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The challenges of the new regulation on KIDs for PRIIPs

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Banking alert | 11 May 2016 | The challenges of the new regulation on KIDs for PRIIPs

The key challenges of the Regulation are having the time and skills necessary for the calculation and monitoring of the risk measures and performance scenarios.

Introduction to the new regulation

The Joint European Supervisory Authorities (ESAs) published their final draft Regulatory Technical Standards (RTS) on PRIIPs on 7 April. The PRIIPs Regulation requires that firms that manufacture, sell or advise on packaged retail and insurance-based investment products (PRIIPs) must provide retail investors with a standardised Key Information Document (KID) that explains the true risks and costs of the product being sold.

The Regulation must be complied with by 1 January 2017.

A PRIIP is any product where the amount repayable is subject to fluctuation because of exposure to reference values, or depending on the performance of one or more underlying assets. The Regulation will therefore apply to a wide range of firms, namely banks, insurers and asset managers. It will cover a broad range of products offered to retail investors such as derivatives (both exchange traded and OTC), structured products, retail packaged insurance products, AIFs and UCITS (although there is an initial exemption for UCITS until 2019).

The RTS cover the presentation, content, review and provision of the KID, including the methodologies for risk and reward and cost calculations.

As reported by the European Banking Authority (EBA)

Click [here] to access the press release and [here] to access the RTS.

Key areas covered in RTS

  • Summary risk indicator (SRI). The SRI (scale of one to seven) is assigned to each PRIIP according to Credit Risk Measure (CRM) and Market Risk Measure (MRM) classes. The RTS require the MRM to be calculated according to specific methodologies, namely Cornish-Fisher expansion and Bootstrapped VaR. The methodology for the calculation of the CRM should be based on the credit assessment of the PRIIP’s manufacturer or relevant obligor by external credit assessment institutions (ECAI), with further allocation of credit assessments to credit quality steps.
  • Performance scenarios. The RTS sets out requirements on the calculation and presentation of performance scenarios corresponding to favourable, moderate and unfavourable outcomes for retail investors at recommended holding and intermediate periods.
  • Costs. Information on costs in the KID is intended to allow retail investors to compare costs across the wide range of PRIIPs. The information must summarise the overall impact of the costs, in monetary and percentage terms, as well as show how costs accumulate for different holding periods. The ESAs have set out the different types of costs (one-off, ongoing and incidental) that must be included for the different types of PRIIPs. The RTS set out rules on the presentation of costs in the KID and the format that should be used.
  • Presentation and content of the KID. The RTS sets out the mandatory template and layout that must be used for the KID, including certain mandatory text.
  • Review, revision and republication of the KID. The RTS requires that the PRIIP manufacturer must revise and republish the KID at least every year, as well as where there is a change that “significantly affects” or is likely to affect significantly the information contained in the KID. In addition to monitoring changes in the SRI, the RTS require monitoring of changes in the performance scenarios, with a 5% change threshold set for moderate performance scenarios.
  • Providing the KID in good time. The RTS set out that the person selling or advising on the PRIIP must provide the KID “sufficiently early” for retail investors to be able to consider it when making their investment decision. The RTS also set out some additional factors that should be taken into account to determine the timing and delivery of the KID e.g. the complexity of the PRIIP and investor knowledge, experience and needs.

Key challenges

  • Time. Will you be able to achieve compliance within 8 months?
  • Resourcing requirements. Do your people have the necessary skills to perform the required calculations of risk and performance scenarios?
  • Data, systems and controls. Are your systems adequate to produce the required data to perform the complex calculations of risk and performance scenarios?
  • Drafting text. Are you capable of producing a KID that is written in clear and understandable language that avoids financial jargon, while remaining accurate and not misleading?
  • Lifecycle management. Will you be capable of monitoring events, performance and risk calculations in order to keep the KID up to date?

How can we help?

Our team of banking experts has the skills, credentials and experience to prepare you for compliance with the KIDs for PRIIPs Regulation. Our service offerings include the following:

  1. KID Production Solution. Outsourcing the production of the KID will free up time to focus on core value-adding business activities. You have the option of outsourcing the production of the KID in full or specific sections which may be more challenging, such as the risk calculations.
  2. KID Review Solution. As an alternative to outsourcing the KID production, you may wish to obtain assurance over the KIDs you produce. Our review solution involves a gap analysis and validation of calculations.
  3. Operational and process review – Internal audit procedures. Given the information required will likely come from different sources, controls are key to ensure accuracy.
  4. Training. Producing a KID in line with the Regulation may require training specific staff members, including members of the Board. We have experience in providing training on areas of risk and regulation.

Our PRIIPs Diagnosis Workshop is an effective way of kick-starting your transformation. In our workshops we will work with you to assess which of your current product offerings fall within the scope of this Regulation.

Should you be interested in any of our solutions, including organising a workshop with our team, please do not hesitate to contact us.

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