ESAs update EU PRIIP Level 3 Q&As

On March 15, 2024, the European Supervisory Authorities (ESAs) provided updates to their PRIIPs Q&As, introducing new questions and answers across several sections, including General topics, “What is this product?”, Market risk assessment, Summary Risk Indicator, Performance Scenarios, Past performance, and Presentation of costs categories.

The Q&As document encompasses the guidance of the European Supervisory Authorities (ESAs) on the application and implementation of the PRIIPs Regulation and its Level 2 Delegated Acts. It addresses questions related to the interpretation of PRIIP Regulation and Regulatory Technical Standards (RTS).

The newly added Q&As are outlined as follows:

Section I: General topics

• Q&A 12 aims at clarifying the term “PRIIPs open to subscription” in the sense of Article 8(3) of the PRIIPs Delegated Regulation, which details specific requirements for UCITs, AIFs and unit-linked insurance-based products.

  • ESAs note that the term “PRIIPs open to subscription” only applies to Category 2 PRIIPs. It refers to situations where retail investors can enter new contracts for these PRIIPs or subscribe to new shares in such PRIIPs, including:

    • Instances where both existing and new customers can enter into new contracts or subscribe to new shares, making the PRIIP open to subscription.

    • PRIIPs available for purchase by retail investors on secondary markets.

    • Other PRIIPs, excluding UCITS and open-ended AIFs, that are undergoing a subscription or marketing phase, such as closed-ended AIFs during their marketing phase.

    • All products allowing new or existing retail investors to invest additional amounts or premiums. ESAs specify that this does not however cover products where only existing retail investors can continue making previously agreed regular payments (e.g., for a fund regular savings plan) or premiums (e.g., for a regular premium insurance-based investment product) since no new subscriptions are involved in these cases.

Section II: “What is this product?” section

• Q&A 7 brings clarifications on 3 questions.

  • What is the distinction between a “benchmark” and a “proxy” as defined in the PRIIPs Delegated Regulation?

    • ESAs note that benchmarks are indexes used to measure investment fund performance, such as stocks, bonds, interest rates or commodities. If an investment fund has a benchmark according to Article 2(2a)(d) of the PRIIPs Delegated Regulation, it must be described in the “What is this product?” section. If the AIF is required to publish past performance for a fund which doesn’t have enough historical data, but its benchmark does, the benchmark may be deemed appropriate to calculate its MRM class and in this case, used for the calculation. Following a similar approach, such benchmark should be used for the performance scenario calculations, according to Annex IV, point 12, case 2 of the PRIIPs Delegated Regulation.

    • A “proxy” is a broader term used when something else can be used as a substitute. In the context of the PRIIPs Delegated Regulation, a proxy can refer to another financial product or instrument closely correlated with the fund performance, like a comparable investment fund. Using a proxy, such as a similar investment fund, to calculate performance doesn’t mean it becomes the fund’s benchmark. The way the fund is managed remains unchanged.

  • If an AIF lacks sufficient historical price time-series, and the PRIIP manufacturer uses the historical prices of a comparable AIF to calculate the MRM class and/or performance scenarios, is the other AIF considered a benchmark that needs to be disclosed in the “What is this product?” section of the key information document?

    • There might be cases where a fund doesn’t have a benchmark in the sense of the regulation, but there might be a suitable benchmark available in the market. In such cases, the benchmark needs to meet specific criteria according to Annex II, point 7 and Annex IV point 16 of the PRIIPs Delegated Regulation, regarding its history and reliability. This criteria exclude synthetic generation such as generation based on the use of estimations, AI models or algorithms.

    • Such other cases include Annex VI, case 3 of the PRIIPs Delegated Regulation, which gives the possibility to an AIF to use a benchmark regulated by Regulation (EU) 2016/1011 to calculate performance scenarios, but does not include benchmarks that need to be referred to in the “What is this product?” section, otherwise case 2 would apply.

  • In the scenario presented in the previous question, should the past performance of the other AIF be published on the PRIIP manufacturer’s website?

    • If an AIF is required to publish past performance in the sense of Annex VIII, point 1(b) of the PRIIPs Delegated Regulation, it also has to publish the past performance of its benchmark according to Annex VIII, point 11 of the PRIIPs Delegared Regulation.

