The ESAs propose amendments to the PRIIPs Regulation

On 29 April 2022, the Joint Committee of the European Supervisory Authorities (ESAs) submitted technical advice to the European Commission setting out recommended changes to the PRIIPs Regulation.

The advice was given in response to the Commission’s Call for Advice, which forms part of its review of the PRIIPs Regulation. Consideration of adjustments to the PRIIPs regime is one element of the Commission's work in developing its retail investments strategy under the Capital Markets Union Action Plan.

Overview of the ESAs’ advice

Among other things, the ESAs suggest that

• a significant number of changes should be made to the PRIIPs Regulation
• the European Parliament and Council of the EU should consider a broad review of the PRIIPs framework
• appropriate consumer testing should be undertaken before any proposals for change are made
• there should be an aim to improve the presentation of information provided to consumers and to make it easier for them to compare different products.

The ESAs’ recommendations

To address these issues, the ESAs have recommended, among other things, that:

• the opportunities afforded by digital disclosure (such as presenting information in a “layered” format) should be harnessed
• there should be no extension of scope to additional financial products at this stage – rather, the existing scope should be further specified
• different approaches should be allowed for different types of products where necessary to ensure that retail investors attain the appropriate level of understanding
• more flexibility should be allowed on the information provided in the performance section of the KID including the indication of past performance
• the rules for multi-option insurance products (MOP) should be changed so they better facilitate comparison between different investments
• a new section should be included in the KID to give prominence to sustainable objectives
• the Commission should consider how to better align the information on costs in the PRIIPs KID with other disclosures and
• successive transactions made in relation to the same PRIIP should only require provision of the initial KID.

Further detail on the recommendations made is set out under the section entitled ‘Key points from the ESAs' technical advice’ below.

Why has the technical advice been published?

The technical advice was published in response to the ESAs’ wide ranging October 2021 call for evidence – see our summary here.

The PRIIPs Regulation includes a requirement for the Commission to review its functioning and to submit legislative proposals, if deemed necessary. In September 2020, the Commission’s published a new Capital Markets Union Action Plan, which set out its intention to publish a strategy for retail investments in Europe in the first half of 2022, including PRIIPs.

The Commission then published its Call for Advice in July 2021, requesting the ESAs’ assistance in providing advice on a number of areas concerning the PRIIPs Regulation, including:

• a general survey on the use of the PRIIPs KID
• a survey of the practical application of the rules laid down in the PRIIPs Regulation, bearing in mind developments in the market for retail investment products
• an assessment of how far the PRIIPs regulation is adapted to digital media.

Following this request from the Commission, the ESAs published their wide ranging October 2021 call for evidence – see our summary here.

However, as was noted in the call for evidence, work that the ESAs have done since 2018 had led them to the view that changes to the PRIIPs Regulation were needed in areas beyond those included in the Commission’s Call for Advice.

As a result, the ESAs’ call for evidence contained a number of questions which sought feedback on issues that went beyond the ESAs’ formal mandate from the Commission.

Key points from the ESAs' technical advice

Looking at some of the ESAs’ key comments in more detail:

1. General survey on the use of the KID

Most NCAs do not have information on actual usage of the KID by distributors and advisors. Using a variety of sources, including comments from respondents, the ESAs noted that:

• National documents sometimes preferred: some distributors still prefer to use documents based on national law, in part because the information on potential future performance is seen as more meaningful.
• KIDs cannot be used for comparison: there may be challenges to using the KID as a basis for comparison, for example as it might not contain comparable costs figures.
• KIDs cannot be used to filter products: the view of a number of respondents was that other tools or documentation are better suited to be used for product filtering and can allow filtering based on product features.
• KIDs are not consumer friendly: many respondents felt that the KID is not widely used, either because of flaws in its contents, or because it is not a consumer-friendly document – one expressed the view that the KID seems to be mainly used for “execution-only” sales, i.e., without a suitability or appropriateness test.
• KIDs and marketing materials service different purposes: the majority of comments about KIDs were negative, but a substantive number of respondents were more positive and particularly stressed that marketing documents and the KID are of a different nature, serve different purposes and, as such, should not be compared.
• KIDs lack flexibility and are complex: the lack of flexibility in content was considered to result in less suitable terminology being used and to prevent additional useful content from being added, and that the KID narratives use complex language that hinders readability.

2. Advice related to the supervision of the KID including notification of the KID to NCAs

The ESAs’ report:

• Ex ante submission of KID to the NCA: the ESAs consider that ex ante submission of KIDs to NCAs would have material benefits and they encourage the Commission to consider how expected amendments to the PRIIPs Regulation can best facilitate the preparation of the proposed European Single Access Point (ESAP) - “including the role of the ex ante notification of the KID in this context”.
• Ex ante submission of KID to the NCA by UCITS: the ESAs highlight the urgency in clarifying the effects of applying PRIIPs rules to UCITS from 1 January 2023, in particular whether a KID must be submitted to NCAs as is currently required for UCITS KIIDs.
• Ex ante review and approval of KID by the NCA: the technical advice appears to support the continued right for member states to require that a KID be submitted ex ante to the NCA.
• Application of the PRIIPs sanctions regime: the ESAs identify the lack of clarity in the sanctions provisions, in particular where PRIIPs are distributed cross-border.

