end 2021 the manufacturers of structured products, OTC derivatives, UCITS funds
and AIF are facing a lot of regulatory work. They are required to identify and
implement amended regulatory technical standards (RTS) on the key information
documents (KID) for packaged retail and insurance-based investment products
(PRIIPs) approved by the European Supervisory Authorities (ESA) on 3 February
manufacturers, distributors and investors
rules expose manufacturers with a complex task. However, irrespective of
whether someone considers the amendments are helpful or not, they significantly
affect the methodology and the content of a KID culminating partially in a
break in the continuity with the current standard. Therefore, distributors as
well as investors have to be carefully trained in order to get familiar and to
understand all new features of the future KID.
KID has been applicable for structured products and OTC derivatives since
January 2018. Due to the envisaged inclusion of UCITS funds and AIF and the
widespread criticism concerning a lack of informative value, the ESAs started a
joint consultation in October 2019. The ESAs agreed on a final report on RTS
amending the PRIIPs Regulation and submitted it to the European Commission for the
final decision in February 2021.
approval of the RTS proposal in its current form is expected for April 2021 at
the latest. Initially it has been envisaged that the RTS will come into effect
by 1 January 2022. However, there are signs that the European Commission could
postpone the implementation by three, six or even twelve months. At a later
stage, the ESAs might publish level 3 guidelines or Q&A on various topics.
Industry associations are already requesting for clarification on certain
of certain parts of the industry for postponing might have been successful – similar
to what happened to the current active RTS, which initially should have been
implemented by January 2017, but then started twelve months later. However, everyone
could hope but should not bet on such a concession as the European
Commission itself had put pressure on the ESAs for a quick submission of the
amendment. Another subsequent last minute stop – in theory a non-objection of
the RTS by the European Parliament or the European Council - appears improbable.
manufacturers should hurry up to meet the deadline, as the new RTS will not
only apply to new offerings, but also for existing products which are still be
offered. The new RTS do not contain any grandfathering clause, so that the
issuers have to decide for existing products whether to switch the KID or to
close the offering at the time when the new RTS will come into effect.
amendments require additional content and cover almost all sections of the
current KID. Manufacturers might question the current page limit for a KID.
This limit of three pages remains untouched as it is part of the level 1
regulation while the amendment constitutes a level 2 regulation only.
Leibowitz, Chief Innovation Officer at LPA/Modelity has advocated more industry
alignment. His claim is that a KID does not offer a competitive advantage. It
is even counterproductive, if KIDs across different manufacturers show
different results for identical items. In addition, the new RTS leaves many
questions unanswered. Therefore, the manufacturers should agree on a
coordinated, industry wide standard. It could not be expected that the ESAs
will provide all-embracing level 3 advice in good time.
list of amendments
includes significant changes on the KID regarding methodology, additional
scenario analyses, calculation of annual return and cost as well as brief
explanations in plain language. Some selected examples might demonstrate the
widespread impact on the KID.
- A far-reaching amendment especially
refers to UCITS funds and AIF as well as structured products classified so called
“category 2”. The back-testing of the different scenarios has to be based on
data which exceeds the recommended holding period (RHP) by at least 5 years,
but covers a minimum of 10 years, instead of currently 2 years.
- A new “minimum scenario” has to be included
in addition to the stress, unfavourable, moderate and favourable scenarios.
- If a manufacturer considers a
scenario too optimistic, it is responsible to use lower percentiles for that
- Specific performance scenarios as
well as cost presentations are required for the high-volume category of autocallable
structured products potentially ending in confusing results.
- Costs are now more but still not fully
aligned with MiFID II complicating the parallel use of documents. Narratives
without prescriptive wording are required for the presentation of cost.
- New narratives apply for
distribution fees being inconsistent with current statements.
- In case the manufacturer considers
the summary risk indicator (SRI) does not adequately reflect market and credit
risks it may decide to assign the product to a riskier category.
- As before, the list of OTC derivatives
does not include OTC options. Consequently, no specifications are made for
example regarding the calculation of the average return.
Seeking a trusted partner
Manufacturers need to find a trusted
partner who has deep expertise and can provide guidance to navigate the RTS
amendment. LPA can combine the expertise of fund and structured products
specialists, lawyers, mathematicians and IT specialists to cover all products under scope of
PRIIPs (funds, insurance-based investments, structured products and OTC derivatives). Furthermore, LPA extensive
experience and coverage of the complete value chain from initial assessment to
final implementation can provide manufacturers with substantial economies of