Packaged Retail Investment and Insurance-Based Products – PRIIPs
Packaged retail investment and insurance-based products (PRIIPs) is a broad category of financial assets that are regularly provided to consumers in the European Union (EU) through banks or other financial institutions. The category is intentionally broad and is intended to cover all packaged, publicly marketed financial products that have exposure to underlying assets (stocks, bonds, etc.), provide a return over time, and have an element of risk. Essentially, this covers all packaged retail investment products marketed in the European Union, including insurance policies and insurance bonds often known as offshore portfolio bonds.
Direct investments, such as purchasing a specific share of a company or a sovereign bond, are not part of the PRIIPs as they are not packaged in with anything. The PRIIPs category was created by the European Commission for the purpose of regulation.
The regulations, set to come into effect as of 3rd January 2018, will set out new calculation methodologies and transparency requirements for PRIIPs, including what key information documents (KID) need to be prepared by entities offering PRIIPs within the EU.
List of PRIIPs and non-PRIIPs products
The UK’s FCA acknowledges that identifying products which may be PRIIPs is not always ‘straightforward’. To help firms, the FCA set out in its July consultation a list of products which it considered either caught or not caught. The FCA is at pains to emphasise that the lists are not ‘definitive’ and ultimately the question would be a matter for the courts, but the lists will give some comfort to manufacturers and distributors for whom the category is not clear. This list has been updated in the policy statement to reflect some responses to the consultation and is set out at the end of this briefing for reference.
Products which are likely to be PRIIPs:
1. Regulated collective investment schemes (CISs) that are:
o non-UCITS retail schemes (NURSs) (authorised unit trusts, open-ended investment companies and authorised contractual schemes)
o qualified investor schemes (QISs) (same types as (a))
o individually recognised overseas schemes (FSMA s272 recognised schemes)
2. Unregulated CISs that are alternative investment funds, including, but not limited to:
o some unauthorised unit trust schemes
o private equity schemes
3. Unregulated CISs that are not alternative investment funds
4. Alternative investment funds that are not CISs, including shares or units in:
o an investment company or an investment trust
o venture capital investments
o European Social Entrepreneurship Funds (EuSEFs)
o European Venture Capital Funds (EuVECAs)
5. Insurance-based investment products such as unit-linked policies, with-profits policies and Holloway sickness policies
6. Fluctuating return annuities (that are not pension products) with features that result in fluctuating amounts being paid to the annuitant because of exposure to reference values (such as indices) or to the performance of one or more assets which are not directly purchased by the annuitant (e.g. purchased life annuities with variable returns)
7. Derivatives: options, futures, and contracts for differences
8. Structured investment products (whatever their form); for example, these may be structured as unregulated CISs, convertible securities, insurance policies or instruments issued by special purpose vehicles (SPVs)
9. Structured deposits (as defined in MiFID II, Article 4(1)(43))
10. Securities issued by certain special purpose vehicles (SPVs) or special purpose entities (SPEs) with variable returns (e.g. convertible securities that may convert from equity to debt securities)
11. Debt securities (bonds, notes or debentures) where the amount repayable is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the investor
Products which are not likely to be PRIIPs:
- Non-life insurance/general insurance, and life insurance that only pays benefits on death or incapacity due to injury sickness or infirmity (i.e. products that have no surrender value, or a surrender value that does not depend on fluctuations in the performance of one or more underlying assets or reference values)
- Deposits (other than structured deposits as defined in MiFID II)
- Assets that are held directly by the retail investor, such as corporate shares or sovereign bonds
- Pension products – pensions that are recognised under national law as having the primary purpose of providing the investor with an income in retirement (including pension annuities purchased using monies from a pension product recognised under UK law), occupational pension schemes, and individual pension products for which a financial contribution from the employer is required by national law and where the employer or the employee has no choice as to the pension product or provider
- Fixed annuities (that are not pension products) where the amount payable to the annuitant does not fluctuate (e.g. a purchased life annuity that pays a fixed amount of income for life or an annuity that pays a fixed income for a specified term)
- Debentures and other debt securities where amount repayable to the retail investor is fixed
- Certain securities such as, subject to certain conditions, securities issued by Member States, their regional or local authorities, central banks, public international bodies, non-profit making bodies or credit institutions
- Investment trust savings schemes that are dealing services dedicated to the securities of one of more investment trusts
- ISA (individual savings accounts) wrappers (although investments held within an ISA wrapper may be PRIIPs for which a KID is required).
KID is sufficient with PRIIPs
Current UK rules require a key feature document (KFD) and key features illustration (KFI) for packaged products, which may include products that fall within the definition of a PRIIP. After 3 January 2018, the FCA has confirmed that PRIIPs will not need a KFD and KFI, just the PRIIPs KID. This includes structured products, which are PRIIPs, and COBS 13.1.3R(3)(d) requiring a KFI will therefore be removed.
For AIFs, the process has also been simplified and for those AIFs that are PRIIPs, the KID is sufficient.
Personalised projections after PRIIPs
In its July 2017 consultation the FCA considered the current COBS requirement for ‘standardised deterministic projections’ which are either generic or personal projections. The FCA was of the view that personalised projections were outside the requirements of the KID. Following responses, the FCA is currently parking the issue and will consult on its approach.