Following changes to the FCA’s Conduct of Business sourcebook (COBS), firms will have the option, but not the obligation, to continue to provide projections to retail investors outside of the Packaged Retail and Insurance-based Investment Products (PRIIPs) standardised key information document (KID), providing they are produced in line with COBS rules.

COBS 13.5 Preparing product information: other projections sets out how a firm must prepare such a projection; the main changes being in COBS 13.5.2R and COBS 13.5.2BG.

If firms choose to provide a projection alongside the PRIIPs KID, then, to avoid consumer confusion, they will need to explain all differences between ‘performance scenarios’ in the KID and any projection provided, in line with the ‘fair, clear and not misleading rule’.

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EU Regulation No 1286/2014 (the “PRIIPs Regulation”) requires those manufacturing a packaged retail and insurance-based investment product (“PRIIP”) to draw up a key information document (“KID”) containing standard information, and requires persons advising on or selling PRIIPs to provide the KID to retail investors, with effect from 1 January 2018.

The UK PRIIPs Regulations (Statutory Instrument 2017 No.1127: The Packaged Retail and Insurance-based Investment Products Regulations 2017) have been laid before Parliament and similarly come into force on 1 January 2018.  They designate the FCA as the competent authority in the UK for the purposes of the PRIIPs Regulation and give the FCA certain enforcement powers.

Where a person has infringed the requirements of the PRIIPs Regulation, these enforcement powers include the power to:

• prohibit or suspend the marketing of a PRIIP,
• prohibit the provision of a KID, or
• require the publication of a new version of a KID.

The FCA also now has the power to impose penalties and make a statement (such as a ‘supervisory notice’, ‘warning notice’ or a ‘decision notice’) in relation to a contravention of the PRIIP Regulation.

Where any of these have been actioned, the FCA may—

1. issue a direct communication to the retail investor concerned, giving the investor information about the sanction, and informing the investor where to lodge complaints or submit claims for redress; or
2. require the PRIIP manufacturer or person advising on, or selling, the PRIIP to issue such a communication to any retail investors concerned specified by the FCA or to retail investors of a description specified by the FCA.

The UK PRIIPs Regulations make the following important additions:

• The Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemption) Order 2001 (S.I. 2001/1060) – addition of new article 31 stating that the ‘scheme promotion restriction‘ does not apply to any communication required by Article 13 of the PRIIPs Regulation.
• The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (S.I. 2005/1529) – addition of new article 20C stating that the financial promotion restriction does not apply to any communication required by Article 13 of the PRIIPs Regulation.

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Guidelines (“Communication from the Commission”) on the application of the KID under PRIIPs have now been published.

It’s fairly modest in length – four pages in total – but clarifies various areas including, but not limited to:

• Distribution of a PRIIP to a retail investor without a KID is a breach of EU Regulation 1286/2014 (see below).
• Even if a PRIIP is sold exclusively by persons other than the PRIIP manufacturer, the latter is required to prepare and publish a KID on its website.
• A KID must be a maximum of three sides of A4 when printed.
• Where a PRIIP is only made available outside the European Union, no KID is required.
• No adaptation to the KID, including titles and sequence of sections, is permitted.

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Of Relevance to:
Most firms providing investments or investment services to retail investors, including AIFMs, UCITS Management Companies and the Authorised Fund Managers of NURS

Firms involved in Packaged Retail and Insurance-based Investment Products (“PRIIPs”) will be aware of the delay in the date of application of the PRIIPs Regulation – see Regulatory Roundup 82.

As a reminder, at its heart the PRIIPs Regulation – which applies to both PRIIPs ‘manufacturers’ and to those that advise on or sell such products – is to help investors better understand and compare the key features, risks, rewards and costs of different PRIIPs by way of a Key Information Document (“KID”) as per Articles 5 and 13 of PRIIPs Regulation:

“Before a PRIIP is made available to retail investors, the PRIIP manufacturer shall draw up for that product a key information document in accordance with the requirements of this Regulation and shall publish the document on its website” and

“A person advising on, or selling, a PRIIP shall provide retail investors with the key information document in good time before those retail investors are bound by any contract or offer relating to that PRIIP”.

PRIIPS was intended to apply from 31 December 2016 but, following the European Parliament’s rejection of the all-important (original) Regulatory Technical Standards (“RTS”), the European Commission was forced to propose an extension of one year to the date of application of the PRIIPs Regulation.

