The European Supervisory Authorities (ESAs) released an official statement on May 10, 2022, addressing the quality of narrative descriptions in the “What is this product?” Key Information Documents (KIDs) section.
The ESAs note that the ‘What is this product?’ section is largely a ‘free text’ section, which in the end results in different approaches to be taken by PRIIP manufacturers, including approaches, which do not fit the aims of the KID.
The primary aim of the KID is to provide retail investors with information that is fair, accurate, clear and not misleading. Precise, understandable language should always be used.
For each of the four KID product sub-section, namely ‘Type,’ ‘Objectives,’ ‘Intended retail investor,’ and ‘Term.’ the ESAs present examples of poor practices as well as their recommendations for improvement.
Below is our detailed analysis and summary of recommendations for each category:
It is worth highlighting that in all cases, the ESAs identify similar issues regarding the appropriateness of the descriptions.
The ESA supervisory statement warns that a large portion of the KIDs only indicate the broad legal category of the product. These fulfill the direct regulatory requirement but are of limited value for potential retail investors. Thus, those should not be considered adequate descriptions that allow retail investors to properly distinguish and compare products.
The ESA thus recommends manufacturers should present the class of the product in a short, concise and easy to understand way and choose legal terminology that represents the nature of the product, and to specify it further to the extent possible.
Additionally, manufacturers should consider adding where applicable the description that the product depends on the performance of the underlying(s) and where capital protection applies, the exact capital protected amount, as well as indication that this protection is only to market risk and does not cover insolvency of the manufacturer.
Naturally, those subsections cover the ESA’s largest number of examples of poor practices and recommendations:
ESA notes that manufacturers must cover all regulatory prescribed aspects in terms of determination of target investors, i.e., the customer knowledge, investment horizon preference, and loss-bearing capacity. The expectation of ESA is that the descriptions and not too generic or unclear and are rather product specific. If labels or categories are used to describe classes of the above-mentioned aspects, those should be well-defined and understood by retail investors, e.g., it is difficult for an investor to decide if their knowledge classifies as ‘sufficient’.
As more specific recommendations, ESA suggests that investment horizon should refer to a concrete timeframe or class of the investment horizon and avoid usage of generic descriptions such as ‘up to maturity.’ Where risk class of the PRIIP is mentioned, the improved readability should be respected, and thus the concrete class should be listed, e.g., “the investor should be willing to assume a risk of 3 out of 7…”. It should be clarified if the loss-bearing capacity description takes both credit and market risk into account.
The supervisory statement of ESA is the first significant guidance with respect to product description section of the PRIIP KIDs. It comes at a time when manufacturers are trying to adapt to the new regulatory requirements, initiated by the ESA quick-fix changes to the PRIIP RTS (Regulatory Technical Standards) and the UK Financial Conduct Authority amendments to the UK PRIIP regime. This opens a potential third parallel update stream. As a result, many PRIIP manufacturers could suffer from the increased regulatory pressure as well as the additional workload in 2022.
cleversoft handles the full compliance of our PRIIP service with all new regulatory requirements. Based on our thoughtful approach, we are confident that the description of our standard service in the ‘What is this product?’ section largely fulfills ESA’s expectations.
Nevertheless, we will continue to review and optimize them to ensure that all recommendations are fully taken into account. At the same time, we encourage our partners and PRIIP manufacturers to actively review the ESA recommendations.
Please do not hesitate to contact us with any feedback or comments you may have. We look forward to supporting and assisting you.