• Q&A 8 ESAs answer the question of the necessity to use similar wording in both ‘What is this product?’ and ‘How long should I hold it and can I take money out early?” sections of the KID.

  • ESAs are aware that the updated wording in Article 2(2a)(b) of the ‘What is this product?’ section seems to repeat a requirement already stated in RTS Article 6 regarding the ‘How long should I hold it and can I take money out early?’ section, specifically the requirement to describe the disinvestment procedure. They emphasize that though it is necessary to include required information from Articles 2(2a)(b) and 6(b) of the PRIIPs Delegated Regulation in their respective sections, it is not necessary to use identical wording. In some cases, the same product aspect or feature may impact different sections of the KID, e.g. details about the product may relate to risks and RHP. Product manufacturers must ensure that the document is coherent and readable for investors, considering cross-references carefully.

  • Article 3(2)(e) of the PRIIPs Delegated Regulation also highlights the necessity to reference the ‘How long should I hold it and can I take money out early?’ section within the risks section. Article 2(2a)(b) of the PRIIPs Delegated Regulation specifies requirements from Article 8(3)(c) of the PRIIPs Regulation about the ‘What is this product?’ section. It includes mentioning the possibility of early redemption before the term. This section provides a general statement about redemption possibilities, distinguishing between immediate redemption and other cases where it’s not possible. Detailed conditions like notice periods and fees are addressed in the ‘How long should I hold it and can I take money out early?’ section. Therefore, the ‘How long should I hold it and can I take money out early?’ section is deemed crucial as its aim is to precisely inform retail investors about redemption specifics like frequency, fees, and other conditions.

• Q&A 9 clarifies whether Article 2 point 5(b) of the RTS refer to market conditions, client-specific situations, or both.

  • ESAs note that this rule concerns situations where the PRIIP manufacturer can end the product without the investor’s agreement. It includes scenarios where the product as a whole might be terminated due to market conditions and situations where only a specific investor’s product may be terminated, for instance if the investor fails to meet certain conditions such as making regular payments.

Section III – A: Market risk assessment – Product categories

• Q&A 20 clarifies whether the PRIIP manufacturer may use a benchmark or proxy to cover up to 5 years, or only for the minimum 2 years requirement, if a daily share class lacks sufficent history for the Summary Risk Indicator (SRI) calculation.

  • ESAs confirm that according to Annex II, Part 1, points 9 and 10 of the PRIIPs Delegated Regulation, the use of 5 years of data is preferred when available for the PRIIP. If less than 5 years of historical daily prices are available for the PRIIP, the historical daily prices of a suitable benchmark or proxy can be used to supplement the data, ensuring that 5 years of historical daily prices are accessible for the SRI calculation.

• Q&A 21 clarifies whether an artificially created “synthetic” proxy could be considered appropriate according to Annexes II and IV of the PRIIPs RTS.

  • ESAs confirm that it could not, as for a proxy to be considered appropriate, it must rely on actual market data or prices of comparable products, reference values, or instruments related to the PRIIP or its underlying assets.

    • Using synthetic or artificial proxies, generated through estimations, artificial intelligence models, or algorithms, contradicts PRIIPs regulations, which require the use of actual historical prices. The prices of an appropriate proxy should be determined using a straightforward and established method, and be verifiable.

    • The PRIIPs Delegated Regulation specifies that a proxy is deemed appropriate if it provides necessary data not available for the PRIIP itself or its underlying assets, as outlined in various points of Annex II.

    • Furthermore, if there’s insufficient market data for the PRIIP or an appropriate benchmark or proxy, synthetic proxies aren’t allowed, as per point 4(c) of Annex II. This implies that an appropriate proxy should always be based on actual market data.

Section V: Summary Risk Indicator (SRI) (Annex III)

• Q&A 5 clarifies whether Risk Element C, which concerns currency risk, applies to investment funds or only to wrapper products or multi-option products.

  • ESAs emphasize that the narrative element C on currency risk applies to PRIIPs denominated in a currency different from the official currency of the Member State where the PRIIP is being marketed. If a PRIIP, including an investment fund, is available to retail investors in a Member State with a different currency than the product, then the KID needs to include Risk Element C. However, if the PRIIP can only be accessed by retail investors in a Member State with the same currency as the product, then Risk Element C shouldn’t be included.

