The European retail investment market is dominated by packaged retail and insurance-based investment products (PRIIPs). These provide retail investors with easy access to financial markets, but can be difficult to understand. Those selling these products can also face conflicts of interest since they are often remunerated by the product manufacturers rather than directly by the retail investors. A complex patchwork of regulation has grown up to address these risks. Inconsistencies and gaps in that patchwork have, however, raised concerns as to the overall effectiveness of the regulatory regime, both in relation to its capacity to protect investors and its ability to ensure that markets work efficiently. These concerns were further heightened by the impact of the financial crisis.
In answer to this, the EC has published a Regulation on PRIIPS that will introduce a new pan-European pre-contractual product disclosure document.
What are PRIIPs?
PRIIPs cover a range of investment products that are marketed to retail investors. These products take a variety of legal forms that perform broadly comparable functions:
- They offer exposure to underlying financial assets, but in packaged forms that modify that exposure compared with direct holdings.
- Their primary function is capital accumulation, although some may provide capital protection.
- They are generally designed with the mid to long-term retail market in mind.
- They are marketed directly to retail investors, although they may also be sold to sophisticated investors.
Broadly speaking, PRIIPs can be categorised into four product families:
- investment funds
- insurance-based investment products
- retail structured securities
- structured term deposits.
In case you think we have mistyped PRIIPs, these were originally called PRIPS (packaged retail investment products). But the term PRIIPs replaced PRIPs within the legislation to reflect the fact that the Regulation covers packaged retail and insurance-based investment products.
What is it trying to achieve?
The PRIIPS initiative aims to raise standards and achieve convergence in rules on sales and pre-contractual information:
- Key investor disclosures provided by product originators PRIPPS takes a horizontal approach to this area, entailing the development of new product disclosure rules, replacing or integrating relevant provisions of existing sectorial rules, and extending them to products where no rules currently apply. The EC has legislated for this in the PRIIPS regulation.
- Selling of packaged retail investment products by intermediaries and other distributors The EC considers that the right approach is to apply the same legislative requirements across all sales of packaged retail investment products, irrespective of the distribution channel employed. This is being addressed in MiFID II and IMD II (now known as Insurance Distribution Directive, IDD).
The KID is the pre-contractual disclosure document that all retail investors should receive when they are considering purchasing PRIIPS. The Regulation lays down uniform rules on both the format and content of the KID as well as the provision of the KID to retail investors.
On 23 December 2016, the Regulation postponing the application date of PRIIPS was published in the Official Journal of the EU.
The Joint Committee of the European Supervisory Authorities published a consultation paper on 10 February 2017 which proposes minimum requirements for the manufacturers of PRIIPs with environmental or social objectives to ensure credible products are offered to retail investors.
The PRIIPs Regulation will now apply from 1 January 2018 instead of 31 December 2016. The delay will enable regulatory technical standards (RTS) to be defined, leaving enough time for the industry to adapt to the new rules.