April 2016

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PRIIPs KID regulation

Finalised draft regulatory technical

standards released

On 7 April 2016, the finalised draft regulatory

technical standards (the RTS) setting out the

mandatory features of key information documents

(KIDs) produced in accordance with the European

Regulation on key information documents for

packaged retail and insurance-based investment

products (the Regulation) were published by the Joint

Committee of the European Supervisory Authorities

(the ESAs). In this briefing, we summarise key

changes made to the previous draft of the RTS and

highlight the practical implications of such changes.

Background

The objectives of the Regulation are to improve the

transparency of packaged retail and insurance-based

products (PRIIPs) sold to retail investors or advised

upon, and to harmonise the currently divergent

disclosure rules applicable to PRIIPs across the EU.

One of the key provisions of the Regulation is the

requirement for a common KID disclosure format

applicable to all PRIIPs.

The Regulation sets out the broad requirements

applicable to PRIIPs. Pursuant to Article 8(5) of the

Regulation, the ESAs have developed more detailed

requirements through regulatory technical standards

which have now been delivered to the European

Commission (the Commission) for review.

To access our PRIIPs KID briefings and links to

preceding consultation and discussion papers, see our

PRIIPS KID website.

FINAL RULES – HEADLINE NEWS

The finalised draft RTS have made many detailed

changes to the previously released draft. However,

in many areas where further clarity was requested,

we will need to wait until "level 3" guidance (such

as FAQs) is published in the coming months. Some

of the key changes in the finalised draft RTS are

set out below.

A KID may include links to other

documentation or websites containing further

information about a product, which the PRIIP

manufacturer must disclose under national or

EU law, in addition to documents which include

information required by the Regulation.

Continual "real-time" updates of KIDs issued in

respect of exchange-traded derivatives are not

required.

Where possible, and where manufacturers have

the details of retail investors, manufacturers

should inform retail investors of any revision to

a KID by mailing lists or email alerts.

Recalibration of the MRM volatility

classification, which will lead to many

structured products being assigned a more

favourable MRM class.

Adjustment to credit quality steps based on

product tenor.

Pay-off structures shall be in the form of

graphs rather than performance scenario tables

for exchange-traded derivatives (See

Treatment of exchange-traded derivatives

below).

Derivatives still automatically assigned a MRM

of 7.

Guidelines provided as to what constitute

unfavourable, moderate and favourable

performance scenarios.

"Costs over time" table is reduced to a single

line only.

Clarification that costs can be shown on a per

annum basis.

Content

Template KID

The RTS contain a revised template KID (the Template

KID), which is replicated as an Annex to this briefing.

The layout of the template remains broadly the same

as in previous iterations but includes additional

guidance and explanations as to what information

must be included in various sections, to assist

manufacturers in preparing the document without

needing to cross-refer to the Regulation.

Inclusion of links to websites and documents

KIDs were originally intended to contain all the

information a retail investor might need in order to

make an investment decision, without providers

having the ability to rely on lengthy complex legal

documents protecting their rights. Providers can now

include in a KID links to other documents and websites

containing further information for investors. This will

be a relief for providers who faced the impossible task

of describing very complex products in three pages

and may also provide greater legal protection for

providers. Firms will still need to ensure that any

website or documents that they refer to investors are

presented in a retail friendly way.

Now that links to websites are permitted, the "How

can I complain" section of the KID is required to

contain a link to the relevant website(s) for any

complaints.

Ad hoc review

The review and revision section of the RTS provides

that information contained in a KID must be reviewed

every time there is a change which "significantly

affects, or is likely to affect significantly" the

information contained in the KID. This is a change

from the previous draft of the RTS, which referred to

"a change which affects or is likely to affect" such

information. The incorporation of a "significance"

threshold allows greater leeway, but further guidance

on how this wording should be interpreted is still

needed.

The RTS give further detail as to how a manufacturer

can determine whether the information in the KID

remains accurate, fair and non-misleading, including

by conducting an analysis of the mean return for the

product's moderate performance scenario. In line with

the RTS' recitals, where possible and where the

manufacturer has investors' details, any revision made

to a KID as a result of one of these reviews (or an

annual review) should be notified to investors by way

of mailing lists or email alerts.

Provision of the KID by the seller

The level 1 text of the Regulation requires a KID to be

provided "in good time". The recitals to the RTS give

some guidance as to what constitutes "in good time",

but this is still unclear and is likely to lead to a

divergence in market practice. In summary, the KID

must be made available "sufficiently prior" to an

investor making a decision that they are able to

understand and take into account the relevant

information. Various factors are to be taken into

account, including the investor's needs, the complexity

of the product, and, where the advice or sale is at the

initiative if the retail investor, the urgency of the

situation. However, no further guidance has been

provided in the RTS as to trades which are executed

within a very short timeframe and/or in respect of

which certain details (the pay-out on a structured

trade, for example) will not be known until the trade

has actually been executed. The right to defer

provision of the KID until after execution of a

transaction remains and is subject to a number of

conditions being satisfied. Primarily, it must be

impossible to provide the KID prior to completion of

the transaction.

