Reflecting on the biggest PRIIPs KID and UCITS KIID challenges

and getting ready for the next annual refresh

With the Packaged Retail and Insurance-based Investment Products (PRIIPs) Key Information Document (KID) transition complete and the industry looking forward, Confluence’s Shane Flatman and Stephane Turpin took the time to reflect on the move from UCITS KIID to PRIIPs KID overall in a recent webinar.

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And now that we’re in the fourth quarter of the year, now is the time to start the process of refreshing your PRIIPs KIDs and UCITS KIIDs.

Here, we discuss the key areas and challenges the industry worked through as part of the transition and the crucial areas KID producers should focus on to ensure they are ready for the annual refresh.

PRIIPs KIDs: How we got here and where we are now

As we reflect on the move from UCITS KIID to PRIIPs KID, here’s a brief recap of how the regulation has been implemented and where it stands today.

In late 2017, some participants had to produce PRIIPs KIDs but may also have needed to produce the European PRIIPs Template to forward to their insurance partners. As a result, many firms had already worked through some of the new challenges.

By January 2018, PRIIPs KIDs were in place for non-UCITS funds with a small volume of documents in the entire universe of UCITS KIIDs and PRIIPs KIDs. At that time, transaction costs and performance scenarios were not popular with investors and asset managers, which is still the case today.

In September 2021, regulators amended the PRIIPs KIDs Regulatory Technical Standards (RTS) following various consultations and listening to working groups. These amendments kicked off the PRIIPs project, which took effect in January 2023.

The 1st of January 2023 marked the official start of the PRIIPs KID roll-out to UCITS products. The European PRIIPs Templates (EPTs) are now circulating and monitoring has begun. Over 2022, the industry had a year to focus on the PRIIPs data they needed to populate documents and distribute them by the 1 January 2023 deadline.

Now that those documents are in place, what needs to happen? How will Synthetic Risk and Reward Indicators (SRRIs) and Summary Risk Indicators (SRIs) be monitored for material changes? Will we later have to focus again on transaction costs and ensuring that arrival prices are used for the entire data set? What movement will regulators and working bodies make after learning from assessments and reviews?

Six main challenges of the PRIIPs KID implementation

As a technology provider, Confluence works with many different types of organizations in the asset management space, including insurance, which gives us a good view of the entire industry and the challenges it has faced while implementing PRIIPs KIDs. These include:

  1. Market data availability

    The first key challenge is market data availability and the calculation of historical prices. The EU PRIIPs revision requires at least 10 years of price history, and if the recommended holding period (RHP) is greater than 5 years, then the required price history is 5 years plus the RHP. Finding the appropriate benchmark to complete the history of funds is a significant change for fund managers since not all funds have a long history, such as ESG funds. While the regulator allows for the bootstrap methodology for a fund with very large RHP but with only 15 years of history, building a process to make that calculation can be challenging.

  2. Performance scenarios

    In the UCITS world, the key information document was straightforward, presenting the annual cost, the performance fees, and a risk indicator consistent with the prospectus. In the first version of PRIIPs KID, the data varied greatly from the prospectus and, instead, was derived mainly from calculations of price history and costs. This made it more difficult for the investor to ascertain the four scenarios: moderate, favorable, answerable, and stressed. In the second version of PRIIPs, calculations changed significantly, requiring the process to be rebuilt with stored and linkable scenarios from the KID or the EPT.

  3. Production and transaction costs

    The new PRIIPs requirement increases the cost of production since it requires the asset manager to do more price history and reporting work and for the asset manager to find the appropriate benchmark. Price history data leads to increased index subscription expenses to acquire enough depth to do calculations.

    Transaction costs are another critical challenge. Some companies have done transaction cost analysis (TCA) for years and scrutinized best execution. PRIIPs brought TCA to the forefront in 2017 when the requirement to source arrival prices was introduced. Failing the availability of an arrival price, firms would use the day-of opening price or prior-day closing or fall back to a benchmark. But to satisfy the benchmark, trades need to be categorized into buckets aligning fully with PRIIPs RTS, however this is rarely done within a firm’s trade management system.

