MiFID II and PRIIPs may have been “just around the corner” forever, but we are now in the last quarter before both come into force at the end of the year. And that three-month deadline may be creating a justified feeling of panic.
Without wishing to add to that panic, it is important to consider the impact of PRIIPs and MiFID II on existing funds. Here are a few examples –
Non-UCITS Retail Schemes (NURS)
NURS are in the unusual position of being able to decide, in the UK at least, whether to adopt the PRIIPs Regulation and issue a PRIIPs KID or (continue to) take advantage of the ability to issue a UCITS-style NURS-KII until the end of 2019. This decision may be driven mostly by what other funds you have, as producing a few documents in a completely different format from all the others will introduce new procedures and data issues.
The treatment of research costs seems to differ across the industry - if you wish to introduce a new charge to your funds to cover these costs, you will need to reflect this in the fund prospectus. This would normally be classed as a fundamental change, requiring a shareholder vote, but the FCA has allowed for this change to be classed as significant, meaning that 60 days’ advance notice must be given to shareholders.
To take effect at the end of the year, therefore, notice needs to be sent by the end of October. But the FCA has also made it clear that the prospectus and client notification also require its approval, for which you need to allow a month. So that moves the deadline to the end of September.
The costs of research also need to be reported in funds’ annual reports and will have a knock-on effect on the ongoing charges figure (OCF) on a UCITS KIID, with the obligation to reissue the KIID if the costs change materially (generally regarded as being at least 5%).
While there is no formal need to do so, managers of UCITS funds may wish to update the wording about the target market on their KIIDs and introduce a recommended holding period. This needs to be incorporated in the product governance process under MiFID II and, while a template has been designed to get this information to distributors, transparency to investors as well can’t hurt.
UCITS KIIDs have been given a stay of execution until the end of 2019. But that doesn’t mean UCITS are exempt from the need to calculate and provide the data required under PRIIPs or MiFID.
If a UCITS fund is “mirrored” by a life company, the mirror fund is a PRIIP that needs to publish a PRIIPs KID, with the full suite of PRIIPs data. UCITS have been given a potentially easier ride than other PRIIPs by being allowed to use the “new PRIIP” method, based on the bid-ask spread of indices that represent the asset classes on given dates over the past year, but don’t underestimate the size of this task.
Under MiFID II, UCITS funds will also need to record and disclose costs of transactions from January 2018 for distributors to include in their ex post client reports.
This is a brief guide to some of the impacts and is by no means comprehensive – don’t forget about your Best Execution policy, Conflicts of Interest policy, Investment Management Agreements, Terms of Business letters for distributors and many other documents.
Some changes are more urgent than others, the UCITS KIID text changes can be introduced at the next annual update and any additional research costs are likely to be reflected on the KIID after the funds’ accounting dates in 2018.
If you would like to know more about how we can help with your regulatory requirements please get in touch.