Conversations with investment firms, management companies, fund administrators and industry attorneys have ramped up this summer as the industry prepares for the European Union’s (EU) new Packaged Retail and Insurance-based Investment Products (PRIIPs) reporting requirements by January 1, 2023.
Firms will need to adjust to new formats, content and calculations for preparing their Key Information Documents (KIDs) by January 1, 2023. Although many of the PRIIPs 2.0 requirements are already in play, one of the biggest impacts will be the “big bang” extension to include all domiciled Undertakings for Collective Investment in Transferrable Securities (UCITS) funds to be PRIIPs-compliant by the same date.
Needless to say, the next few months will be busy for the industry amid these and other simultaneous regulatory initiatives – such as the new ESG related MiFID II and Insurance Distribution Directive (IDD) requirements taking effect last month and the next wave of SFDR rules coming up, followed by periodic disclosures and the monitoring of data behind those disclosures – all of which will have a significant impact on operations resources, technology platforms and processes.
Key changes and timelines
Of particular note is the fact that PRIIPs KIDs will be published for UCITS products for the first time with new Regulatory Technical Standards (RTS) in place for existing PRIIPs KIDs. Other key areas of change include:
- Expansion of data requirements
- More detail around the appropriateness of benchmarks
- New complex calculations around performance scenarios
- Changes in how costs should be disclosed
- Insurance wrappers requiring the new EPT data
- European PRIIPs Template (EPT) changes and alignment with the PRIIPs KID
- UK divergence on UCITS/PRIIPs
In addition, EPTs will need to be circulated with new rule data starting from September/October 2022.
Expansion of data requirements and calculations
PRIIPs will expand data requirements including those for net asset value (NAV), dividends, proxy, index, trial balance, and trade data. With PRIIPs, historical data will cover ten years to start. Funds that have been in existence for less than ten years will need to find proxies and benchmarks to do their calculations.
The requirements also stipulate more detail about the appropriateness of benchmarks. In addition, new complex calculations are driving firms to do parallel runs on new PRIIPs against the old requirements.
In some situations, this can present a significant amount of change in the project figures as a result of changes in methodology. There are also changes around how the costs are to be disclosed, which will affect the figures the companies show for the Reductions in Yields (RIY), for example.
Version 2 EPT changes
The new EPT will include updated fields to align to the new PRIIPs RTS which comes into force on January 1 and will need to begin circulation from October/November 2022 to allow insurance firms to meet their January 1 PRIIPs obligations.
One key consideration is the fact that the EPT data should now align with the PRIIPs KID at all times. This differs from the previous approach whereby a fresh set of monthly or quarterly recalculations were pushed out to the insurance firms. Going forward, EPT data will be aligned to the PRIIPs KID and only updated when the PRIIPs KID is updated.
Discussion around performance displays
The new PRIIPs RTS requires that monthly past performance and performance scenario results should start to populate on the product manufacturers’ websites from January 1 and will need to continue for as long as history is available.
Currently, there is discussion around what date periods should be shown, how the results will be displayed, and for how long. A standard is beginning to emerge around annual performance results and index returns showing for 10 years on websites – similar to how UCITS KID looks like today – and that monthly performance scenario results should be available for as long as the history used to compute the calculation exists.
Another key discussion concerns the performance scenario table including date references to give investors a view of when a particular performance scenario was reached or experienced.
RTS and filing requirements
UCITS filings were straightforward since every regulator, whether in the home domiciled country or any cross-border jurisdictions, required the KIIDs to go to a local regulator either directly or via a local party.
However, PRIIPs KID is not as simple as each local regulator is still deciding on their specific requirements, even though a few are currently saying that they are not going to require the KIDs.
The impacts of UK divergence
The UK has taken a much different directive for PRIIPs KIDs which is affecting every UK domiciled fund that is sold to an EU investor or any EU product which is sold to a UK investor. For UK UCITS-like products, a UCITS KIID-like document is to remain in place for UK investors until 2026.
Firms will need to be aware of updates to requirements, able to feed the right data to the appropriate places, and be prepared to duplicate some effort in terms of PRIIPs filings and additional EPT versions.
In practice, this means firms will need to use dual PRIIPs templates and process dual KIIDs/KIDs in English for shared classes sold in both the EU and the UK. For UK-domiciled products, they will need to translate PRIIPs KIDs into non-English languages if they are selling cross-border in the EU.
In addition, the UK’s moderate performance scenario for UK PRIIPs KIDs, which underlies the calculation and disclosure of costs including the RIY, is now taken out of the specification but there is still uncertainty as to what will replace it. Therefore, it is likely companies will continue to use the moderate performance scenario method for the time being.
Moving forward with PRIIPs
With PRIIPs KIDs regulation deadlines fast approaching, it is more important now than ever that asset managers ensure they are ready to meet the compliance requirements. Your firm should be on track to onboard your providers in September, complete onboarding by November, and be fully tested and ready to go by early December.
If not, then the first step is to figure out what’s stopping you from moving forward. Maybe you’re confused by the different PRIIPs interpretations. Or you haven’t had the time to assess your current reporting capabilities. Or you’re not sure your teams can handle the additional data and workload with everything else on their plates.
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