The European Parliament and the Council of Member States have reached agreement on the proposal for regulation of packaged retail and insurance-based investment products. The proposals will be formally adopted by the member states, will apply throughout the EU and are binding in their entirety. Each member state will have to implement Priips within a two-year period.
The regulation covers all packaged investment products for retail investors, including certain life insurance products (such as unit-linked and with-profit solutions), investment funds and structured products. However, ordinary bank deposits, occupational pension schemes and personal pension products are not covered.
At different stages of the drafting process, worrying requirements were included such as:
- A proposed limit on the rate advisers could charge for providing advice;
- Joint responsibility of intermediary and producer for the product disclosure document;
- A requirement that advice should be given on the basis of hourly rates and that the client should be given a breakdown of the time spent by the adviser.
Apfa was active in opposing and removing these from the text. We believe a product disclosure document should be just that, information about the product.
The new key information document will explain the essential features of structured products, insurance-based investments (including unit-linked and with-profit products) and investment funds in a prescribed format to make it simpler for consumers to compare investments. The use of financial jargon and terminology, which is not immediately clear to retail investors, should be avoided.
The measure will be the principal responsibility of the product manufacturer but there will be some implications for financial advisers.
When the regulation was drafted, it was recognised that unless the information provided to investors was short and concise, there was a danger it would not be used. Therefore, the KID will be a maximum of three pages long, it has to be clear and understandable and will provide information on the risks, costs, potential gains and losses of the product to help comparison with other products.
It is also required to contain information on:
- the manufacturer and supervisor
- the nature and main features of the product (type, objectives, description of the consumer type, details of insurance benefits if any, term of the PRIIP)
- the risk-reward profile
- the consequences of default of the manufacturer
- the costs (summary indicators of costs and total aggregate costs)
- conditions regarding the holding period and early withdrawal
- how to complain
- existence of additional information documents to be provided by the manufacturer.
The KID will also need to describe the consumer type to whom the Priip is intended to be marketed, in particular information around the ability to bear loss and the product’s investment horizon.
As one would expect, there are specific requirements around the timing of delivery of the KID to the investor by the adviser. The starting point is in good time before the investor is bound by the transaction but there are circumstances when it may be delayed. For example, distance sales on the request of the client or where an adviser explains that the client can delay the transaction until the KID is delivered but the client does not want to hold up the investment.
In addition to the information about the product, there will need to be an indication that the intermediary will provide further information about distribution costs. We do not expect this to be a problem in the UK where advisers will have to agree fees in advance.
Much of this information is already covered by existing FCA rules and Apfa will be seeking to ensure application of the new measure does not cause duplication and unnecessary or unwanted paperwork – for the consumer or for the adviser.
Linda Smith is senior technical adviser at the Association of Professional Financial Advisers