EU PRIIPs Regulation – A Further Package of Amendments

The European Commission has published a proposed regulation to amend the EU PRIIPs Regulation. The proposed regulation is part of a larger package of amendments to a number of EU Directives - MiFID, the IDD, Solvency II, UCITS and AIFMD – comprising the so-called "Retail Investment Package", with a view to addressing perceived shortcomings in the current EU regulatory framework for retail investment, as commented upon in our latest 'MIFD III aarives as the Retail Investment Package is unveiled' briefing. The proposed Regulation builds on previous recommendations by ESMA following its review of the EU PRIIPs Regulation. The proposed Regulation will mark a further round of substantive changes to the EU PRIIPs KID regime following the changes to the PRIIPs KID delegated regulation which came into force on 1 January 2023 which finally brought UCITs into the EU PRIIPS KID regime and which introduced changes in the methodology and presentation of performance scenarios and costs.

Key Points

The key elements of the proposed Regulation to amend the EU PRIIPs Regulation are: 

• Clarification of the scope of the EU PRIIPs Regulation to exclude bonds with make-whole clauses and certain pension products;
• Addition of a new "Product at a glance" dashboard in KIDs (and removal of the Comprehension Alert);
• Addition of a new section to the KID entitled "How environmentally sustainable is this product?" with disclosure aligned with the EU Sustainable Finance Disclosure Regulation and the EU Taxonomy;
• New rules to facilitate the provision of interactive KIDs;
• More detailed conditions for presenting costs of multi-option products; and
• Clarification to follow as to the scope of the KID revision requirements.

The new Regulation is unlikely to take effect until some time in 2025.

Clarification of Scope

The proposed Regulation clarifies the scope of the EU PRIIPs Regulation by expressly excluding:

• any investment where the fluctuations in the amount payable to the investor are only attributed to the inclusion of a make whole clause (using the same definition of make-whole clause as is used in MiFID II for the purposes of exclusion from the scope of the product governance regime) and
• pension products, including immediate annuities without a redemption phase, which have the primary purpose of providing the investor with an income in retirement.

New "Product at a glance" dashboard

The proposed Regulation will remove the requirement for a KID to feature a comprehension alert. In its place will require a new section entitled "Product at a glance" which will be a "dashboard" with summarised information on:

• the type of the PRIIP;
• the summary risk indicator;
• the total costs of the PRIIP;#
• the recommended holding period; and
• whether the PRIIP offers insurance benefits.

New "How environmentally sustainable is this product" section

In its review of the EU PRIIPs Regulation, the ESAs acknowledged calls of market participants for guidance in relation to the requirement in the EU PRIIPs KID Regulation to disclose "…where applicable, specific environmental or social objectives targeted by the product" in light of the lack of progress of publishing any delegated regulations on point and the related development of the EU sustainable finance framework since the EU PRIIPs KID Regulation came into being – notably the EU Sustainable Finance Disclosure Regulation ((EU) 2019/2088) and the EU Taxonomy Regulation ((EU) 2020/852). The ESAs also took the view that the sustainability characteristics of the PRIIP should be more prominent within the KID.

Consistent with the ESAs views, in the draft Regulation, the European Commission has proposed to remove the above requirement and replace it with a new section entitled "How environmentally sustainable is this product?". The new section will only apply to PRIIPs in respect of which financial market participants are required to disclose precontractual information pursuant to the EU Sustainable Finance Disclosure Regulation (SFDR), and must include the following information:

• the minimum proportion of the investment of the PRIIP that is associated with economic activities that qualify as environmentally sustainable in accordance with the EU Taxonomy Regulation ((EU) 2020/852); and
• the expected greenhouse gas emissions intensity associated with the PRIIP pursuant to the SFDR regime.

According to the European Commission, by leveraging disclosures that are already required in relation to the relevant PRIIPs under the SFDR, such disclosures are made more visible to retail investors and the financial sector thereby avoids duplications and unnecessary costs. Further, through an empowerment of ESAs to publish regulatory technical standards in respect of the specifications for the calculation and presentation of the selected indicators, the disclosure requirements of this new section are meant to be kept consistent with the potential future changes to SFDR and the EU Taxonomy.

Interactive KIDs

The proposed Regulation will require that the KID will generally be provided to retail investors in an electronic format, the exception being where a retail investor has requested to receive the KID on paper. The electronic format of the KID may be provided by means of an interactive tool that enables the retail investor to generate personalised information based on the information in the KID or the information underlying it. In such a case the format may be layered and may be adapted compared with what would otherwise be required. An interactive tool must respect the following conditions:

• it must not alter the understanding of the KID;
• all key information must be presented;
• the KID must be easily accessible through a link next to the interactive tool, and the link must be accompanied by the following message "It is recommended to download and store the key information document"; and
• it must allow investors to simulate costs over the recommended holding period.

The proposed Regulation will empower the ESAs to develop regulatory technical standards for interactive tools.

European Single Access Point (ESAP)

The Commission considers these changes to be complementary with the inclusion of KIDs in the scope of the proposed European Single Access Point (ESAP). This could see the content of KIDs being made available on a single platform in a data-extractable format starting from end of 2027. ESAP is expected to benefit retail investors by increasing access to online tools for comparing many different investment products (by making it easier for third parties to develop such tools).

Multi-option products (MOPs)

The EU PRIIPs Regulation requires a KID to be a stand-alone document without cross-references to other materials, but there is an exception in the case of MOPs. The proposed Regulation will amend this exception to require:

• the KID to state the costs of the PRIIP other than the costs for the investment option;
• retail investors to have easy access to relevant pre-contractual information; and
• the manufacturer to provide investors with appropriate tools that facilitate research and comparison among the different investment options and, upon their request and in good time, the complete costs of the PRIIP relating to the chosen option.

Clarification to follow of when KIDs must be revised

In a clarification to the revision requirement, the empowerment of the ESAs to publish RTS as to the conditions under which the KID must be revised is to be amended to ensure that the ESAs specifically distinguish "between PRIIPs that are still made available to retail investors and PRIIPs that are no longer made available".

Further Divergence with the UK

The changes proposed by the European Commission in the draft Regulation underline the commitment of the EU to the PRIIPs KID regime, notwithstanding widespread criticism of the inflexibility of its one-size-fits-all format across diverse investment products and its questionable efficacy towards retail investors. In contrast, the UK government has deemed the PRIIPs KID regime as not fit for purpose and, as part of its so-called "Edinburgh reforms", proposes to repeal it as a matter of priority. Accordingly, PRIIPs KID may be seen as the starkest example of real divergence in approach in the post Brexit regulatory landscape as between the EU and UK, and the competing approaches may be difficult to reconcile if the political winds eventually shift back towards greater integration.

Next steps

The proposed Regulation will now enter the usual co-legislative process which may see it enter into force later this year. It provides that is to apply 18 months afterthe entry into force date.