I KID you not! FCA to ditch performance scenarios from PRIIPs KIDs

Of all the new regulations we have seen over the last few years, few have raised as many concerns, or have been as controversial and polarising as the KID requirements under the regulation for Packaged Retail and Insurance-based Investment Products (PRIIPs).

In an attempt to address many of the concerns raised over the years, the FCA have published a consultation setting out their proposals to change disclosure documents provided to retail investors under the PRIIPs regulation.

The FCA consultation proposes to amend the PRIIPs Regulatory Technical Standards to:

Require written explanation on performance in the KID;
Combat the potential for PRIIPs being assigned an inappropriately low summary risk indicator in the KID and;
Address concerns over applications of the slippage methodology when calculating transaction costs.

Additionally, the consultation proposes to clarify the scope of the PRIIPs regulation making it clearer that certain common features of these instruments do not make them into PRIIPS.

The FCA plans to amend the PRIIPs RTS by the end of 2021.

FCA PRIIPs Concerns

In 2018, the FCA conducted a call for input seeking views and evidence on market participants’ initial experiences of the requirements introduced by the PRIIPs Regulation. The main issues raised included:

a lack of clarity on the scope of application of the PRIIPs regime, in particular in the corporate bond market; and
concerns about methodologies for producing performance scenarios, summary risk indicators and transactions costs.

Scope

The PRIIPs Regulation sets out a broad definition of what kind of investment is a PRIIP at article 4. In summary, article 4 of the PRIIPs regulation defines a PRIIP as one or both of a packaged retail investment product (PRIP) or an insurance-based investment product (IBIP), as follows:

a PRIP is an investment where, regardless of its legal form, 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 that are not directly purchased by the retail investor (art. 4(1))
an IBIP is an insurance product which offers a maturity or surrender value which is wholly or partially exposed, directly or indirectly, to market fluctuations (art. 4(2))

As mentioned above, there are concerns around the scope of the PRIIPs Regulation, notably for certain retail corporate bonds. Respondents to the call for input expressed particular confusion regarding which corporate bonds are in or out of the scope of the regulation and as a result reported.

Summary Risk Indicators

Performance Scenarios

Transactions Costs

FCA PRIIPs Proposals

In order to address the above concerns regarding the PRIIPs Regulation, the FCA have proposed:

Introducing rules to clarify the scope of the PRIIPs Regulation in relation to corporate bonds, making it clearer that certain common features of these instruments do not make them into PRIIPs;
Introducing interpretative guidance to clarify what it means for a PRIIP to be “made available” to retail investors;
Amending the PRIIPs RTS so as to:
– Replace the requirement and methodologies for presentation of performance scenarios in the KID with a requirement for narrative information on performance to be provided;
– Address the potential for some PRIIPs to be assigned an inappropriately low summary risk indicator in the KID;
– Address concerns pertaining to transaction costs reporting, in particular certain applications of the slippage methodology

Scope

In the consultation, the FCA have made proposals to clarify through rules the scope of the PRIIPs regime in relation to corporate bonds, confirming which features do not turn a debt security into a PRIIP as well as looking to clarify the type of corporate bond that would normally be a PRIIP. The proposed rules look to distinguish between:

Corporate bonds which contain features that introduce a degree of variability or uncertainty to the overall return to investors, but which are properly viewed as nonpackaged, direct investment in the business of the issuer, and
Corporate bonds where the overall return to investors is substantially determined by the performance of investment assets the investor does not purchase, or which are better regarded as a packaged investment due to their complex features.

Specifically, the proposed rules clarify that:

To be a PRIP, a debt security must come between the retail investor and an ultimate investment asset which is not purchased by the investor.
Debt securities with fixed coupons are not PRIPs, even if the coupons are subject to pre-defined changes.
Incorporation of a put option that gives the investor a discretion to demand early repayment of the debt security or to convert it into one or more shares of the same issuer, in each case under pre-agreed terms, does not make the debt security into a PRIP.
A debt security will not be a PRIP simply by virtue of having a perpetual or indefinite term, or because of its subordination in the creditor hierarchy in the event of the issuer’s insolvency.
A debt security or indeed any other financial instrument issued or sold before 1 January 2018 is not a PRIIP.

How we can help!

To alleviate the regulatory burden caused by the EU and UK divergence, the Funds-Axis Fund Document Production Module can automate the process and create PRIIPs KIDs in seconds.

The Funds-Axis Fund Document Production Module provides:

Custom Layout and Branding.
Comprehensive Statistics – automated calculation of a wide range of fund performance and risk calculations (e.g SRI).
Interactive Charts – With our dynamic charts, you can easily create powerful visuals to assist in telling your data’s story.
Web Widgets – The widgets provide you with additional functionality for your website.
Full API – Our API which provides full access to all your data, calculations, statistics and charts.

Contact us today to learn how we can automate fund document production through direct connectivity to your source data, file transfer and batch data uploads.