The European Banking Authority has over the last few years nailed its flag to the mast of protection and transparency for consumers, and this has most obviously been seen in the forthcoming legislation relating to Packaged Retail & Insurance-based Investment Products (PRIIPS).
The EBA is now firmly travelling down a route towards collective governance of financial products. What makes the PRIIPS legislation unique is that they cut through vast swathes of the financial services sector. As an illustration, PRIIPS mothballs two different services into one piece of legislation. One covers packaged retail based investments and the other insurance based investment products.
Vendors of PRIIPS will need to allocate substantial resource prior to 2017 to ensure that they have produced KIDs for all PRIIPS and further resource allocation in their upkeep
In the purchase of PRIIPS the new rules will cover a range of products including investment funds, life insurance policies and structured deposits and products.
Due to come into effect from December 31st 2016, requirements will be put in place to make the purchasing of PRIIPS more transparent. This will be done through the introduction of Key Information Documents (KIDs) that will allow purchasers to readily verify the suitability or otherwise of PRIIPS for purchase.
Interestingly, at this stage, Undertakings for Collective Investments in Transferable Securities (UCITs) have been omitted from the legislation for the next five years. What happens at the end of this timeframe remains to be seen.
This has placed considerable onus on the vendors of PRIIPS. As reported by Deloitte, in 2009 the total PRIIPS market was estimated at being worth €9 trillion. While a considerable chunk of this market is taken up by UCITs, there is still considerable work to be done by agents of PRIIPS to ensure that they are ready for January 2017. Manufacturers will now need to identify all PRIIPS that are sold to retail investors and develop KIDs for them – a huge undertaking.
KIDs have been designed to be simple documents (no more than three sides of A4), outlining such questions as “What is the investment?”; “what are the potential risks?” and “what are the associated costs?”. This will entail more work for PRIIP manufacturers however, as they are responsible for ensuring that all information contained within a KID is kept up to date and relevant. If information contained within a PRIIP changes and the PRIIP is then sold without the KID being updated, then the manufacturer could be held liable.
Could then, KIDs be outsourced? In theory yes, there is nothing to stop manufacturers from outsourcing this part of the administration to an external partner. However, if there is an issue with a KID, such as it being found to be out of date or incorrect, then any claim would still be against the manufacturer, not the outsourced partner.
Further challenges for manufacturers of PRIIPS include the fact that all KIDs must be free of jargon, short in length and clear and understandable for consumers. Produced in Word format, they further need to be actively distributed by the manufacturers of PRIIPS, in essence a pre-contractual document.
Clearly the effects of these changes mean vendors of PRIIPS will need to allocate substantial resource prior to 2017 to ensure that they have produced KIDs for all PRIIPS and further resource allocation in their upkeep. While the new changes will be welcomed by those purchasing PRIIPS, it places a considerable onus on the seller. The flip side of these changes for the seller is that it will allow those that sell quality products to stand out from the crowd. Where in the past it may have been difficult for buyers to see differences in PRIIPS, the introduction of KIDs will illustrate clearly the differences between them. As such, sellers of PRIIPS should look at these changes as an opportunity to reinvigorate their product offering and ensure that they stand out from the crowd, rather than focusing on the additional administration that KIDs will entail.
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