Structured Thoughts: News For The Financial Services Community - August 10, 2018

UK FINANCIAL CONDUCT AUTHORITY CALLS FOR INPUT ON PRIIPS

On July 26, 2018, the Financial Conduct Authority (FCA) of the United Kingdom issued a Call for Input1 in relation to the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation2 and the related PRIIPs Regulatory Technical Standards (RTS)3 which took effect in January 2018.

The PRIIPs legislation requires the production of a standardized key information document (KID) whenever a product within the scope of the PRIIPs legislation is being sold or recommended to retail investors in the European Economic Area (EEA), irrespective of where the manufacturer or distributor of the in-scope product is located or regulated. Therefore, this Call for Input will be of interest to, among others, all manufacturers of PRIIPs and those who advise on or distribute PRIIPs within the EEA. The FCA considers that this will include issuers of securities that are classed as PRIIPs, life insurance companies, discretionary investment management firms, firms providing services in relation to insurance-based investments, fund managers, wealth managers, brokers and other firms that provide advice to retail clients, financial advisers, and firms operating retail distribution platforms.

The Call for Input relates to the scope of the PRIIPs Regulation (Regulation), and, in particular, whether certain products are in or out of scope of the PRIIPs Regulation, and also to the cost and risk disclosure requirements in the PRIIPs legislation. In addition, the FCA also invites input on any other practical experiences that market participants have had with the remaining parts of the PRIIPs legislation.

The FCA requests all interested market participants provide input and any accompanying evidence by September 28, 2018. Thereafter, it aims to publish a feedback statement in early 2019 and use the responses to inform its engagement with the three European Supervisory Authorities, and other national competent authorities in the EEA.

THE SCOPE OF THE PRIIPS REGULATION

Ever since the PRIIPs Regulation was passed in 2014, market participants have struggled with the issue of exactly which products are within the scope of the regulation.

The definition of a PRIIP, as contained in Article 4 of the Regulation, is extremely broad and essentially encompasses:

any investment where, regardless of the legal form of the investment, the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the retail investor; and any insurance product which offers a maturity or surrender value that is wholly or partially exposed, directly or indirectly, to market fluctuations. Although Article 2 of the Regulation specifies a list of certain products to which the Regulation does not apply, the European Commission has never produced a list, or more specific definition, of products that do fall within the scope of the Regulation. This is despite requests from market participants for further guidance from the European Commission and/or the European Supervisory Authorities on the scope of the Regulation. Guidelines from the European Commission have made clear that it is the manufacturers and distributors of products who are responsible for assessing whether the products are within the scope of the Regulation, and that the assessment must take into account the specific economic features and contractual terms and conditions of each product.

The FCA has gone further and published on its website both a list of products that it considers to be within the scope of the Regulation and a list of those that it considers are not.

The FCA makes it clear that investment funds (whether regulated or not) are subject to the Regulation, as well as structured products and structured deposits, derivatives, some non-pension annuities, and many insurance-based investment products.

Contained on the list of out-of-scope products are deposits (other than structured deposits, as defined in the MiFID II Directive4), debentures, and other debt securities where the amount repayable to the investor is fixed.

Despite these two lists, there are many financial instruments and contracts that are not featured on either list which have a status that is regarded as unclear by many market participants. In the Call for Input, the FCA highlights certain corporate bonds, such as those that are callable together with payment of a make-whole amount. Although not highlighted by the FCA, one could add...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT