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PRIIPs - The Quest To Recreate The KID
1. WHITE
PAPER PRIIPS - THE QUEST TO RECREATE THE KID
HOW TO OVERCOME THE CHALLENGES OF PRIIPS REGULATION
2. CONTENTS
FOREWORD
INTRODUCTION 01
CREATING A LEVEL PLAYING FIELD FOR INVESTMENT PRODUCTS 01
PART 1: BACKGROUND 02
THE PURPOSE OF THE PRIIPS REGULATION 02
IMPLICATIONS FOR THE INDUSTRIES INVOLVED 02
PART 2: REQUIREMENTS 03
THE PRIIPS KID REQUIREMENTS – WHAT YOU WILL NEED TO PROVIDE 03
DEFINITIONS AND SCOPE 03
PART 3: CHALLENGES 05
NO TRANSITION PERIOD AND LIMITED TIMEFRAME FOR IMPLEMENTATION 05
KEY PRIIPS KID CHALLENGES 06
PART 4: RECOMMENDATIONS 08
ACT NOW TO GAIN COMPETITIVE ADVANTAGE 08
CONCLUSION 10
GLOSSARY 10
ABOUT RR DONNELLEY 11
Author
Patricia Myles (CPA,
Dip. IFRS), Manager:
Regulatory Solutions
at RR Donnelley
WHITE PAPER PRIIPS - THE QUEST TO RECREATE THE KID
3. FOREWORD
I am delighted to introduce RR Donnelley’s PRIIPS white paper. PRIIPS is an important piece
of legislation that is essential to the integration of the financial markets in Europe, and to the
benefits of investor protection, by creating a level playing field between financial products
disclosures towards retail investors. European investors need to have access to efficient and
reliable information on investment products, all the more with our ageing population.
The objective of the PRIIPs regulation is to provide a single document to ensure comparable
information is made available to the investors. It promises greater transparency and
greater protection.
The general principles of the legislation have already been defined and approved by the
European Parliament and the Council of Ministers. Different consultation papers have been
issued by the European Supervisory Authorities, draft Regulatory Technical Standards (RTS) on
the PRIIPs regulations were recently issued on November 11, 2015. The PRIIPs regulation will
come into force in January 2017, as this is a regulation no national transposition is required to
be fully enforced on January 2017.
To make the most of the PRIIPs regulation, the financial industry will need to continue to work
on a number of important issues, in particular on cost and risk disclosure. Creating a single
market where retail investment products will be made easily comparable for retail investors
across insurance, banking and asset management is the key focus for the European Supervisory
Authorities. The industry will have to deal with these challenges collectively.
The path to the single European market may be long and complex but it is well under way and
PRIIPs is a great milestone in its advance. I trust you find this paper interesting and enjoyable,
and it helps in your understanding and decision-making for the future.
Rafael Aguilera
Ernst & Young
Executive Director - Directeur Associé
EMEIA Wealth & Asset Management Product
Strategy and Distribution Leader
4. INTRODUCTION
CREATING A LEVEL PLAYING FIELD FOR INVESTMENT PRODUCTS
From January 2017, providers of investment products will need to give retail investors a Key
Information Document (KID) – a “standardised and simple document giving key facts on the
product”. The KID will need to explain clearly, in three pages, everything the potential investor
needs to know to make a sound investment decision.
The new rules will apply to Packaged Retail and Insurance-Based Investment Products
(PRIIPs). The regulations cover not only collective investment schemes but also other
’packaged’ investment products offered by banks and insurance companies (although pensions,
non-life insurance products and instruments that are directly purchased by the retail investor
such as corporate shares and sovereign bonds are out of scope).
The new PRIIPs regulation represents a major challenge for manufacturers and distributors of
financial products right across the banking, insurance and asset management industries. The
new documents will be costly and time-consuming to create and any inaccurate, out-dated or
misleading information could lead to non-compliance.
This white paper will:
✤✤ Explain the history and background to the new rules
✤✤ Set out the requirements and show what products and services are affected
✤✤ Show the timeframe for implementation
✤✤ Discuss the challenges that manufacturers and distributors of financial products will
need to overcome
✤✤ Make recommendations for action that will help to minimise the manual processes,
lengthy data gathering and lack of automation in place at some financial institutions.
Key Information Document
(KID) – a “standardised and
simple document giving
key facts on the investment
product”.