3. Advice on the content, structure, accessibility and provision of the KID, including in view of the use of digital media

The ESAs recommend the following:

• Consumer testing: conduct of consumer testing in relation to the sequence and title of the different sections and the details of the contents of the KID to ensure that the KID is clear, succinct and comprehensible.
• User friendliness: if felt appropriate following the consumer testing, changes could be made to include a summary of the most essential information at the top of the KID, for example, in the form of a dashboard (as currently included in PEPP KIDs).
• Adaptation to digital media: changes to adapt the KID to digital media, allowing the opportunities of digital disclosure to be harnessed so that it is easier for the consumer to compare between products and potentially allowing ‘layering’ of the information, possibly with a ‘digital’ KID being the default form to provide the KID (instead of the current default of a paper KID).
• Tailoring to investor type: the PRIIP manufacturer should be required to take into account the characteristics of the type of retail investor to whom the PRIIP will be marketed
• Availability on website: the PRIIPs KID should be easily accessible from the PRIIP manufacturer’s website
• Provision of KID: that the rules regarding the provision of the KID should be made consistent with the equivalent rules regarding other retail investor protection disclosures, such as in MiFID II and the upcoming revision of IDD.
• European Single Access Point (“ESAP”): as part of the ESAP proposals to introduce a public, free access to financial and sustainability related information, that a requirement should be introduced to prepare the KID in a machine-readable format, and that information on the PRIIP’s past performance of the PRIIP should in future be included within the proposed ESAP (preferably through a requirement for this information to be included in the KID itself) but that in the meantime the ESAP proposals should be amended to include the reference to past performance information that can now be published separately.

4. Advice on scope of the PRIIPs Regulation

The ESAs decided against recommending the extension of the scope of the PRIIPs Regulation to cover additional financial products at this stage - at least until a more differentiated approach between products is possible.

However, the ESAs have recommended that certain changes be made to the scope of the PRIIPs Regulation:

• Bonds: the types of bonds which fall within the scope of the PRIIPs Regulation to be specified more precisely, in particular, making clear that “make-whole” clauses should not of themselves result in a bond falling within scope
• Non-financial services companies: the application of the scope to non-financial services companies should be clarified
• Longer list of products in scope: a significantly longer (non-exhaustive) list of products that are in or out of scope could be included
• ‘Made available’: the concept of a KID being ‘made available’ to retail investors should be clarified to set out the circumstances under which a PRIIP manufacturer is required to draw up and publish a KID on its website and distinguishing the responsibilities of (a) the product manufacturer and (b) the distributor.

5. Advice on approaches to take into account different types of PRIIPs

The ESAs recommend the following changes to the PRIIPs Regulation:

• More tailored KIDs: a trade-off between comparability and comprehensibility of the information in certain parts of the KID should be permitted under the PRIIPs Regulation, allowing a degree of tailoring. The first objective should be to achieve comprehensibility but with the aim of achieving comparability between substitutable products is, whereas the current objective is to obtain comparability between KIDs irrespective of the type of PRIIP.
• Different approaches for different types of PRIIPs: different approaches should be allowed to be taken between different types of PRIIPs (where appropriate), so that retail investors are provided with fair, clear and not misleading information.

6. Advice on performance scenarios and past performance

The ESAs recommend a change from the current requirement for ‘appropriate performance scenarios’ to be included in the KID to a requirement to include ‘appropriate information on performance’. This allows more flexibility on the nature of the information provided in the performance section of the KID, such that the PRIIPs Delegated Regulation could allow past performance to be included for certain types of products, rather than the KID for all types of PRIIPs needing to include forward-looking performance scenarios.

The ESAs have repeated the view expressed previously that past performance should be included in the KID for relevant PRIIPs, such as investment funds (UCITS and AIFs, except structured UCITS and structured AIFs).

7. Advice on multi-option products (“MOPs”)

The ESAs recommend a number of changes to the PRIIPs Regulation in respect of MOPs, including:

• permitting a derogation whereby, if a PRIIP offers the retail investor a range of options for investments, the PRIIP manufacturer can provide the required information for the different investment options in separate documents. For each option, the information would
  • take into account the impact of the costs of the PRIIP other than the costs for the underlying investment option (so far as these costs a significant effect on return), and
  • be of a maximum of three sides of A4-sized paper when printed.
• the addition of a new provision requiring that, where the PRIIP offers a retail investor a range of options for investments, the person advising on, or selling, the PRIIP must provide the retail investors with:
  • KIDs relating to the options that the retail investor is considering; or
  • a KID which reflects the combination of investment options that the retail investor is considering.

8. Inclusion of information on ESG objectives

The ESAs recommend that a new section be included in the KID to prominently show where a PRIIP has a sustainable investment objective or promotes environmental or social characteristics. Also recommended is that language used in the PRIIPs Regulation be aligned with that used in the SFDR.

9. Alignment between the information on costs in the PRIIPs KID and other disclosures

The technical advice recommends that the Commission consider whether to make changes aimed at improving how information provided to consumers is presented, with the intention of making it easier for them to compare products.

The ESAs note that some of this work has already begun *in the implementation of changes to the PRIIPs Delegated Regulation.

10. Provision of KIDs on successive transactions

Finally, the ESAs recommend that successive transactions made under the same instruction in relation to the same PRIIP should only require provision of the initial KID, with information included as to where a revised KID can be found and for the latest KID to be provided upon request.