ESMA updates its PRIIPs KID Q&As

On 15 March 2024, ESMA published an update to its PRIIPs KID Q&As (produced jointly with the other European Supervisory Authorities) with ten new questions.

Section I - ‘General topics’

• A new Q&A12 clarifies that the term "PRIIPs open to subscription" (in Article 8(3) of the PRIIPs Delegated Regulation) is relevant only for Category 2 PRIIPs and covers cases where new contracts for such PRIIPs can be concluded, or shares in such PRIIPs can be subscribed to, by retail investors.

  ESMA notes that this would include (among other examples)

  • if existing, as well as new, customers can conclude new contracts or subscribe to new shares and

  • PRIIPs that can be purchased by retail investors on secondary markets

Section II - ‘What is this product?’

• A new Q&A7 considers the difference between a "benchmark" and a "proxy" in the Delegated Regulation.

  ESMA notes that benchmarks “are expected to be indexes [….] that can be used to measure the performance of investment funds”. An AIF’s benchmark relates to how the fund is designed and managed, and specifically whether the management of the AIF includes or implies a reference to a benchmark in accordance with Article 2(2a)(d) of the PRIIPs Delegated Regulation.

  Where the AIF is required to publish past performance under Annex VIII of the Delegated Regulation, it must include the past performance of the benchmark. Similarly, the benchmark should be used for required performance scenario calculations.

  ‘Proxy’, on the other hand, is a more general term used to capture cases where a substitute can be used because it is not possible or appropriate to use the original. The Delegated Regulation uses the term proxy to capture cases, besides benchmarks, where it is reasonable to expect a very good correlation between the performance of the PRIIP and the proxy (such as using another financial product or instrument that is of the same type as the PRIIP - for example, where the PRIIP is an AIF, another comparable AIF).

  ESMA concludes that using a proxy specifically for the purpose of calculating the MRM class or performance scenarios “does not mean that the proxy becomes a benchmark for the AIF, since it does not change how the AIF is managed”.

• A new Q&A8 looks at whether new wording in Article 2(2a)(b) of the ‘What is this product?’ section duplicates Article 6(b) in the “How long should I hold it and can I take money out early?” section, which requires “a description of the disinvestment procedure and when disinvestment is possible”.

  ESMA’s view is that it is necessary to include the required information in both sections. This does not, though, mean that the same wording needs to be used. ESMA expects there to be cases where the same product aspect or feature has implications for different sections of the KID.

  The aim is to provide comprehensible information to retail investors and manufacturers are responsible for the KID’s overall coherence and readability. As such, ESMA suggests that cross-references can be useful to help navigate the reader around the document or avoid unnecessary repetition – though excessive use of cross-references is likely to undermine the document’s readability.

  ESMA's answer notes that the requirements in Article 2(2a)(b) further specify those in Article 8(3)(c) of the PRIIPs Regulation that the ‘What is this product?’ section should contain information about ‘the nature and main features of the PRIIP, including: (…) (iii) (…) investment horizon; (…)(v) the term of the PRIIP, if known’.

  Article 2(2a)(b) of the PRIIPs Delegated Regulation specifies that the information on the nature and main features must include the possibility of early redemption before the term while, at the same time, indicating that this should be a statement rather than a detailed description. For cases involving more specific conditions regarding the redemption frequency, retail investors should be informed that redemptions might be limited, delayed, or subject to conditions, and that further details about these conditions are provided under the section ‘How long should I hold it and can I take money out early?’

• A new Q&A9 clarifies that Article 2(5)(b) of the RTS (‘an indication of whether the PRIIP manufacturer is entitled to terminate the PRIIP unilaterally’) relates to any circumstances which allow the PRIIP manufacturer to cancel or redeem the product without the retail investor’s consent.

  This covers both market circumstances (where the product as a whole might be redeemed) as well as circumstances specific to the retail investor.

Section III - Market risk assessment (A) Product categories

• A new Q&A20 examines whether a PRIIP manufacturer can use a benchmark/proxy where enough history for the SRI calculation is not available to cover 5 years of data for a daily share class or whether this should only be used for the minimum 2 years requirement.

  ESMA underlines that Part 1 of Annex II of the Delegated Regulation expects 5 years of data to be used where this is available. However, where less than 5 years of historical daily prices of the PRIIP are available, ESMA confirms that historical daily prices of an appropriate benchmark or proxy can be used to supplement the data of the PRIIP so that 5 years of historical daily prices are available for the SRI calculation.

• A new Q&A21 asks whether an artificially created “synthetic” proxy could be considered an appropriate proxy in accordance with the PRIIPs RTS Annex II and Annex IV?

  ESMA’s view is that the use of synthetic or artificial proxies (created, for example, using estimations, artificial intelligence models or algorithms) to generate price data is not consistent with the PRIIPs Delegated Regulation as this refers to the use of actual historical prices.

  The prices of an appropriate proxy should be determined based on a relatively simple and established method (i.e. not based on an artificial intelligence model) and be verifiable.

Section V - Summary risk indicator

• A new Q&A5 confirms that currency risk described by Risk Element C is applicable to investment funds that are denominated in a currency other than the official currency of the Member State where the PRIIP is being marketed. As such, it relates to the currency in which pay outs are made to retail investors.

  If a PRIIP is available to retail investors in a Member State with a currency different from that of the product, the KID must include the SRI narrative element C. On the other hand, if a PRIIP can only be accessed by retail investors in a Member State which has the same currency as that of the product, the KID should not include the SRI narrative element C.

Section VI - Performance scenarios

• A new Q&A23 confirms that, where a retail investor cannot exit the product before the RHP, performance and cost information should only be shown in relation to exiting the product at the RHP.

  Under Annex VI, point 90(d) of the Delegated Regulation, where a PRIIP does not allow exit before the RHP, costs should be shown only at the RHP. In such a case

  • in Table 1, ‘Costs over time’, the intermediate holding periods do not need to be shown, and

  • in Table 2, ‘Composition of costs’, costs should also be shown at the RHP, including if the RHP is more than one year.

Section VII - Past performance

• A new Q&A8 provides that the publication of past performance by UCITS should be within 35 business days after 31 December whilst for other funds this should be updated and published as soon as possible after the end of each calendar year (and ESMA’s expectation is that this would be within 35 business days after 31 December). For UCITS, this may also indicate ESMA’s position regarding the timing to update the KIDs of UCITS.

  For other PRIIPs, rules on the content and presentation of the past performance information are also set out in Annex VIII of the Delegated Regulation – this includes a requirement for information to be published for each complete calendar year once this is available. Although there is no specified deadline for updating the information on past performance, such information should be updated and published as soon as possible after the end of each calendar year - this means that ESMA expects it to be published within 35 business days after 31 December each year.

  As past performance information is not published within the KID itself, ESMA notes that “it may not be necessary for the PRIIP manufacturer to review and revise the KID at the same time as publishing the updated information on past performance”.

Section XIII - Methodology for the calculation of costs (F) Presentation of costs

• A new Q&A12 clarifies that costs disclosed in table 1 (cost over time) of Annex VII of the Delegated Regulation and table 2 (total cost) should be aligned for year 1.

  Table 2 is intended to show a breakdown of one of the figures included in table 1. For PRIPs which show costs in table 2 at 1 year in Euros, the sum of the different rows in table 2 should equal the ‘Total costs’ figure in Euros shown at 1 year in table 1. Table 2 does not include a ‘Total’ row given that this figure should already be provided in table 1