    Unable to find arrival prices, most of the industry used estimate values instead. The challenge continues since no one TCA vendor or market data provider offers full coverage for all asset classes or helps to bring together all the accurate data. Many firms need clarification about what these transaction costs represent and need help understanding the explanations.

    The transitional period for transaction costs and being able to use the new PRIIPs method finishes on the 31st of December 2024. This gives firms another year and a half to tackle the arrival price issue technically. However, it will be a considerable effort, and projects will likely fall around the same time the KIDs are being refreshed.

  4. Different UK/EU approaches and cost calculations

    The UK went a slightly different route than the EU regarding the transaction cost calculation and anti-dilution levies, requiring two different calculations. The divergence has caused additional complications as well.

    Today’s general rule of thumb is that if you are investing to a retail investor in the UK, they should receive a UCITS KID. If you are investing to a retail investor in Europe, they will get a PRIIPs KID. However, in Europe, institutional investors can receive a PRIIPs KID ultimately, and if a fund is never going to be sold to retail investors, a UCITS KID can be maintained.

    A UCITS KID used in the EU would have to migrate to PRIIPs KID if it is sold to retail client, and a PRIIPs KID used in the UK should remain as a PRIIPs KID but will become a UK PRIIPs KID. This means a revision of the UK PRIIPs KID will be needed, requiring scenarios to be deleted and replaced by narratives. As such, the fund manager will have to set the narratives for each scenario while the rest stays the same, and all the costs are based on the assumption of the moderate scenarios.

    If there is no scenario, the FCA says that the cost must be calculated on a performance scenario based on a reasonable and robust assumption and methodology. Therefore, in a sense, it is up to your own interpretation to determine a rate to calculate the cost. But what is reasonable and robust? Do we continue to calculate the moderate scenario even if we do not show it, but just to calculate the cost? Or do we use 3% for the UK PRIIPs or ask the fund manager? The regulation is not clear. On the EU side, the FCA regulation says the cost in version one of the PRIIPs was based on the assumption of the moderate scenarios.

    Also, firms will need to show the amount at one year under the assumption that it has a net performance of zero. This makes it difficult to explain to an investor, especially when they switch from UCITS to PRIIPs KID, whether it’s PRIIPs version one or version two. In the meantime, discussions are occurring amongst the FCA and EU regulators around retail documentation and the future of convergence and providing investors with one accurate or consistent document.

  5. Ambiguity of website performance data

    How do we satisfy the new requirement to surface the past or monthly performance data on our websites? Many in the industry only started to think about this issue in February or March of this year.

    In searching random asset manager websites, it’s plain to see how they’re presenting performance data – or not. In many cases, the data is not presented, or it’s not shown in line with the regulation, or different versions exist.

    In addition to performance scenarios, firms will have to provide annual performance. Regulators are keen to retain a link to a bar chart within the three-page PRIIPs KID. This means firms will have to create the bar shot, store it somewhere, and provide a direct link to it – rather than point to the fund manufacturer website.

    As mentioned earlier, this also leads to increased production costs since it requires more work for the fund manufacturer to find the appropriate benchmark and the price history via expensive indexes to have enough history depth to do the calculation.

  6. SRRIs and SRIs

    Regarding the SRRI and the SRI, what level of differentiation or confusion has been seen throughout the industry?

    For a UCITS fund manager or retail investor who was used to looking at UCITS KIIDs, switching to PRIIPs KIDs means two risk indicators that are on the same scale, one to seven, but the methodology is not the same to get the figures. A UCITS fund could have a UCITS KIID risk indicator of six, but when switched to the PRIIPs KID, it could have a risk indicator of four for the same fund. How the risk indicator could go from six to four is not easily explainable, but the investor may believe the fund is less risky.

    Moreover, the risk indicator for PRIIPs does not rely only on the history price. Rather, it relies on a combination of prices and the credit risk measure. Therefore, it’s essential to determine the proper risk indicator for your PRIIPs fund because it directly impacts the value of the SRI.