1 WHITE PAPER PRIIPS - THE QUEST TO RECREATE THE KID
5. PART ONE: THE BACKGROUND
THE PURPOSE OF THE PRIIPS REGULATION
Since the financial upheavals of 2008, the European Commission has been working on reform
of the investor protection regulation with the aim of creating a safe, responsible and
growth-enhancing financial sector within Europe.
The PRIIPs regulation has been in the pipeline since 2009 when the European Commission
put forward the first set of legislative proposals. The regulation will come into force for all EU
member states in January 2017.
The new PRIIPs rules are seen as a way to deliver greater transparency to the increasingly
complex set of product categories within the retail investment market. Evidence suggests retail
investors find it increasingly difficult to understand the components of investment products
and often make investments without fully understanding the associated risks and costs. This
exposes retail investors to unnecessary risk.
The aim of the new rules is to protect investors and to improve transparency in the investment
markets. The new key information documents (KIDs) will be uniform disclosure documents
providing standardised information about financial products. This will enable investors to
compare like-with-like and assess the products for suitability and value.
IMPLICATIONS FOR THE INDUSTRIES INVOLVED
The main aim of
the PRIIPs regulation is to
protect investors and to
improve transparency in the
investment market.
The new rules will present a number of significant challenges for the financial services and
investment sectors. PRIIPs will represent the core of the retail investment market, including
investment funds, structured products (including structured deposits) and insurance-based
investment products.
The asset management industry has a head start because it has been dealing with Key Investor
Information Documents (KIIDs) since 2011 as part of the EU rules related to UCITs
(Undertakings for the Collective Investment in Transferable Securities).
For the banking and insurance industries, however, this is new and has the potential to create
a large amount of additional work both in producing the KIDs and in preparing for
their introduction.
The new regulation also contains certain ambiguities that are yet to be fully worked out and
resolved. For example, complex financial structures often lie behind the packed and structured
products offered to retail investors. Showing this complexity in a meaningful way that gives true
insight into the likely risks and returns will be no simple matter. It is something that will need
to be resolved in the Level 2 measures, which are still at the proposal stage.
There are also questions as to whether standardisation of disclosure can be achieved in a way
that is genuinely useful to retail investors, given the huge variety of different types of products
that fall under the new regulation.
There is no doubt that the scale of the impact on the industry is huge: in 2009, the European
Commission estimated the PRIIPs market to be almost €9 trillion in value within the EU.
There will be a strain on resources with responsibility for creating and maintaining PRIIPs KIDs
while meeting rigorous standards of disclosure and accuracy.
2
150
6. The costs are a concern and so are the timescales. Massive amounts of data must be captured and
put into a regulatory compliant PRIIPs KID production and distribution platform. There’s no time
to lose, and no better time to make a start than right now.
This white paper has been created to help guide you along the arduous journey to the fast
approaching go-live date of January 2017. It outlines the important steps you can take now to gain
competitive advantage and be fully prepared to meet the requirements of the PRIIPs KID
regulation.
PART TWO: THE REQUIREMENTS
THE PRIIPS KID REQUIREMENTS – WHAT YOU WILL NEED TO PROVIDE
The regulation introduces a new form of standardised product disclosure in the form of a KID (Key
Information Document). The regulation applies to PRIIPs manufacturers and anyone advising on,
or selling, PRIIPs. The document must be given to the retail investor before they are bound by any
contract. The KID must be:
✤✤ A pre-contractual, plain language document containing specific information in relation to the
product being offered
✤✤ A three page document, A4 size
✤✤ A standalone document, separate from other marketing material (so simply cross-referencing
other brochures is not an option)
✤✤ Accurate, fair, clear and not misleading
✤✤ Available in the official languages, or in one of the official languages, used in the part of the
Member State where the PRIIP is distributed
The rules also suggest that where complex products are being offered, a comprehension alert
should be inserted in the document.
DEFINITIONS AND SCOPE
A "manufacturer" is defined in the regulation as "any entity that manufacturers PRIIPs" or "any
entity that makes changes to an existing PRIIP including, but not limited to, altering its risk and
reward profile or the costs associated with an investment in a PRIIP."
A "person selling" a PRIIP is defined as a person offering or concluding a PRIIP contract with a
retail investor.
According to estimates by
the European Commission,
the PRIIPs market is worth
€9 trillion in value.
