The latest version of the PRIIPs Regulatory Technical Standards (RTS) were published last month. You would think that, with the amount of thought and debate that have gone into PRIIPs since 2014, the RTS would cover every situation and to have a clear rule for each. But, sadly, that isn’t the case.
Last July, when questioned about the need to inform existing investors that a KID, which is a pre-sale document, has been revised, the response from the Commission was that, as this instruction is only in the recitals and not the articles of the RTS, it is “not binding, but represents best practice”.
By that logic, Recital 18, requiring fund level information to reflect the features of the linked product, is also not binding. But this is a pretty fundamental issue and raises several questions. Is one guide needed per fund or is a different fund guide needed for every fund/product combination? Do KID systems need to identify which products and funds are linked so they can combine the features? If fund guides don’t reflect the product features, where will the “death” return scenario be shown for insurance multi option PRIIPs (MOPs)?
These are not small questions that need to be resolved. The questions below all relate to MOPs and UCITS funds, which have been out of scope, then in scope and now out again (sort of).
Article 13.2 of the RTS offers the option of using the “new PRIIP” method (bid-ask spread / 2) to calculate transaction costs when using a UCITS KIID as the fund guide. But any UCITS with a “mirror” fund issued by a life company will need to use the full PRIIPs method, with an arrival price and taking account of any market impact, as the mirror funds themselves aren’t exempt. For many funds, this means there is no benefit from using the simpler method, as it would actually mean extra work.
But then, when it comes to providing cost data under MiFID II, no account should be taken of any market impact, so the simpler method should be used. Will lots of funds need to calculate transaction costs under two different methods for the different reports?
The very next paragraph – Article 13.3 – says any MOP that offers only UCITS funds as its investment options can rely on the UCITS KIID costs disclosure. Taken literally, this means they can ignore transaction costs completely, but does it really mean that?
Finally – and this is the subject of much debate and little certainty – the exemption for UCITS funds in the RTS applies when they are included in MOPs, ie products where clients can choose from two or more investment options. So they don’t include products where the fund choice is made by a discretionary manager or which combine several funds to make a single product with no fund choice.
There are those who insist that it is not the intention of the RTS to limit the exemption only to MOPs, but that it applies wherever a UCITS fund is included in a PRIIP product. They may be right, but I would like to see confirmation of this (in the Level 3 guidance, due out shortly?) before advising anyone to take that stance.