Next steps

The RTS will be reviewed by the Commission,

which has three months to decide whether or not

to endorse. Assuming they are endorsed with no

amendments, the Council and Parliament will have

a two month review period (which may be

extended by a further month), after which the RTS

will be published in the Official Journal of the EU

and enter into force 20 days thereafter.

Notwithstanding industry objections, it remains the

case that the Regulation will apply from 31

December 2016.

Ahead of the application date, the ESAs expect to

publish FAQs or "How-To" guides giving detailed

guidance on methods for the calculation of the SRI

for a product, performance scenarios and the cost

information to be included in a KID.

Treatment of exchange-traded derivatives

In response to concerns raised by market participants,

clarity has been provided about the treatment of

derivatives traded on exchanges and the related

disclosure requirements. A key concern was the

sensitivity of these products to exchange conditions,

which are variable and could in theory give rise to a

requirement for the information in a KID to be

continually updated as it became out of date. In

consequence, providers have been investigating costly

IT systems which auto-update KIDs. The RTS address

this concern by clarifying that continuous real time

updates are not required. The KID must not be

misleading or inaccurate, but it is considered a pre-

contractual document which is designed to show

example investments; therefore it must by definition

contain information which is to some degree general in

nature.

In addition to the above, a new structure graph has

been included in Annex V of the Template KID,

indicating how performance scenarios must be

presented in respect of certain exchange-traded

derivatives.

Kids for products offering multiple options

There is no change to the approach for PRIIPs that

offer multiple investment options (MOPs) to investors.

Manufacturers of MOPs may choose one of two

different approaches; they can either:

produce a separate KID for each option, with each

KID containing information about both the PRIIP in

general and about the relevant option; or

produce a generic KID for the PRIIP in general, and

supplement this with additional documents

containing specific information relating to the

various options, giving details of the separate

options (including on their investment objectives,

their risks and rewards, and their specific costs).

However, clarification has been provided in the RTS

that there is no requirement to reflect every possible

combination of underlying options; for instance, the

information provided in a KID would not need to

reflect specific choices for a certain proportion and

selection of different underlying investment options.

This "personalisation" of the information to reflect the

details of a specific transaction is not required, since

the aim of the KID is to provide pre-contractual

information to aid the retail investor in considering and

comparing options before they have made an

investment decisions, not at illustrating an investment

decision that they have already made.

Performance scenarios

The RTS build on requirements set out in the

Regulation to include in the risk and reward section of

the KID various hypothetical performance scenarios,

set out in a prescribed format. The RTS still require

the presentation of three scenarios (unfavourable,

moderate and favourable), but additional guidance has

now been incorporated into the RTS as to what

constitutes an unfavourable, moderate or favourable

scenario. The prescribed text has also been amended

in places to make it easier to understand.

Quick Q&A

Has the KID template changed? Not

substantively but additional text has been

included so that less cross-referral to the

Regulation is required.

Have the calculation and assessment

methodologies changed? Yes. Firms will

need to look in detail at the Annexes to the

RTS to ensure that their internal

methodologies reflect these changes. For

example, MRM volatility classification, category

allocation and credit quality steps have all

changed to some degree since the previous

version of the RTS.

Does the KID need to be published on the

firm's website? Yes. The KID needs to be

"clearly identifiable" on the website.

How often does the KID need to be

reviewed? Every twelve months and

whenever there is a change which significantly

affects or is likely to affect significantly the

information contained in the existing KID.

Has any further guidance been provided

as to what 'in good time' means? No.

Current guidelines still state that a KID should

be made available before an investor is bound

by a contract or offer, and "sufficiently prior" to

any investment decision being made (see

Provision of the KID by the seller below).

Will further guidance be provided? Yes.

The ESAs are aware that there are outstanding

issues and questions in respect of the RTS,

which need to be addressed. They plan to issue

further guidance in the form of FAQs and/or

'How-To' guides.

As mentioned in Treatment of exchange-traded

derivatives above, rather than the tabular form used

to display performance scenarios for the majority of

PRIIPs, performance scenarios for certain exchange-

traded derivatives are required to be displayed using a

structure graph.

