The Regulations apply automatically in every EU Member State and require the production by or on behalf of relevant investment products of a new standardised KID, which is intended to improve the retail investor’s understanding of PRIIPs and the comparability of those products. Relevant investment products include, but are not limited to, investment companies traded on stock and investment exchanges in EU member states and investment products marketed either directly or indirectly to retail investors in EU member states.
In March, 2017 the EU Commission published the level two regulations specifying in detail the format and content of the KID and in July, 2017 the European Securities and Markets Authority (“ESMA”) published the final Q&A on the required disclosures for the KID. Various industry bodies, most notably the Association of Investment Companies (”the “AIC”), also published guidance over Summer, with the final revised guidance from the AIC being published in September, 2017. As a result, all necessary information has now been published to enable manufacturers of a PRIIP (which may be the PRIIP itself) to comply with these regulations.
Is my organisation required to prepare a KID?
The UK’s Financial Conduct Authority (the “FCA”) has published a policy statement setting out inter alia the types of investment entity which are likely to be required to prepare a KID (“In Scope Entities”) and the content of certain prescribed disclosures. In Scope Entities include investment companies admitted to trading on a regulated market in the European Union (the “EU”), and a large number of different types of open-ended investment funds marketed into the EU. Unlike under the Alternative Investment Fund Manager’s Directive (the “AIFMD”), the FCA has indicated that companies whose shares are not being actively marketed but are traded in the secondary market should still be considered within scope of this regulation. A key test is whether the shares are available to the retail investor, as opposed to marketed for the purposes of the AIFMD.
Who has responsibility for preparing the KID?
The manufacturer of the PRIIP is responsible for preparing a KID. Where the entity has an AIFM or investment manager, it may be the case that the AIFM or investment manager can take responsibility for preparing the KID. However, in the event that such third party either is not willing to take responsibility or does not exist, it is envisaged that the PRIIP itself will be responsible for preparation of the KID.
In the case of a PRIIP constituted as a limited partnership, the general partner may be the manufacturer and, in the case of a PRIIP constituted as a unit trust, the manager may be considered to be the manufacturer.
Article 6 of level 1 of the Regulations provides that “The KID shall constitute pre-contractual information. It shall be accurate, fair, clear and not misleading.”, so significant responsibility attaches to the party responsible for preparation of the KID.
What must the KID contain?
The information contained in the KID will vary, depending on the complexity and category of the PRIIP. Each KID will contain tightly prescribed information about the PRIIP’s structure, investment objective and policy, costs and risks, as well as performance and stress testing data, calculated under various prescribed scenarios, and will be three pages in length.
How often should the KID be revised?
The KID should be reviewed and revised “every time there is a change that significantly affects or is likely to significantly affect the information contained in the KID and, at least, every 12 months following the date of the initial publication of the KID”. This might be a change due to corporate activity, such as the announcement of a tender offer, a change of service provider, change of investment objective or policy or a material change in fees payable, or it might be a change in available financial information underpinning the disclosures, such as a significant change in the value of the investment portfolio or a change in market conditions affecting the PRIIP’s future prospects.
How should the KID be made available ?
The Regulations require that the KID should be made available on the PRIIPs manufacturer’s website. For publicly-traded investment companies with their own website, JTC envisages that the KID will usually be published on their own website. For those PRIIPs with an AIFM, the KID may also be published on the AIFM’s website and, if the AIFM is deemed to be the PRIIP’s manufacturer, the KID will only be required to be published on the AIFM’s website. If the PRIIP is being actively marketed, we would recommend that a copy of the KID be provided to any placees or offerees when the PRIIP is offered to them.
In addition, for those PRIIPs which are publicly traded within the EU, it is recommended that the PRIIP release an announcement via a regulatory information service, notifying the market of the publication of the KID. For PRIIPs traded on a regulated market in the United Kingdom, the KID should be submitted to the FCA’s National Storage Mechanism and a statement of such submission included in the afore-mentioned announcement.
How can JTC assist with the preparation of a KID?
JTC has been monitoring the Regulations for some time and is well placed to assist our clients with compliance with this new requirement. If instructed, we can prepare the template for the KID and populate the majority of the prescribed disclosures. Calculation of the summary risk indicator (the “SRI”) and forecast performance data (“Performance Data”) in four scenarios, including a stress scenario, will need to be calculated by a third party.
JTC has liaised with numerous possible counterparties, including audit firms, risk analysts and other consultancy firms and can procure formal quotations for clients for their calculation of this data on your behalf if requested. Where required, we will also provide source data from our systems, including portfolio data and valuations, to enable this information to be calculated and JTC will co-ordinate the drafting process. We can also procure quotations from legal advisers for a legal review of the KID if requested.
What will be the costs of producing the KID and how much will any update cost?
Because this is a new legal requirement imposed on the PRIIP manufacturer, these services fall outside of the scope of agreed services with JTC and your other service providers and preparation of KIDs will therefore need to be charged for separately.
The costs of producing the KID will usually be JTC’s fees for producing the KID itself, the fees of third parties for calculation of the SRI and Performance Data and, if required by the manufacturer of the PRIIP, counsel’s fees for the legal review. These fees will depend upon the size and complexity of each PRIIP and quotations can be provided upon request. Whilst the preparation of the first KID may be quite costly, periodic reviews of the KID should not be particularly significant unless there are frequent or material changes to the KID.
Who should I contact for further information
Should you wish to discuss any of the matters raised in this briefing note or to request a quotation, please contact any of Matt Tostevin or Matthew Riley by e-mail or telephone.