PRIIPs

In July 2016 the FCA published CP16/18 with the catchy title ‘Changes to disclosure rules in the FCA Handbook to reflect the direct application of PRIIPs regulation’.
Basically new rules are coming into place on 31st December 2016 regarding disclosure rules for Packaged Retail and Insurance-based Investment Products. This regulation from the EU is directly applicable without any need for domestic legislation to be passed.  Why is the FCA introducing this following the results of the Brexit referendum? Well the paper confirms that ‘the UK will be obliged to enforce EU Regulations for as long as the UK remains a member of the EU’.

The rules state that firms will need to ‘prepare, publish and provide a Key Information Document’ for each PRIIP. The ‘KID’ should be no more than 3 pages and contain the following information:
•    What is this product?
•    What are the risks and what could I get in return?
•    What happens if (name of the PRIIP product provider) is unable to pay out?
•    What are the costs?
•    How long should I hold it and can I take money out early?
•    How can I complain?
•    Other relevant information

So what is a PRIIP? The regulation states that a PRIIP is an investment which ‘ regardless of the legal form of the investment, the amount repayable to the retail 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 retail investor, or which is an insurance product that offers a maturity or surrender value that is wholly or partially exposed, directly or indirectly, to market fluctuations’ (PRIIPs regulation article 4(1) and 4(2). The paper lists the types of products to be as follows:

1.    ‘Regulated collective investments schemes (CISs) that are:
-    Non-UCITS retail schemes (NURSs) (authorised unit trusts, open-ended investments companies and authorised contractual schemes)
-    Qualified investor schemes (QISs) (same type as (1))
-    Individually recognised overseas schemes (FSMA s272 recognised schemes)

2.    Unregulated CISs that are alternative investment funds, including, but not limited to:
-    Some unauthorised unit trust schemes
-    Venture capital trusts
-    Private equity schemes

3.    Unregulated CISs that are not alternative investment funds.

4.    Alternative investment funds that are not CISs, including shares/securities of investment trusts to be held in a managed account.

5.    Investment trust savings schemes that allow the shares/securities of investment trusts to be held in a managed account.

6.    European Social Entrepreneurship Funds (EuSEFs) and European Venture Capital Funds (EuVECAs)

7.    Insurance-based investment products such as unit-linked policies, with-profits policies and Holloway sickness policies.

8.    Fluctuating return annuities (that are not pension products) with features that result in fluctuating amounts being paid to the annuitant because of exposure to reference values (such as indices) or to the performance of one or more assets which were not directly purchased by the annuitant (e.g. purchased life annuities with variable returns).

9.    Derivatives: options, futures and contracts for differences.

10.    Structured investment products (whatever their form); for example, these may be structured as unregulated CISs, convertible securities, insurance policies or instruments issues by special purpose vehicles (SPVs)

11.    Structures deposits (as defined in MiFID II, Article 4(1) (43))

12.    Securities issued by certain special purpose vehicles (e.g. convertible bonds that convert from equity to debt securities)'

However, the FCA have stated that they do not believe this to be an exhaustive list particularly as providers develop new products over time.

Products that are not PRIIPs have been specified as:

1.    ‘Non-life insurance/general insurance, and life insurance that only pays benefits on death or incapacity due to injury, sickness or infirmity (ie, products that have no surrender value, or a surrender value that does not depend on fluctuations in the performance of one or more underlying assets or reference values)

2.    Deposits (other than structured deposits as defined in MiFID II)

3.    Assets that are held directly by the retail investor, such as corporate shares or sovereign bonds.

4.    Pension products – pensions that are recognised under national law as having the primary purpose of providing the investor with an income in retirement (including pension annuities purchased using monies from a pension product recognised under UK law), occupational pension schemes, and individual pension products for which a financial contribution from the employer is required by national law and where the employer or the employee has no choice as to the pension product or provider.

5.    Fixed annuities (that are not pension products) where the amount payable to the annuitant does not fluctuate (e.g. a purchased life annuity that pays a fixed amount of income for life or an annuity that pays a fixed income for a specified term)

6.    Certain securities such as, subject to certain conditions, securities issued by Member States, their regional or local authorities, central banks, public international bodies, non-profit making bodies or credit institutions’.

So how does this impact financial advisers? In the first instance, advisers will have to provide a KID to their client whenever a PRIIP is recommended. Undertakings for Collective Investment in Transferable Securities (UCITS) are classed as a PRIIP and many advisers recommend UCITS funds in their portfolios. However, the regulation will not apply to UCITS until 31.12.19 due to an exemption meaning that advisers will still need to issue the KIIDs to clients until December 2019. When the regulation does kick in for UCITS though it will mean less paperwork will need to be issued to the client which is a positive thing.

The COBS rules will be updated to confirm under COBS 13 & 14 when a key features document and illustration need to be given to the client. Basically COBS 13.1.1 R confirms that a product provider ‘…must prepare:
1.    A key features document for each non PRIIP packaged product, cash deposit ISA and cash deposit CTF it produces; and
2.    A key features illustration for each non PRIIP packaged product it produces’ (COBS 13.1.1.R)
And for a firm advising on non PRIIP packaged products COBS 14.2.1 R states the client must be provided with a key features documents and a key features illustration – so no change really.

The crux of this will be understanding how the provider is classifying the product to ensure that the adviser then provides the correct disclosure documents to the client. This will mean the adviser ensuring that he reads the product detail to check whether it is a PRIIP or non PRIIP. This may be another agenda item for forthcoming Investment Committees!