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On July 20th, 2021, the FCA published a Consultation Paper (CP21/23) on amending the UK PRIIPs regulation. In the Consultation Paper, the UK PRIIP regime — and the steps the UK is taking, post-Brexit, to amend the related legislations — is outlined.
After the official Brexit as of 01 January 2021, via the European Union (Withdrawal) Act 2018[1], the EU PRIIP Regulation (1286/2014), together with the related Level 2 Delegated Regulation (2017/653), has been one of the multiple European regulations domesticated in UK. During this onshoring, the UK PRIIP regime[2] has been kept in tight correspondence to its EU parent.
As announced before, the Financial Services Act 2021[3] that was adopted on 29 April 2021 has laid the way for fundamental changes the UK PRIIP Regulation by giving the power to the UK Financial Conduct Authority (FCA) powers to amend UK PRIIP Regulation. Those were specifically in relation to the UCITS transition period, PRIIP scope and methodology for presentation performance information.
As a first step, on 01 June 2021, HM Treasury announced an extension of the UCITS transition period in the UK, meaning that UCITS and AIFs manufacturers targeting retail clients in the UK are exempted from the requirement to produce a PRIIP KID as long as a KIID document is provided.
Now, the next step of the Brexit changes is announced with a Consultation paper published on Tuesday (20 July 2021) by the FCA. The paper focuses on 3 fundamental changes envisioned to the UK PRIIP regime.
The FCA acknowledges the concern of the stakeholders that the PRIIP scope is unclear for several type of investment products. Most manufacturers have taken a conservative interpretation approach, resulting in an overall reduction of debt securities on the retail market.
Thus, the FCA clarifies the scope of PRIIP on debt securities, specifically corporate bonds, greatly limiting the scope of PRIIP for that product type. For example, products like Make-whole bonds, which previously fell under the original EU PRIIP scope, are now excluded under the FCA, as well as any debt securities issued prior to 01 January 2018.
Furthermore, the obligation to publish a KID, where a PRIIP is made available to retail investors, is clarified. This provides a classification to the rule that if a product is made available to retail investors (e.g., when marketing materials or term-sheets of the product include a prominent disclosure that they are not intended for retail investors), those products will not be considered PRIIP, even if retail investors have access to those products over a secondary market, for example. A general denomination of minimum 100.000 GBP is also a sufficient condition for the exemption from PRIIP.
The FCA considers that the methodology for the performance scenarios in the existing regulation results in misleading information across the full breadth of application of the PRIIP regulation. As an immediate remedy to this, the FCA is proposing complete removal of the performance scenarios in the KID. Instead, the KID should contain a product specific description on the performance. Requirements for this are proposed in a new Annex 4A.
The proposed approach is a that KID contains narrative explanations with several elements on the main factors and conditions affecting the PRIIP future returns, as well as what outcome the investor may expect if the PRIIP is redeemed early or under severely adverse market conditions. A brief explanation using a relevant proxy or index to the product is also requested.
A question from the consultation refers to the topic of inclusion of Past Performance scenarios, although the FCA clearly states that they do not consider this as appropriate and is thus currently not envisioned.
The existing PRIIP methodology is not removed completely, and the SRI calculation is kept. The consultation discusses the risk of misleadingly optimistic SRI and the proposal to require PRIIPs manufacturers to upgrade a product SRI score, where the methodology for SRI calculation seems to underestimate the risk.
The FCA affirms that the slippage methodology prescribed by existing regulation is accurate and working as intended and that concerns for negative transaction costs are generally in reality unfounded. However, several amendments are proposed in relation to anti-dilution treatment, transaction costs for OTC bonds and index tracking funds.
Our regulatory watch work group on PRIIP continues to closely monitor regulatory developments. cleversoft will follow up with more details on the topic of UK PRIIP amendments, as soon as the related consultation has been completed and results have been published. Once final changes are adopted, we will adapt our PRIIP services to the new UK-specific PRIIP requirements, to ensure full compliance with the UK PRIIP regime.
European Union (Withdrawal) Act 2018