PRIIPs and hedge fund managers – a quick update

While most of the hedge funds managed by our clients don’t typically have retail investors and so won’t be affected by the recent changes to the EU and UK PRIIPs rules, some do. Funds may, for example, end up in the hands of retail clients through private wealth advisory/distribution channels and this can generate the need to provide a Key Information Document (KID).

For those clients, we have prepared a quick update on what’s been happening on PRIIPs.

The bottom line is that, if you think you are - or may be - affected, speak to one of your Simmons contacts and consider undertaking a gap analysis to see if you need to update your disclosures.

Headline points

Both the EU and UK rules on the content and format of the PRIIPs KID will change (and diverge) on 1 January 2023.

This is the first divergence of any significance on PRIIPs since Brexit, and managers will need to ensure they make the correct KID available to the correct investors.

In summary, hedge fund managers who make their funds available to

• UK retail investors will need to amend their PRIIPs KIDs to reflect these changes - in particular, under the UK regime, performance scenarios will be replaced with narratives and they will need to consider if the SRI number accurately reflects the risk
• EEA retail investors will need to amend their PRIIPs KIDs to reflect changes being made to the EU PRIIPs regime.

Brief background

On 1 January 2018, the EU’s PRIIPs Regulation introduced a mandatory PRIIPs KID document for packaged retail and insurance-based investment products that are made available to retail investors. Responsibility for preparing the PRIIPs KID lies with the ‘PRIIP manufacturer’.

The KID is a three-page A4 information document which gives key facts to investors – its form and content, as well as how it must be distributed to investors, are all highly prescribed.

In the EU

The Level 2 measure which specified the contents and format was amended in December 2021 – the new rules, though, don’t apply until 1 January 2023.

In particular, the new rules include:

• past performance – allowing certain types of investment funds to include, in the ‘Other relevant information’ section of the KID, a link to a website or a separate document in which past performance information is contained
• new calculation methodologies and/or revised presentation requirements for
  • performance scenarios
  • transaction costs and
  • summary cost indicators
• Multi-Option Products - refinement of the rules relating to PRIIPs offering a range of options for investment.

Our summary of the draft new EU rules (which, with some minor changes, became the final text) is here.

In the UK

Following Brexit, the UK retained an on-shored version of the PRIIPs Regulation but it’s now starting to move away from certain aspects of that. In July 2021, CP 21/23, consulted on changes (summarised in our article here) to the on-shored regime

The final rules were unveiled on 25 March 2022 in the FCA’s policy statement, PS 22/2 and include a number of key points where the UK’s regime moves away from the EU’s, including;

• Performance scenarios
  Narrative information on performance will replace the need to provide performance scenarios. The FCA, though, has offered little guidance as to what should go into the narratives – there’s no indication, for example, of word/character limit.

• Summary Risk Indicators (SRI)
  the manufacturer will have to upgrade the SRI if the current SRI underestimates the level of risk, but there is no longer a requirement to notify FCA if they do so.

  Our summary of PS 22/2 is here.

While the new UK rules came into effect the same day as PS 22/2 was published (ie, 25 March 2022), an implementation period has been included to 31 December 2022 – this allows firms time to comply while also aligning the date of introduction of the rules with that under the EU’s regime.