At last, it’s happening.
Two years since consultations started — and over three years since the PRIIP regulation came into force — the European Commission has agreed a final version of the PRIIP key information document (KID).
The asset management industry was never keen on the PRIIP KID requirements. And, given that it now has less than a year to make sense of a delegated act and 46 pages’ worth of amendments to complex technical standards, it’s safe to say not many people will change their minds.
That said, regardless of your views on the matter, the new rules are coming into force from 1 July 2022. Which means that, if you’re an asset manager, you’re going to have to make some significant changes in the coming months.
Here’s everything you need to know about the new PRIIP KID, and some tips on how to prepare.
PRIIP KIDs: The story so far
PRIIPs — packaged retail investment and insurance products — are investment products where market fluctuations can impact investors’ earnings. These include:
- Structured products and derivatives
- Alternative investment funds
- Insurance policies with an investment element, such as unit-linked life policies
These products all carry some risk, because their value can go up or down. So, what is the European Commission trying to achieve with the implementation of this change to the existing regulations? The PRIIP regulation aims to increase transparency by creating a standard set of disclosures that make it easy for customers to understand a specific product’s key features, its risks, and the costs involved.
This aim is, of course, admirable.
The problem is that the regulation applies a one-size-fits-all approach to products with fundamentally different characteristics. Case in point, it introduces future case scenarios, which can work for insurance products but are challenging for UCITS.
As a result, the asset management industry obtained an exemption. To date, manufacturers and distributors have been providing the less demanding and data-heavy UCITS KIID in place of a PRIIP KID.
What’s changing on 1 July 2022?
Now that the European Commission has agreed on a revised PRIIP KID, the exemption is coming to an end.
From 1 July 2022, if you manufacture or distribute a product in the scope of the PRIIP regulation to retail customers in the EU — including UCITS — you’ll have to start producing PRIIP KIDs.
To make things trickier, in June 2021 HM Treasury announced it would be extending the PRIIPs KID exemption for UCITS for a further five years — up to 31 December 2026.
So if you’re a UK-based fund that distributes PRIIPs to EU-based customers — or an EU-based fund that distributes UCITS in the UK — your workload is going to double.
You’ll have to produce PRIIP KIDs that follow EU standards, and UK-specific KIDs modelled on the current UCITS KIID.
Prepping for D-Day: the challenges of PRIIP KID compliance
Brexit duplication aside, you’ll need to address a number of technical challenges to comply with the new PRIIP KID requirements.
To begin with, you’ll need to review your current KID production system, plug any data and reporting gaps, get documents translated into the languages of all the countries your products are distributed in, and make sure everything works as it should before the deadline.
More significantly, you’ll need to make changes to your methodology for working out risk, performance scenarios, and transactions.
UCITS will have to start providing future estimated returns
The PRIIP KIDs for UCITS must estimate future performance in four scenarios:
Under the revised rules, you can adjust your calculations if the results could create unrealistic expectations and link to a separate document showing past performance. But the fact remains that extrapolating possible returns is far less reliable than presenting historical data.
Changes to Reduction in Yield disclosures
These must now have an assumed holding period of one year and assume 0% return. The list of product costs must also include explanations for each of the costs.
Changes to slippage cost methodologies
While there’s a limited and specific exemption for OTC trades and very low transaction volumes, firms must factor in the impact of market movements and arrival prices when working out slippage costs.
Racing against the clock
Needless to say, these technical challenges mean asset managers have their work cut out for them, especially at a time when there are competing priorities and lingering Covid-19 uncertainty.
EFAMA, the European Fund and Asset Management Association, has noted that complying with the new PRIIPs KID:
‘…requires significant implementation efforts involving numerous departments and competences to interpret the new requirements, to gather new data, to make actuarial and financial calculations, to properly plan and make changes to software and other IT systems, to redesign the templates, to test the calculations and design, to legally assess the narratives and figures, to possibly translate them into different languages, to draft new documents and to adapt the training for distributors…’
Most asset managers will also have to find a sustainable way of producing large volumes of PRIIP KIDs on an ongoing basis.
EFAMA estimates that ‘for a medium-sized asset manager… [complying with the PRIIP regulations] will typically mean producing thousands of KIDs. When taking translations into account, this figure can easily rise to five digits. Conservative estimates point towards hundreds of thousands of KIDs in aggregate — with one large Member State alone totalling around 140,000 PRIIP KIDs.‘
It’s not all bad news.
While it’s not the 12-month transition period EFAMA was hoping for, 1 July 2022 still gives the industry some time to prepare. More importantly, two years of uncertainty have come to an end.
That said, the reality is that there’s an immense amount of work to do and several issues to overcome in a very short space of time. In the face of these mounting challenges, it’s never been more critical for asset managers to use the right technologies and tools.
It’s time for more automation
EFAMA has said that the sheer volume of work means processes ‘must be automatised [sic] as far as possible.‘ Otherwise, firms risk not being ready and falling foul of regulators.
At Fundipedia, we’ve created a powerful set of tools that makes this process simple and intuitive. This will empower your firm to prepare for PRIIP KID changes well ahead of the 1 July 2022 deadline.
Our core platform comes with a comprehensive bank of pre-set data sets you can start using straight away. We’ve also made it simple to run data experiments — even with large data sets — so you can identify any weaknesses or gaps in your data and fix them.
More to the point, our system is designed to populate data into the format you require, including the new PRIIP KID format, and to update templates automatically if there are any changes.
This means that, with Fundipedia, you don’t have to worry about revising templates, reworking calculations, or other technicalities. On 1 July 2022, you’ll have accurate, complete, and up to date data and you’ll be ready to comply with your new reporting obligations.
Big changes are coming… make sure you’re good and ready
Whether you agree with them or not, the European Commission seems determined to press on with implementing the new PRIIP KID requirements as of 1 July 2022. Which means big changes are afoot.
Not sure how to adapt your business to the new rules?
Or feeling overwhelmed by it all?
At Fundipedia, we can help you make the transition and ongoing compliance simpler, smoother, and stress free.