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Brussels, 15 April 2014
Key Information Documents (KIDs) for packaged retail investment and insurance products - Frequently asked questions
See also STATEMENT/14/122
1. What are Packaged Retail Investment and Insurance Products (PRIIPs)?
PRIIPs are at the core of the retail investment market. They cover a range of investment products that are marketed to retail investors which, taken together, make up a market in Europe worth up to €10 trillion. PRIIPs are the investment products retail investors would typically be offered by their bank when they want to make an investment, e.g. to save for a target amount of money such as buying a house or paying for their children's education.
Although there is no rigid definition of PRIIPs and they take a variety of legal forms, they can be distinguished by the broadly comparable functions they perform for retail investors. They typically combine exposures to multiple underlying assets; they are designed to deliver capital accumulation over a medium- to long-term investment period; they entail a degree of investment risk, although some provide capital guarantees; and they are normally marketed directly to retail investors. Broadly speaking, they can be categorised into four groups: investment funds, insurance-based investment products, retail structured securities and structured term deposits.
2. What problems are being addressed?
The retail investment market is a difficult market for consumers to navigate. There is a gulf in understanding between providers and distributors on the one hand and retail investors on the other. This is particularly the case for PRIIPs which, while offering considerable benefits for retail investors, are often complicated and opaque. The information that is available 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 interests of the investor.
It can be difficult to quantify precisely the impact of these problems on retail investors, although evidence gathered throughout the consultation process indicated that it can be substantial. Consumers are not always fully aware of the scale or nature of the risks they are taking on, or they purchased investments which are not well-suited to their needs, or which represented poor value for money. These problems can lead not only to financial losses for the investor, but, when taken together, a wider loss of confidence in the retail investment markets. The problems have implications for the efficiency of the market and the ability of retail investors to make appropriate use of their savings.
The financial crisis has underlined the impact of this: retail investors lost on investments, sometimes in a personally devastating fashion, where the possibility of these losses was not understood beforehand. Investments believed to be safe were not always as safe as they appeared. This has undermined consumers' trust in financial services, as a recent consumer market monitoring survey from 2011 showed. This lack of confidence itself undermines sound and effective investment and growth in the EU. Clear and transparent information is a vital foundation for sound markets, a necessary building block, which can also be a foundation for empowering consumers themselves.
3. Are there any examples of the problems the KID will tackle?
The Commission's consultation and impact assessment work have identified many examples of the problems faced by investors. For example, the Ombudsman in one Member State recently found 12-year subordinated notes being sold to the very elderly. Risks of exiting these investments were not fully explained. In another example, a study for a consumer affairs ministry in one Member State suggested that up to 50-80% of consumers could be terminating long-term investments prematurely, indicating investments were made that were not suited to their investment or savings needs. On an EU-wide level, a mystery shopping exercise by the Commission indicated that up to 60% of sales of investments could be considered unsuitable or not in the best interest of the consumer. The quality and neutrality of advice is part of addressing these problems, but so is improved transparency about the investments themselves. Better disclosures about the features, risks and costs of products through the KID are vital. Consumers have themselves called precisely for better, more standardised information, seeing lack of comparability as a key barrier to more informed shopping for investments.
4. What are Key Information Documents (KIDs) and what will they include?
KIDs are short, plainly-worded documents – no more than three pages long – that will provide investors with answers to the key questions they have about the features, risks, and costs of investment products.
They are designed for the retail investor rather than the professional. They will help the retail investor make a more informed decision on whether an investment is right for them.
So the investor can better compare investment products, every KID will follow the same structure. They will answer a standard set of questions, such as: What is the investment? Can I lose money? What are the costs associated with this investment? What are the risks and what might I get back?
Information that is vital for comparing different investments – on how risky the investment is, on whether it has guarantees and what these are, on the costs of the investment – will be carefully selected and presented so as to make comparisons as easy and as accurate as possible.
5. Why is the EU taking action on KIDs rather than leaving the issue to the Member States?
The EU has a unique vantage point for creating a consistent approach – something that is crucial for comparisons across products, in particular where these are sold across the EU and not only in one Member State.
This Regulation is an effective and proportionate way to ensure consumers can rely on strong rules for different products throughout Europe and across all industry sectors. It will apply to all PRIIPs regardless of whether they are sold in one single Member State or a number of them.
6. What investments will the KIDs cover?
All the key investment products are covered. This includes structured products, whatever the underlying legal form these take, insurance-based investments (including unit-linked and 'with-profit' products), and all kinds of investment funds. These products carry particular risks for the investor or are more complex to understand and compare. To allow for comparisons, KIDs will also be required for products that provide guarantees, for instance for the invested capital, as long as the returns on the investment vary (are 'at risk').