3 WHITE PAPER PRIIPS - THE QUEST TO RECREATE THE KID
7. The PRIIPs regulation captures a broad range of products. The regulations state that a "packaged
retail investment product" is an investment “where the amount repayable to the investor is subject
to fluctuations because of exposure to reference values or to the performance of one or more
assets which are not directly purchased by the investor”.
An “insurance-based investment product” is an “insurance product which offers a maturity or
surrender value and where that maturity or surrender value is wholly or partially exposed, directly
or indirectly, to market fluctuations”.
The following non-exhaustive list of products fall within the definition of a PRIIP:
There are a number of products explicitly excluded from these definitions. In summary,
these include:
✤✤ Non-life insurance products
✤✤ Pure protection products
✤✤ (Non-structured) deposits
✤✤ Vanilla shares
✤✤ Government bonds
✤✤ Pension products recognised by Member States as retirement vehicles
Delayed introduction for UCITS
UCITS (Undertakings for Collective Investments in Transferable Securities) provide a single
European regulatory framework for an investment vehicle. This makes it possible to market the
product across the EU.
UCITS are already covered by the requirement for key investor information documents (UCITs
KIIDs). The new regulations therefore include a grandfathering period until December 2019
before UCITS products will be subject to the PRIIPs KID regulation. However, many providers may
choose to become early adopters in the marketplace.
There is no transition
period and plenty of
challenges to overcome.
Many providers may choose
to become early adopters
in the marketplace.
Life assurance-based
investment products
Retail structured securities (including
instruments issued by securitisation
institutions and corporate bonds)
Structured term
deposits
Investment funds
Derivatives
Convertible bonds and other
structured securities embedding
a derivative
4
8. PART THREE: THE CHALLENGES
NO TRANSITION PERIOD AND LIMITED TIMEFRAME FOR IMPLEMENTATION
The go-live date to meet the requirements of the PRIIPs regulation is January 2017.
However, the final regulatory technical standards will not be made available by the European
Supervisory Authorities "ESAs" until approximately March 2016. This potentially will leave those
affected with a little less than nine months to adapt their operational structure to the new regulation.
There is no transition period, not much time to take action, and plenty of challenges to overcome
before you can put the KIDs into operation.
The KID must be available to
retail investors before any
contract is agreed.
PRIIPs Timeline
Dec' 14 Feb '15
LEVEL 1 MEASURES LEVEL 2 MEASURES
Aug ‘15 Nov ‘15 Mar ‘16 Jan ‘17
5 WHITE PAPER PRIIPS - THE QUEST TO RECREATE THE KID
PRIIPS
The European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets
Authority (ESMA) collectively known as the European Supervisory Authorities (ESAs).
PRIIPs Regulation
enters into force
ESAs publishes
responses to its first
Discussion Paper on
PRIIPS KID
ESAs publishes
responses to its
second Discussion
Paper on PRIIPS KID
Consultation paper
on Draft Regulatory
Technical Standards
Deadline for
providing draft
Regulatory Technical
Standards to the
European
Commission on
Articles 8, 10 & 13
Date of application
of the regulation and
Regulatory Technical
Standards
Note:
9. COMPLETE
AUDIT
TRAIL
TOTAL MANAGEMENT
OF YOUR
KIDS
IN-HOUSE
LANGUAGE
SOLUTIONS
COVER ALL
EU TRANSLATIONS
IN SCOPE
KEY PRIIPS KID CHALLENGES
Content of the KIDs
To create content for the KIDs, the following steps are recommended:
✤✤ Analyse the products in scope
✤✤ Produce a plain language document for each
✤✤ Translate the content as necessary for use in different EU markets
This will be a time consuming process, to put it mildly. You will need to follow the standard template
layout, condensing the narrative of the products in scope and dealing with space restrictions – no more
than three pages. Each KID should include answers to the following:
✤✤ What is this product?
✤✤ What are the risks and what could I get in return?
✤✤ What are the costs?
✤✤ What happens if (X) is unable to pay out?
✤✤ How long should I hold it and can I take money out early?
✤✤ How can I complain?
✤✤ Other relevant information
The KID will need to be free from jargon and complex terminology.
A new methodology will be used for the Synthetic Risk Indicators (SRI) calculation – for which you
may need to reconsider the data points. You will also need to gather the data points to show full
transparency regarding cost disclosure.
