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PRIIPS Discussion Paper

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Text of PRIIPS Discussion Paper

  • JC/DP/2014/02

    17 November 2014

    Discussion Paper

    Key Information Documents for

    Packaged Retail and Insurance-based Investment Products (PRIIPs)

  • Table of Contents

    Practical information .............................................................................................................................. 3

    Glossary ................................................................................................................................................... 3

    Executive Summary ................................................................................................................................. 4

    1 Introduction .................................................................................................................................... 8

    2 Key Questions and Criteria for Assessing Options ...................................................................... 17

    3 What are the risks and what could I get in return? ...................................................................... 21

    4 What are the costs? ...................................................................................................................... 48

    5 Other Sections of the KID .............................................................................................................. 73

    6 Products offering many options ................................................................................................... 85

    7 Review, Revision and Republication ............................................................................................. 91

    8 Timing of delivery .......................................................................................................................... 95

    9 General aspects of the KID ............................................................................................................ 97

    10 Impact assessment .................................................................................................................. 101

    2

  • Practical information

    EBA, EIOPA, and ESMA (the ESAs) welcome comments on this Discussion Paper on Key Information Documents for Packaged Retail and Insurance-based Investment Products (PRIIPs).

    Comments can be sent by clicking on the send your comments button on the consultation page of one of the ESAs websites. Please note that the deadline for the submission of comments is 17 February 2015. Comments submitted after this deadline, or submitted via other means may not be processed.

    It is important to note that although you may not be able to respond to each and every question, the ESAs would encourage partial responses from stakeholders on those questions that they believe are most relevant to them.

    Publication of responses

    All contributions received will be published following the close of the consultation, unless you request otherwise in the consultation form. A confidential response may be requested from us in accordance with the ESAs rules on public access to documents.1 We may consult you if we receive such a request. Any decision we make not to disclose the response is reviewable by the Board of Appeal of the ESAs and the European Ombudsman.

    Data protection

    Information on data protection can be found at the different ESAs websites under the heading Legal notice.

    1 See https://eiopa.europa.eu/about-eiopa/legal-framework/public-access-to-documents/index.html.

    3

    https://eiopa.europa.eu/about-eiopa/legal-framework/public-access-to-documents/index.html

  • Glossary

    AIF Alternative Investment Fund AIFM Alternative Investment Fund Manager AIFMD Directive 2011/61/EU on Alternative Investment Fund Managers APR Annual Percentage Rate CDS Credit Default Swap CESR Committee of European Securities Regulators CFD Contract for difference EBA European Banking Authority EC European Commission ECB European Central Bank EIOPA European Insurance and Occupational Pensions Authority ESA European Supervisory Authority ESMA European Securities and Markets Authority EURIBOR Euro Interbank Offered Rate FTT Financial Transaction Tax IMD Insurance Mediation Directive ISIN International Securities Identification Number KID Key Information Document KII Key Investor Information KIID Key Investor Information Document LIBOR London Interbank Offered Rate MiFID MIFIR

    EU Directive on Markets in Financial Instruments and Amending Directive EU Regulation on Markets in Financial Instruments

    OTC Over-the-counter PRIIP Packaged Retail and Insurance-based Investment Product PRIP Packaged Retail Investment Product RIY Reduction in Yield RTS Regulatory Technical Standard SRRI Synthetic Risk and Reward Indicator TER Total Expense Ratio UCITS Undertakings for Collective Investment in Transferable Securities VAR Value at risk

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  • Executive Summary

    The Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products (PRIIPs Regulation)2 empowers the three European Supervisory Authorities (ESAs)3 to prepare draft Regulatory Technical Standards (RTS) in specific areas. This Discussion Paper is a preparatory step in the preparation of the RTS, setting out early thinking on the part of the ESAs and gathers feedback and reactions from stakeholders.

    The PRIIPs Regulation has been introduced to improve the quality and comparability of information provided to retail investors in the European Union (EU) on often complex investment products. The need for EU action reflects the difficulties retail investors have faced in comprehending and comparing investments, hampering the emergence of efficient EU markets.

    The RTS will contain detailed rules on the contents and presentation of the Key Information Documents (KIDs), including calculation methodologies and presentation templates necessary for a summary risk indicator, performance scenarios, and cost disclosures. The measures should be designed to be engaging for retail investors, and to help them better comprehend and compare the many different products that fall within the scope of the PRIIPs Regulation.

    The RTS will also address measures on the revision, review and republication of the KID, and on the timing of delivery of the KID to the retail investor.

    Substance of the Discussion Paper

    The Discussion Paper predominantly focuses on the different sections of the KID that need to be covered in the RTS, followed by a number of transversal issues that arise.

    Many of the issues raised at this stage are covered in Chapters 3 and 4, which relate to two sections of the KID that the ESAs have identified as raising particular challenges: What are the risks and what could I get in return? and What are the costs?.

    For the risk and return section (chapter 3), the Discussion Paper outlines the challenges for and needs of retail investors in understanding and comparing the risks and rewards of PRIIPs. This is essential information about any investment, yet can be very difficult for many retail investors to fully understand. This reflects in part the complexity of the risk profiles of many PRIIPs. The Discussion Paper explores the different dimensions of risk; market, credit and liquidity risks are identified as key risks, and the Discussion Paper explores possible ways of measuring or classifying these and aggregating them. Aggregating different dimensions of risk could be important for aiding retail

    2 See http://www.europarl.europa.eu/sed/doc/news/document/2012_0169(COR01)_EN.doc. 3 European Insurance and Occupational Pensions Authority (EIOPA), European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA).

    5

    http://www.europarl.europa.eu/sed/doc/news/document/2012_0169(COR01)_EN.doc

  • investors in using the information, yet aggregating risks might also reduce the quality of the information provided.

    In relation to returns, the Discussion Paper sets out two basic approaches to performance scenarios (what-if scenarios and the use of probabilistic scenarios) and raises a number of technical issues that will need to be considered. For such information, providing estimates of the likelihood of future outcomes might be attractive for retail investors, but difficult for the investors to accurately interpret.

    The Discussion Paper explores a variety of presentational approaches for the risk and return section, such as the use of simpler or multi-dimensional summary risk indicators and tables or graphs for performance scenarios, and examines some options for how the risk and return section as a whole might work.

    For the costs section (chapter 4), the Discussion Paper follows a similar structure. It sets out some of the key questions that might be expected from the perspective of retail investors and examines some detailed issues relating to the identification and quantification of individual costs, and the aggregation of these in order to produce a total aggregate costs figure in both percentage and monetary terms. Key challenges for retail investors include comparing different cost structures, and understanding how the costs of a product will apply in practice for the investor. Creating a fair level-playing field between products will be important, and this will involve ensuring a consistent treatment of costs, including costs that are implicit, such as those embedded in prices, for instance for structured products and portfolio transaction costs for funds. Aggregating costs will also require examples of assumptions to be made. Here consistency in these assumptions could help in ensuring comparability between different PRIIPs.

    The Discussion Paper then explores different presentational

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