Contacts

Hubert Blanc-Jouvan Avocat à la Cour, Paris T: +33 1 53 53 53 97 hubert.blanc-jouvan@ashurst.com Nicola Higgs Partner, London T: +44 (0)20 7859 1033 nicola.higgs@ashurst.com Tobias Krug Managing Partner, Germany T: +49 (0)69 97 11 28 75 tobias.krug@ashurst.com

Detmar Loff Partner, Germany T: +49 (0)69 97 11 26 41 detmar.loff@ashurst.com Michael Logie Partner, Global Head Securities and Derivatives, London T: +44 (0)20 7859 2489 michael.logie@ashurst.com Anders Malm Senior Legal Consultant / Advokat, Stockholm T: +46 (0)8 407 24 37 anders.malm@ashurst.com Rob Moulton Partner, London T: +44 (0)20 7859 1029 rob.moulton@ashurst.com Arnaud Wtterwulghe Partner, Brussels T: +32 2 626 1914 Arnuad.wtterwulghe@ashurst.com Lorraine Johnston Senior Expertise Lawyer, London +44 (0)20 7859 2579 Lorraine.Johnston@ashurst.com Reuben Greet-Smith Senior Associate, Chartered Financial Analyst, London T: +44 (0)20 7859 2206 reuben.greet-smith@ashurst.com Anne Mainwaring Associate, London T: +44 (0)20 7859 2719 anne.mainwaring@ashurst.com

Standardised amounts for examples

The standardised example amounts for the

calculation and presentation of figures in the Risk

and Reward and the Costs sections of the KID

have changed in the RTS.

In the Consultation Paper, the following

standardised amounts were prescribed for different

types of PRIIPs:

1,000 euro for investment funds and PRIIPs

other than insurance-based investment

products;

15,000 euro for single premium insurance-

based investment products; or

1,000 euro yearly for regular premium

insurance based investment products.

This has been changed to the following:

10,000 euro for all PRIIPs except regular

premium insurance-based investment

products; and

1,000 euro for regular premium insurance-

based investment products.

ANNEX

Template KID

Presentation of summary risk indicator (SRI)

Presentation of performance scenario

Performance scenarios

[Element A] This [table/graph] shows the money you could get back over the next [recommended holding

period] years, under different scenarios, assuming that you invest €[…] [per year].

[Element B] The scenarios shown illustrate how your investment could perform. You can compare them with

the scenarios of other products.

[Element C]The scenarios presented are an estimate of future performance based on evidence from the past,

and are not an exact indicator. What you get will vary depending on how the market performs and how long

you keep the investment/product. []

[Where applicable][Element D] This product cannot be [easily] cashed in. This means it is difficult to estimate

how much you would get back if you cash in before [the recommended holding period/maturity]. You will

either be unable to cash in early or you will have to pay high costs or make a large loss if you do so.

[Element E] The figures shown include all the costs of the product itself, [where applicable]:[but may not

include all the costs that you pay to your advisor or distributor][and includes the costs of your advisor or

distributor]. The figures do not take into account your personal tax situation, which may also affect how much

you get back.

[Element F] This graph illustrates how your investment could perform. You can compare them with the pay-

off graphs of other derivatives.

[Element G] The graph presented gives a range of possible outcomes and is not an exact indication of what

you might get back. What you get will vary depending on how the underlying will develop. For each value of

the underlying, the graph shows what the profit or loss of the product would be. The horizontal axis shows

the various possible prices of the underlying value on the expiry date and the vertical axis shows the profit or

loss.

[Element H] Buying this product holds that you think the underlying price will [increase/decrease].

[Element I] Your maximum loss would be that you will lose all your investment (premium paid).

[Element J] The figures shown include all the costs of the product itself, but may not include all the costs that

you pay to your advisor or distributor. The figures do not take into account your personal tax situation, which

may also affect how much you get back.

Cost over time

The person selling you or advising you about this product may charge you other costs. If so, this person will

provide you with information about these costs, and show you the impact that all costs will have on your

investment over time.

Composition of costs

The table below shows:

The impact each year of the different types of costs on the investment return you might get at the end of the

recommended holding period

What the different cost categories mean.

On the same basis, the additional impact of your insurance premium payments (equivalent to the estimated

value of insurance benefits) is [x%]. Details of the insurance benefits such as death benefits are in the section

“what is this product”.

This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.

Readers should take legal advice before applying the information contained in this publication to specific issues or transactions. For more information

please contact us at Broadwalk House, 5 Appold Street, London EC2A 2HA T: +44 (0)20 7638 1111 F: +44 (0)20 7638 1112 www.ashurst.com.

Ashurst LLP is a limited liability partnership registered in England and Wales under number OC330252 and is part of the Ashurst Group. It is a law firm

authorised and regulated by the Solicitors Regulation Authority of England and Wales under number 468653. The term "partner" is used to refer to a

member of Ashurst LLP or to an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of

Ashurst LLP's affiliates. Further details about Ashurst can be found at www.ashurst.com.

© Ashurst LLP 2016 Ref: 47948987 08 April 2016

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