Some of these data points might be captured already. However, you may need to extract additional
data points from your existing systems. To do this, you may need to create and develop new
processes.
Effective version control will be essential, but complex – because different KIDs and different
versions of KIDs will need to be managed for a single product. You’ll need to keep appropriate
records for each KID produced.
6
10. OPTIMISE
PERFORMANCE
PROCESS RE-ENGINEERING
AND AUTOMATION
BY
Timings
A PRIIPs KID must be produced before the PRIIP is made available to investors and must be
published on the website. Regulators can demand to see the KID before you begin marketing
the PRIIP.
The KID must also be made available to retail investors before any contract is agreed. The
regulations say it must be made ‘in good time’ but without defining exactly what this means.
The KID must be kept up-to-date. If there are any changes to the PRIIP, you will need to review
the KID. Conditions for updating disclosure have not yet been finalised.
Production
Many organisations will be faced with the task of producing a huge volume of documents.
These will need to be well written, accurate, translated into a range of languages, following
a specific format and available in both print and on websites (the regulations say that when
selling PRIIPs face-to-face, paper should be the default option).
Updating systems and processes will incur significant costs. You could also find yourself facing
the annual update for the UCITs KIID during the implementation of the PRIIPs KID.
Data management and automation
The KID will include information from multiple internal sources. Key controls must be in place
to ensure accuracy is maintained. Information within the KID must also be consistent with
other product documents. Information gathering should involve robust processes to ensure full
adherence to the PRIIPs regulation.
Translation
Cross-border distribution will require translation: you will need to translate the KID into at
least one of the recognised languages of the Member State where the product is distributed.
Translation will be time consuming but you will need controls in place to ensure it is accurate
and in line with the regulations.
Dissemination
You will need to distribute the KID to a large number of recipients. It is a pre-contractual
document, so it must reach the retail investor before they make a decision or commitment. You
may also need to send it to various other distributors. Having an effective transmission process
in place will be essential.
Notification to national competent authorities
EU Member states may require ex-ante notification of the KID to the competent authority in the
host member states where the PRIIP is marketed.
7 WHITE PAPER PRIIPS - THE QUEST TO RECREATE THE KID
WE HAVE HELPED PRODUCE
70%OF ALL UCITS KIIDS
IN THE MARKET PLACE
11. ✤
PART FOUR: RECOMMENDATIONS
ACT NOW TO GAIN COMPETITIVE ADVANTAGE
The deadline is fast approaching. Firms should use what time is available to consider the
challenges and develop a PRIIPs compliance strategy. Those affected by the new regulations
should begin by reviewing the current discussion papers released by the ESAs to understand the
potential impact on operations. In addition, we recommend taking the following steps:
PRIIPs preparatory steps
Data and products in scope
✤✤ Classify the products in scope and determine how to produce the content of the KID
✤✤ Define where the data will come from and whether it is accurate and up-to-date
✤✤ Define responsibility for all touch points of the approval process
In-house versus outsourcing
✤✤ Decide whether the data and publishing will be fully in-house or partially outsourced
✤✤ Determine whether your in-house production teams have sufficient capacity or if additional
staff will be required; consider the cost implications compared with outsourcing
✤✤ If outsourcing, consider whether publishing and translation will be outsourced to one supplier
or many
✤✤ If working with multiple outsourcing providers, consider how you will manage version control
Costs
✤✤ Estimate workload for in-house production
✤✤ Consider resourcing requirements for the drafting and translation of the PRIIPs KID document,
systems changes, training and dissemination – Do your people have the time, energy and skills
needed to deal with the workload or would they be better placed concentrating
on core business tasks?
✤✤ Produce costings for both in-house and outsourced options – and factor in quality, ability to
deliver on time, responsiveness of service and experience when dealing with complex
financial documentation
Content management and version control
✤✤ Review your in-house systems for content creation, management and version control.
Are they efficient? Is over reliance on word processing and spreadsheets creating bottlenecks
in workflow and introducing errors into content?
✤✤ Assess more modern and efficient technologies and the impact they could make on your
operations. While it is possible to manage and pre-process virtually any data files, the most
efficient way to handle incoming data and final PRIIPs distribution is via XML. Choosing a
provider with stable processes in place to move to XML is of utmost importance.
