UCITS/PRIIPs Distribution It’s Going to be a Nightmare

Once upon a time, the financial supervisory authorities across the EU and the UK had a utopian plan. They said: let’s have a single system to provide information on financial investment products. For each product, investors will always receive the same simple document, can compare and make informed decisions. What a nice and logical ambition!

This sensible intention had its first obstacle with HM Treasury’s decision to extend UCITS funds exemption from PRIIPs for 5 years (Source). And now, as published last Friday (March 25th, 2022), the UK FCA completely buried the one-system objective, with the formation of a UK version for PRIIP KIDs.

Manufacturers of UCITS & PRIIPs that distribute their products to the EU and the UK will need to deal with 3 separate systems:

• EU PRIIP KIDs for all PRIIPs distributed in the EU
• UCITS KIIDs for UCITS distributed in the UK
• UK PRIIP KIDs for PRIIPs (other than UCITS) distributed in the UK

3 different methodologies and templates of key information documents. Distributors will need to be very cautious on providing the right document for each combination of product and potential client. Let’s go through the main differences among the 3 systems.

Risk
The methodologies for calculating the risk in UCITS KIIDs and PRIIP KIDs are completely different. This is dangerous, as both are using the same 1 to 7 scale. Here are some sample calculations we did a year ago: 

(Luckily) EU and UK PRIIPs use the same methodology for the SRI calculation, but they usually end up with a lower risk class than the UCITS SRRI. It is true that both EU and UK PRIIPs allow manufacturers to increase the SRI in case they believe it should be higher. However, the industry is reluctant to exercise this option, as it would lead to incomparability with other PRIIPs.

Having two different risk classes for the same fund, one when distributed to EU investors and another one when distributed to UK investors, both on the same 1 to 7 scale, is a risky outcome and a likely cause of investor confusion.  

Performance
Here the 3 systems notably differ:  

Cost Disclosure
The costs are another section where the methodologies and the presentation diverge significantly among the 3 systems:  

 * For the calculation of cost impact on returns, there needs to be a scenario, based on which the cost impact is calculated. Since the UK PRIIPs dropped performance scenarios from the performance section, the use of the Moderate Scenario is not relevant anymore. The amended UK PRIIPs RTS then requires the use of “a moderate performance scenario based on reasonable and robust assumptions and methodology”. Is this the same scenario as the EU PRIIPs’ Moderate Scenario? Unclear.

 ** RHP is an abbreviation for Recommended Holding Period  

Conclusion
The KI(I)Ds future turned uneven and complicated. The rest of year 2022 is going to be very challenging for manufacturers and distributors. Manufacturers need to update their systems and disclosures to support the new regulatory amendments. Distributors need to train their personnel on the changes.

Let’s hope this disclosure fragmentation doesn’t lead to too-many retail investment losses.