    Going forward, we’ll have several month-end calculation track periods. SRRIs are weekly whereas SRIs are monthly. The SRI did not change from PRIIPs version one to PRIIPs version two. All the methodology changes focus on the scenarios and the cost for rather than for the SRI itself. Otherwise, it’s the same as in PRIIPs version one, requiring two to five years of price history.

What’s next? Looking forward

Now that the documents are in place and KIDs are onboarded, what’s next on the PRIIPs agenda?

We’re now approaching the annual update period. Critical updates will require firms to compile the series of figures derived from calculations from different forms of raw data and recompute figures from a year ago. The first refresh is due on 1 January 2024 for all jurisdictions apart from Luxembourg where, as we understand it, the CSSF will require the PRIIPs KIDs to be updated in line with the UCITS KIID 35 business day rule.

UCITS KIIDs will need updating by the 35th business day in 2024, which brings us to 20 February 2024. PRIIPs KIDs will need to be updated no later than 31 December 2023. PRIIPs KIDs can be given an earlier refresh date, which many firms are opting to do to avoid the holiday period, however, please note the CSSF requirement mentioned in the paragraph above.

In addition to this, the main activities are KID monitoring, regulatory submissions, and the EFAMA cost review.

  • KID monitoring
    KID monitoring is a key action that needs to be happening right now. Within the RTS, it specifically states the monitoring requirements for the SRI figure and the performance scenarios, explicitly stating that the PRIIPs KID needs to be updated when those reach certain thresholds. There is also a general expectation to monitor other ongoing costs (OOCs), although it doesn’t explicitly highlight this in the RTS. The UCITS KIID did have a monitoring requirement for OGC, which was based on the past three months and a 5% shift which we see the industry applying to the PRIIPs OOC.
  • Regulatory submission
    Regulatory submission relates to the filing of the PRIIPS KID documents. So far, we’ve a low uptake among European regulators requiring PRIIPs KIDs to be filed. Compared to the UCITS KIID, this was a requirement per the regulation. It’s not a requirement in the PRIIPs RTS, and it’s been mostly left up to local regulators. Incidentally, many have opted not to receive large volumes or thousands of PDFs in their inboxes each month. Now, the Central Bank of Ireland (CBI) have switched on the requirement to have documents filed in 2024 via the portal process they currently have in place for the UCITS KIID along with the CSSF requiring KID documents to be submitted also.
  • EFAMA cost review
    We note that The European Fund and Asset Management Association (EFAMA) is working with its members to review a series of cost calculations concerning how OOC calculations are done today and how that translates into cost over time. Many insurance companies and asset managers have varying interpretations of the regulator’s requirements or views on how a firm should approach its own fee calculations. Hopefully, the EFAMA will help to offer more guidance and direction in the future.

Updating documents: Things to do now

Now is the time to review and make narrative changes to documents. In November, the focus should be finding key data and calculating figures complete drafts in December. Because the documents are narrative and legal in nature, they will require multiple layers of approval across legal, compliance, and risk teams, which could take weeks.

Here is a checklist of the critical things to do now in preparation for updating the documents:

  • Pick a refresh/filing date for the documents well before the regulatory deadline.
  • Finalize template changes and narrative updates with internal teams.
  • Begin preparing the figure re-calculations.
  • Be aware of translator crunch times within the industry.
  • Prepare for post-document approval tasks like filing with the regulator, disseminating to the market, hosting online, and file naming conventions.

Taking action with a robust plan forward

PRIIPs KIDs now apply to more fund types in larger volumes than ever before. Almost everyone in the industry is directly affected by the quickly evolving regulation.

Most firms accomplished a great deal by January of this year; however, many firms needed to prepare better. The change was tough for everyone in the industry in terms of time and cost, and misinterpretations of the regulations caused efforts to take different directions.

Now is the time to implement a robust project plan for the next round of changes and strengthen your book-date process, data, and filings. But you don’t have to go it alone.

Learn how we can help you better manage the entire process, from the pre-production process of the PRIIPs KID requirement through to compliance monitoring, including the calculation of ex-ante costs, summary risk indicators, and performance scenarios. Contact us today.