) identification of the most relevant index, benchmark, target, or proxy, as applicable, along with an explanation of how the PRIIP is likely to compare in terms of performance and volatility;

c) under a sub-heading 'what could affect my return positively?', a brief explanation of the kinds of conditions that would be conducive to the PRIIP generating higher returns;

d) under a sub-heading 'what could affect my return negatively?', a brief explanation of the kinds of conditions whereby the PRIIP is likely to generate lower returns or lead to investment loss; and

e) a brief description of what outcome the investor may expect where the PRIIP matures or is redeemed or encashed under severely adverse market conditions.

The requirements for sub-headings in c) and d) are new in the PS (i.e. were not included in the CP).

No past performance will be included in the KID (yet).

Requirement to upgrade the SRI

As per the CP, PRIIPs manufacturers will have to ensure the SRI is appropriate and upgrade the SRI where the score underestimates the level of risk. Contrary to what was set out in the CP, the manufacturer will no longer need to tell the FCA if they choose to upgrade the SRI.

As per the CP, VCTs must have minimum SRI of 6 or 7.

As per the CP, the rules also increase the character limit for the description accompanying the SRI (Element E) from 200 to 400 characters.

Costs

As per the CP, the new rules make amendments in the following areas:

Anti-dilution: There will be no need to breakdown transaction costs, including disclosing where an anti-dilution mechanism is used. The FCA are proceeding with the proposal that any portion of an anti-dilution benefit that would lead to negative transaction costs should be disregarded to prevent negative transaction costs from being disclosed.

Calculation of transaction costs for debt securities: The FCA has advised that the best evidence that will be available for the market mid-price of a bond will be the average of the best bid and best offer obtained when seeking quotes from multiple counterparties, which it expects should avoid the possibility of firms calculating negative transaction costs for such transactions.

Calculation of costs for index-tracking funds: Firms should use a spread model rather than slippage for index tracking funds; the arrival price should be calculated as the mid-price immediately prior to the auction.

Average price: The FCA has advised that the correct approach is to calculate all transaction costs over three years and take the average for the whole period rather than a rolling average of annual transaction costs.

UCITS

The PS also makes consequential date changes to the Handbook to align with the UCITS exemption ending at the end of December 2026.

There is no update on a decision as to what EEA UCITS that are marketed in the UK under the TMPR will need to disclose in future, which the FCA has advised is a determination that HM Treasury is due to make in due course. Until then, EEA UCITS under the TMPR must continue to provide a UCITS KIID.