A KID has only to be produced when the products are to be sold to retail investors: this is not a document for professional investors.
The proposal does not apply to occupational pension schemes, to pension products for which the employer is required by law to contribute financially and where the employee has no choice as to the pension provider or other pension products that are recognised or certified under national law as providing income in retirement.
7. Why are some direct investments or simple savings not covered?
For direct investments, the investor is buying assets such as shares in companies themselves. In this case, banks, insurers and fund managers are not 'packaging' the investment into a product where the investor does not buy the underlying assets directly.
This packaging of investments raises costs and complexity and makes investments more difficult to compare. All these aspects warrant stronger investor protection and transparency measures for packaged investments compared with direct investments. The Commission's impact assessment also suggests that packaged investments make up the important core of the retail investment market in the EU, so focusing on these makes sense.
Simple savings products are not covered because these are easier to compare and understand; the saver generally only has to consider different interest rates. In general, the information needed to compare these differs from that needed for the products covered by the KID.
8. Why are private pensions not covered?
Private pension products, sometimes called 'third pillar pensions' are often integral components of Member States' social security systems. Where this is the case there will usually be some form of national recognition or certification of their use in funding retirement provision. Typically this is done by providing some form of tax break on the money paid in, when it is invested or when it is paid out in return for restrictions on access to the money, i.e., it can only be paid out as an income once the saver has reached a specified minimum age.
Given that many Member States have specifically tailored tax regimes for private pension and disclosure regimes for those products, it is not appropriate to require them to have a KID as well.
9. Does the Commission plan on expanding the type of investment product covered by KIDs?
Once the KID has been established for packaged investment products, it should be reviewed to see whether the scope of the document can be practically extended to cover a wider range of investment products. Assessing whether to extend the scope of the KID also depends on future innovation in the financial markets. The PRIIPs Regulation will be reviewed after four years.
10. What about other disclosures that investment product manufacturers or distributors might be required to produce or provide?
The KID places a new emphasis on keeping information short and focused on the key features of the products. For this reason it has been designed to stand on its own. In the future, we will assess whether other disclosures produced under different regulations – which can provide more detailed information than in the KID, or information for other purposes – should be amended or adjusted in the light of the development of the KID.
Additionally, proposals on how investment products are sold are being examined separately, through the revision of the Insurance Mediation Directive (see MEMO/12/516) and of the Markets in Financial Instruments Directive (see MEMO/14/305).
11. How are UCITS (Undertakings for Collective Investment in Transferable Securities) funds being treated?
A similar document to the KID has also been introduced for UCITS – the key investor information document. UCITS however also fall within the scope of the KID proposals.
To allow the key investor information document for UCITS to flourish, we propose that UCITS are exempt from the new KID requirements for a transitional period of five years. The ultimate aim is however for the documents for all investments products to be as comparable as possible. Possible refinements to the UCITS key investor information document will therefore be considered in light of the end of this transitional period. So for the moment UCITS will continue to have to provide their own key investor information document and not the KID.
12. Who will have to produce the KID?
Because investment product manufacturers know their investment products best and are responsible for creating them, they should be responsible for producing the KID. They may delegate production but would remain ultimately responsible for the document.
13. Who will have to provide the KID to investors and when?
The proposals require that whoever is selling an investment to a retail investor is responsible for giving the document to them. This would often not be the investment product manufacturer themselves, but an intermediary.
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.
14. What are the costs and benefits of KIDs?
The proposal was developed after an extensive consultation period and is supported by a robust impact assessment of different options, supported by studies designed to show what kind of approach is most effective for retail investors. This work showed that simplifying and standardising information is vital for investors, since it will encourage them to understand and compare different investment products. These findings have been central to the approach developed.
Evidence from the introduction of the key investor information document for UCITS can be used for a best estimate for the retail investment market as a whole – the Commission's PRIIPs impact assessment work suggests possible one-off costs of around €171 million, and ongoing costs of around €14 million per year. Costs would likely be absorbed relatively quickly as the new regime settled. Consistency in approaches between industry sectors and national markets would also potentially reduce costs over time.
The impact assessment shows that the benefits of bringing in the KID will outweigh the costs over the longer term. Given the estimated €10 trillion size of this market, a 1% reduction in the instance of mis-sales as a result of PRIPs would lead to a possible €10 billion reduction in mis-held PRIIPs, or €4 billion if UCITS are not included. Clearer, simpler, and more comparable information about products will be a strong basis on which to develop better investor confidence, trust in financial services, and sounder investment decisions.
Consistency in requirements between different industry sectors and different Member States will also help competition and the growth of the single market.
15. When will the KID be in place?
The vote today paves the way for the introduction of the KID for PRIIPs by as early as the end of 2015.