The EC noted two areas of work in this regard: rules applying to sales, and rules on product disclosures. This proposal, also known as PRIPs, stems from the latter work stream on product disclosures and, forms part of a wider legislative package dedicated to rebuilding consumer trust in financial markets including a review of the IMD (Insurance Mediation Directive) and a review of the UCITS directive. It is also complemented by the review of MiFID directive currently underway. PRIPs stands for packaged retail investors products, as those are the financial instruments under the scope of this proposal of regulation. PRIPs typically combine exposures to multiple underlying assets; are designed to deliver capital accumulation over a medium- to long-term investment period; entail a degree of investment risk, although some provide capital guarantees; and are normally marketed directly to retail investors.
Broadly speaking, PRIPs can be categorised into four groups: investment funds, insurance-based investment products, retail structured securities and structured term deposits. Private pension funds are also under the scope of this regulation as are often the same or extremely similar to other kinds of investments. PRIPs regulation, in consequence, is a cross-sectoral regulation which sets up common disclosure provisions to products that although legally different are economically the same.
The reasons for this proposal are the following: 1) PRIPs are the investment products retail investors would typically be offered by their bank when they want to make an investment; 2) In addition, it is considered that the complexity of these products is higher compared to direct investments; and 3) information provided to investors can be overly laden with jargon, complex and difficult to use for comparisons between different investment products. There are also conflicts of interest in the sales and advice process which may not result in outcomes that are in the best interest of the investor.
This proposal sets up the Key Information Document (KID), which is short, plainly-worded documents –no more than a few pages long– that will provide retail investors with answers to the key questions they have about the features, risks and costs of investment products. Manufacturers are responsible for producing this document and whoever is selling an investment to a retail investor is responsible for giving the document to them. The KID is designed to help retail investors make an investment decision; for this reason it is vital they are given it while they are weighing their investment options, before they make a decision.
In general, the proposal is for a high degree of standardisation of KIDs, but the goal is not to impose a ‘one size fits all’ approach. Differences between products need to be reflected too.
The Commission’s proposal will now go to the European Parliament and the Council for their consideration under the codecision procedure. Once they reach agreement, detailed work would be done by the Commission with the input of experts, consumers and stakeholders on the implementing measures. The full proposal could be expected to be in place by the end of 2014.
If you are interested in more detail please click on: http://ec.europa.eu/internal_market/finservices-retail/docs/investment_products/20120703-proposal_en.pdf