Section VI: Performance Scenarios

• Q&A 23 asks whether a KID should disclose cost information and scenario information about 1 year and half the RHP in case no early exit is possible before the end of the RHP.

  • For PRIIPs where retail investors can’t exit before the end of the recommended holding period (RHP), the KID should only show performance and cost information for exiting at the RHP. This is in line with the PRIIPs Delegated Regulation. Costs should be shown only at the RHP as well, even if the RHP is longer than one year. Therefore, intermediate holding periods don’t need to be shown in the ‘Costs over time’ table, but costs should be shown at the RHP in the ‘Composition of costs’ table.

Section VII: Past performance

• Q&A 6 addresses cases when multiple versions of a benchmark are available with different approaches to reinvestment of revenues and clarifies which one should be used in the past performance chart.

  • According to Annex VIII, point 2 of the PRIIPs Delegated Regulation, past performance figures should assume that any distributable income has been reinvested. So, if available, the performance of the benchmark with reinvestment of revenues should be used in the bar chart alongside the past performance of the PRIIP. If no such benchmark exists, the KID should include a disclosure stating that the benchmark doesn’t consider reinvestment of revenues.

• Q&A 7 ESAs clarify how Annex VII, points 19 and 20 should be interpreted in cases where the receiving UCITS or AIF is newly established with no performance history and is in effect a continuation of the merging UCITS or AIF.

  • Based on the statement in Annex VIII point 19 of the PRIIPs Delegated Regulation that in mergers referred to in Directive 2009/65/EC, only the past performance of the receiving UCITS shall be maintained, ESAs note that in such cases the past performance of the merging UCITS or AIF should be used if the competent authority assesses that the merger doesn’t impact performance. This means that if there are changes to investment policy or entities involved in investment management, the past performance may not be applicable. In such cases, it should be clearly stated that the past performance is that of the merging UCITS or AIF.

• Q&A 8 ESAs clarify whether past performance information should be published no later than 35 business days after 31 December each year.

  • ESAs confirm that according to Article 23(3) of Commission Regulation (EU) No. 583/2010, past performance information should be published no later than 35 business days after 31 December each year.

    • For UCITS, this requirement remains unchanged, with updated presentation of past performance required by the same deadline.

    • For other PRIIPs such as certain types of AIFs and unit-linked insurance-based investment products, the rules on past performance are outlined in Annex VIII of the PRIIPs Delegated Regulation. While there isn’t a specific deadline for updating past performance information, it is expected to be published as soon as possible after each calendar year, typically within 35 business days after 31 December.

    • Since past performance information is not part of the KID, PRIIP manufacturers may not need to revise the KID at the same time they publish updated past performance data, as long as the KID is reviewed annually as required by Article 15 of the PRIIPs Delegated Regulation.

Section XIII: Methodology for the calculation of costs – F. Presentation of costs (Annex VII)

• Q&A 11 replies to the question whether the costs disclosed in table 1 (cost over time) and table 2 (total cost) should be aligned for year 1.

  • ESAs confirm that the costs disclosed in table 1 (cost over time) and table 2 (total cost) should be aligned for year 1. Table 2 aims at showing the breakdown of one of the figures included in table 1. This applies to both PRIPs and insurance-based investment products. For PRIPs, if costs in table 2 at 1 year are shown in Euros, the sum of the rows in table 2 should equal the ‘Total costs’ figure in Euros shown at 1 year in table 1. Similarly, for insurance-based investment products, the sum of the rows in table 2 showing ‘Annual cost impact’ percentage figures should equal the annual cost impact percentage figure at the RHP in table 1. As a result, table 2 doesn’t include a ‘Total’ row because this figure should already be provided in table 1.

cleversoft’s regulatory watch is closely monitoring all regulatory developments. As part of our Compliance Commitment guarantee, we are happy to offer our customers continuously evolving regulatory services that take into account regulatory changes and new disclosure requirements.

We would be happy to guide and empower your regulatory compliance. Feel free to send us a message via the contact form on our website. We will be happy to answer your questions

If you have any questions about PRIIPs reporting and our services, please send us a message. Our experts will be happy to advise you on the details.

For more information on our PRIIPs services, please visit our website).