Distribution
✤✤ Define the distribution model – who will get KIDs and how will you send them? Do your
outsourced suppliers have integrated distribution solutions to offer?
✤✤ Determine how investors will be informed about the KID
Don’t under-estimate
the challenges of
managing the
production process.
If outsourcing, consider
whether publishing and
translation will be
outsourced to one
supplier or many.
8
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1010101
1010010
v1.1
v1.2
v1.0
12. 200KIID CLIENTS
OVER BUILT-IN CALCULATION
ENGINES HANDLE
RISK, REWARD &
PERFORMANCE
IN-HOUSE
LANGUAGE
SOLUTIONS
COVER ALL
EU TRANSLATIONS
IN SCOPE
Consistency with binding pre-contractual and contractual documentation
✤✤ Consider updating related documents (sales and application materials, prospectus, etc.)
which may need to refer investors to the KID
✤✤ Carry out a KID and prospectus review – Are the KID and the prospectus consistent?
Service level agreements
✤✤ Consider updating Service Level Agreements (SLAs) between manufacturer and distributor to
include respective responsibilities under the regulation
The asset management industry learnt a key lesson during the implementation of UCITs KIIDs:
don’t under-estimate the challenges of managing the production process. Significant time and
effort was spent on aggregating the data, creating content and managing translations. Providing
effective resourcing for this process was a critical factor.
9 WHITE PAPER PRIIPS - THE QUEST TO RECREATE THE KID
13. CONCLUSION
The PRIIPs regulation will have a major impact on the marketplace and retail investors have much
to gain from the introduction of the regulations. A more transparent marketplace will enable the
retail investor to regain confidence in the financial services industry.
There are, however, some major hurdles to overcome to meet the implementation date of January
2017. As we await the final draft of level two technical standards to be issued by the ESAs, it is
important to utilise the time available to prepare for the onset of the PRIIPs regulation and meet
all the necessary requirements within the given timeframe.
Challenges also represent opportunities: organisations that act quickly and decisively and put in
place more modern and efficient processes to handle the workload will make a stronger impression
on the marketplace and earn an opportunity to seize competitive advantage and grow market
share.
A more transparent
marketplace will enable
the retail investor to regain
confidence in the financial
services industry.
GLOSSARY
EC European Commission
ESA European Supervisory Authorities
EU European Union of x countries or Member States
KID Key investor document (relating to PRIIPs)
KIID Key investor information documents (relating to UCITS)
Member State A country member of the European Union (EU)
NCA National Competent Authority
PRIIPs Packaged retail and insurance-based investment products
RTS Regulatory Technical Standards
SLA Service Level Agreement
SRI Synthetic risk indicator (relating to PRIIPs)
SRRI Synthetic risk and reward indicator (relating to UCITS)
UCITS Undertakings for the collective investment in transferable securities.
A public limited company that coordinates the management and distribution
of funds (unti trusts, common funds and SICAVs) among European Union
Member States, provided the fund and fund managers are registered within
the domestic state.
XML Extensible Markup Language
10
14. About RR Donnelley
RR Donnelley (Nasdaq:RRD) helps organisations communicate more effectively by working to
create, manage, produce, distribute and process content on behalf of our customers. The
company assists customers in developing and executing multichannel communication strategies
that engage audiences, reduce costs, drive revenues and increase compliance. RR Donnelley's
innovative technologies enhance digital and print communications to deliver integrated messages
across multiple media to highly targeted audiences at optimal times for clients in virtually every
private and public sector. Strategically located operations provide local service and responsiveness
while leveraging the economic, geographic and technological advantages of a global organisation.
As one of the first companies to specifically address the compliance communication needs of
asset management, retail banking and insurance industries, RR Donnelley employs a
comprehensive team specifically focused on the regulatory requirements affecting the European
markets. Our range of capabilities and superior technology, combined with process improvements,
optimisation solutions and production expertise, help clients stay in compliance with changing
regulations, reduce total costs and optimise the preparation, production and delivery of their
documents. Our composition, production, translation, delivery and results tracking offer the
complete communications solution.
RR Donnelley offers a fully integrated PRIIPs KID service model, which takes into consideration
the evolving regulatory requirements as they surface. Being part of ALFI PRIIPs working group,
we are at the forefront of the changes and a trusted participant in this process.
11 WHITE PAPER PRIIPS - THE QUEST TO RECREATE THE KID