UCITS KIID PRIIPs KID Transition. Is That Ever Going to Happen?

UCITS KIID PRIIPs KID Transition. Is that Ever Going to Happen?

There are few reasons why UCITS managers are concerned with PRIIPs. The first and most apparent one is that the definition of PRIIPs encompasses both packaged retail investment products and insurance-based investment products, with UCITS falling under the first category. The second reason, more political in nature, is linked to the future evolution of the PRIIPs regulation and the grandfathering provisions for UCITS.

For the UCITS directive already imposing a requirement to produce a Key Investor Information Document (UCITS KIID), very similar in nature to a PRIIPs KID, UCITS have been so far grandfathered from the requirement to produce a PRIIPs KID. The so-called transitional period, supposed to last until the end of December 2019, has since been extended until the end of December 2021. Given the complexity of the issues raised by the PRIIPs regulation and the status of its review, it does not seem so unlikely at this point that an additional extension to the transitional period might be granted.

However, little is certain about the future of PRIIPs regulation and whether the grandfathering for UCITS will be terminated at some point, if at all. This doesn’t necessarily mean though that UCITS managers will get necessarily away from the obligations imposed by PRIIPs regulation. The implementation of PRIIPs regulation remains accordingly a topic high on the agenda of the majority of UCITS managers, some of which are looking at the UCITS KIID PRIIPs KID transition already in 2021.

Get in touch here with your contacts at Veneziano & Partners to see how we can help with UCITS KIID PRIIPs KID Transition.

The Status of PRIIPs Regulation

Since inception in 2018, the history of the PRIIPs regulation has been characterized by something more than a mere lukewarm reception by the industry. Over the course of the recent past, we heard in more than one instance that the aim of the PRIIPs regulation – provide accurate disclosures to retail investors – had been frustrated, resulting instead in misleading disclosure on costs and other significant features of PRIIPs for retail investors.

In principle, PRIIPs regulation had a very ambitious goal of introducing a standard set of disclosures across a very varied range of investment products. Yet, in order to achieve this goal and accommodate features of the very different investment products covered, it somewhat deviated from what the industry was used to in other forms of similar disclosures. The most apparent and significant of these deviations has been so far the introduction of future case scenarios for UCITS and investment funds as opposed to past performance. Whilst this approach might work well in the insurance environment, it generated vigorous opposition from the investment fund industry, traditionally anchored to past performance in its disclosures.

The inherent difficulties in maintaining alive the PRIIPs regulation became evident one more time recently, in relation to the approval of the revised version of its implementing second level regulation. A consultation was launched in 2019, but, unsurprisingly in the history of PRIIPs, a series of hiccups have resulted in a block of the approval process of the RTS. For the lack of unanimous consent on the revised version of the RTS from all the ESAs involved, it has not been possible to date to have a final version of these RTS, nor to submit these for formal approval to the EU Commission. Various reasons behind this one more bump in the road. However, it is noteworthy to mention that past performance comes again under the spotlight also in this case, with the preference expressed at various levels to have it reinstated in the PRIIPs disclosure for UCITS, rather than included separately but in an annexed disclosure.

The EU Commission finds itself without a clear playbook in this situation. Different scenarios can be envisaged, including the option for carrying out a complete revamp of the PRIIPs regulation. It is not totally unlikely that in this situation the grandfathering provision for UCITS could be extended further, postponing again to a later stage, likely in three to five years from now, the UCITS KIID PRIIPs KID transition.

What UCITS Managers Need to Know About UCITS KIID PRIIPs KID Transition

The case of UCITS funds is clearly peculiar, given the two legislative sources driving the relevant disclosure requirements.

Here the first set of considerations relate to the requirement under the UCITS directive for a Key Investor Information Document. Assuming that this requirement is here to stay for the time being, UCITS managers will potentially find themselves required to produce two different sets of precontractual disclosure with the end of the grandfathering provisions for UCITS under PRIIPs.

Also, for the fact that PRIIPs KID are required exclusively for those PRIIPs that are made available to retail investors, UCITS managers who target also retail investors will find themselves in this scenario with both an obligation to produce a UCITS KIID and a PRIIPs KID, the latter only for the share or unit classes offered to retail investors. Conversely, UCITS managers who target exclusively professional investors with their funds, might decide to interpret restrictively the provisions under the PRIIPs regulation and end up not producing a PRIIPs KID at all.

We don’t know how realistic the scenario might be of concurrent disclosures under UCITS directive and PRIIPs regulation imposed on UCITS. We also don’t believe that the additional cost represented by having to produce additional PRIIPs KIDs will be considered as an insurmountable obstacle by the regulatory authorities in the face of ensuring appropriate disclosures to retail investors. This being said, we have also been recently accustomed to so-called iterative processes in European regulation. On this note, it might well serve the purpose of bettering the end product of the disclosure if for a certain period these were run in parallel for UCITS funds. Of course, if PRIIPs KID for UCITS end up to disclose past performance, a potential iteration could bring the benefit of concentrating on the cost disclosure element of the equation and offer more data to evaluate how is best to present cost elements in these disclosures.

The Impact of Brexit on UCITS KIIDs and PRIIPs KIDs

An onshoring process was carried out in the UK, with the purpose of incorporating selected pieces of EU regulation into UK internal law. As part of this process, completed in 2019, also the PRIIPs regulation was onshored in the Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019. This means not only that PRIIPs regulation will be retained in the UK post Brexit, but also that UK Authorities will have the right to implement ad-hoc modifications to the PRIIPs regime. On this point, it is already in the plans of HM Government to amend the existing PRIIPs regulation. The timing of these amendments is still vague, yet the plan is clear and will tackle two of the main pain points discussed already. In first instance, tackling the performance aspect of the PRIIPs, by replacing performance scenarios with appropriate information on performance. A subsequent amendment of the RTS, also onshored, will make clear what type of information will have to be provided in the PRIIPs KIDs. Also, the plan entails an extension of the exemption for UCITS funds. On the grounds that the disclosure currently provided via the KIIDs is satisfactory, the proposal is for an extension of the current exemption for a period of at least five years.

ESG Related Considerations

Given that we can no longer ignore ESG related considerations, especially when discussing disclosures to investors, it noteworthy to mention how UCITS KIID and PRIIPs KID deal respectively with the issue of disclosure of ESG characteristics.

For the time being, the UCITS KIID was excluded from the list of precontractual documentation that, under the Sustainable Finance Disclosure Regulation, will have to contain ESG related disclosure. This being said, the comments made recently by the Securities and Markets Stakeholders Group on the template of ESG disclosures issued by the ESAs suggest that this position might possibly be revised in the near future. A proposal in this direction, potentially including in the UCITS KIID some ESG related disclosure, would be supported by the need to reduce the amount of precontractual documentation that retail investors will have to digest before proceeding with an investment.

The issue of ESG disclosures in PRIIPs KID was instead tackled on an ad-hoc basis with a joint technical advice of the ESAs already in 2017. For PRIIPs having social or environmental objectives (interestingly the G element of ESG was neglected in the advice issued by the ESAs) the KID will have to be clear and specific as to the environmental or social objectives being pursued and include a reference as to whether these are achieved via a direct or indirect exposure to the underlying investment assets. The bottom line is that the KID will have to enable retail investors to decide whether the environmental or social objectives are in line with his/her own personal objectives. A reference should be included in the section of the KID titled ‘Other relevant information’ to where further information can be found on these specific objectives and the associated investment strategy to be followed.

Get in touch here with your contacts at Veneziano & Partners to see how we can help.