What are PRIIPs?

By Ryan Smith on August 24, 2018

What financial advisers need to know about 'packaged retail and insurance-based investment products'

The term “Packaged Retail and Insurance-based Investment Products” (PRIIPs) originated from the European Commission along with regulations for the underlying market.

PRIIPs are products that could entail investment risks for retail investors. Products and contracts where the consumers invest money indirectly or directly into the capital market apply, as do those where repayments otherwise affect the performance of certain reference values or securities.

The scope is quite broad, including products such as structured financial products (certificates and structured deposits) and those whose value comes from reference values such as shares, investment funds (except for UCITS) and endowment life insurance products.

Central to the regulation is the introduction of the “key information document” (KID) for covering product disclosure. The content of these documents is subject to detailed regulatory standards, for example, limitations in length to try and make it easier for consumers to understand the main features of the respective product. The focus should be on risks, potential rewards and associated costs.

Whether they actually invest or not, all retail investors who ask for information about PRIIPs must receive the respective KIDs. Each KID must address the market in general but also concentrate on a specific target group of investors. It is up to financial advisers to decide whether each KID addresses the right target group.

Construction of the KID

The manufacturer of the PRIIP, or whoever makes changes to an existing PRIIP, must ensure the compliance of the KID with legal provisions. There is no option to delegate or outsource the responsibility.

When it comes to manufacturing a KID, regulations are in place to standardise the content, layout and order of the information provided. The more important components are the following:

  • A product description – including determination of the target investor and the intended purpose of the investment
  • A summary risk indicator – depicting the market and credit risk in quantitative terms and supplemented by qualitative statements on liquidity
  • Performance scenarios – including a stress/worst case scenario covering the term or recommended holding period
  • Summary cost indicator – a breakdown of costs including interim periods
  • Early exit consequences
  • Details of possible complaint procedures

Both the seller and the manufacturer of the PRIIP are generally liable regarding the investment advice process when it comes to the content of the KID. They must also have the appropriate complaint and redress procedures in place for anyone who does make a PRIIP investment.

Finally, it is worth noting that the European Commission has said that using the regulation to standardise and simplify key information documents could well extend to other financial products.

This general approach is in line with the UK’s own Financial Conduct Authority, which has published its own guidelines and regulations in relation to clarifying information for consumers and keeping them appropriately informed at all stages of the sale.

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