The final agreed RTS (Delegated Regulation 2017/653) has now been published in the Official Journal meaning that the one obstacle to the application of PRIIPs Regulation has been removed. The Annexes provide the important information that firms will have been waiting for including, but not limited to:

• KID Template
• Methodology for the presentation of risk
• Presentation of Summary Risk Indicator
• Methodology for the calculation of, and presentation of, costs

For the avoidance of doubt, the RTS, and hence PRIIPs Regulation, will apply from 1 January 2018, although note that Article 14(2) – which allows UCITS Management Companies to continue to continue to use a Key Investor Information Document (“KIID”) (see COLL 4.7.2) – applies until 31 December 2019. Note that the FCA intends to offer this route in respect of non-UCITS retail schemes (“NURS”) where the authorised fund manager has elected to provide a NURS KII document.

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The July edition of the Regulatory Roundup (Issue 78) included a reminder (“PRIIPs: Are you ready?”) that Regulation 1286/2014 on the provision of a Key Information Document (“KID”) for Packaged Retail and Insurance-based Investment Products (“PRIIPs”) applies from 31 December 2016.

At its heart, the concept behind Regulation 1286/2014 – which will apply to both PRIIP ‘manufacturers’ and to those that advise on or sell such products – is to help investors better understand and compare the key features, risks, rewards and costs of different PRIIPs by way of a KID. This requirement arises under Article 5 of the PRIIPs Regulation which states:

“Before a PRIIP is made available to retail investors, the PRIIP manufacturer shall draw up for that product a key information document in accordance with the requirements of this Regulation and shall publish the document on its website.”

The regulatory technical standards on the content, presentation etc. of the KID were contained in a Delegated Regulation (and Annexes).

A European Parliament (“EP”) Press Release of 14 September announced that the EP had rejected the proposed Delegated Regulation.

An ‘Item Note’ issued by the European Council advises that the Delegated Regulation “can no longer enter into force”.

This leaves firms in an unusual situation in that a Regulation – which is binding on all Member States – would apply from the end of this year but regulatory technical standards which would ensure consistent application of the requirement do not currently exist.

According to press reports, a majority of Member States have backed a call for a 12-month delay in the implementation of PRIIPs.

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Following on from PRIIPs (see previous article), ESMA has published an updated version of its Q&As (2016/1165) concerning the “provision of CFDs and other speculative products to retail investors under MiFID”.

In addition to CFDs, the paper also references binary options and rolling spot forex and reminds the reader that these products will require a KID (key information document) from January 2017 when they are made available to retail investors. Note that binary options are not currently regulated by the FCA.

Although the Q&As are aimed at competent authorities, they will also help firms by providing clarity as to the content of the MiFID rules. In addition, elements of the paper e.g. ‘appropriateness’ will be of interest to firms in general including those that are not involved in CFDs etc.

One new section that has been added concerns the importance of ‘appropriateness’ and endeavours to answer the question as to what information a firm should gather to assess the appropriateness of such products. As firms will be aware, the purpose of the appropriateness test – which is derived from MiFID – is to determine whether the client has the necessary experience and knowledge in order to understand the risks involved in relation to the product (or service) to be provided (see COBS 10 for further details).

Firm’s using a ‘questionnaire’ approach to determine appropriateness are expected to tailor the questions to the specific product in question.

Bad practices that have been observed include:

• Questions that are too reliant on the investor’s self-assessment about knowledge and experience, rather than gathering sufficient information to allow the firm to assess whether the response can be regarded as accurate.
• Using simple yes/no answers e.g. “do you understand the risks associated with trading CFDs?” without collecting sufficient, if any, supplementary information.
• Asking questions that are too broad such as experience in trading financial instruments in general rather than the particular product in question.

To counter this, some observed good practices are also mentioned including, not surprisingly, the use of questions to test a client’s understanding of a product rather than relying on the client’s self-assessment.

Where the firm’s assessment is that the client has ‘failed’ the appropriateness test then best practice, we are told, would be for the firm not to allow the client to proceed. However, under the MiFID appropriateness rules, it is possible for a firm to decide to allow such a client to proceed, subject to them providing the client with a warning (see COBS 10.3). ESMA suggests that the competent authorities should monitor those firms adopting this approach to ensure the required warning is not simply a ‘tick-the-box’ exercise and instead could be designed so as to be an actual disruption in the transaction process e.g. having a ‘cooling off’ period after the warning is given so that the client can consider the information in the warning before deciding whether to proceed.

Firms will also be interested in Question 4 which addresses the methods that could be used by e.g. FCA to assess whether appropriateness testing is being performed correctly.

It may be recalled that inadequate appropriateness assessments were also a concern highlighted in an FCA’s ‘Dear CEO’ letter published in February this year (see Regulatory Roundup 73). The letter arose following a review of new client take-on procedures in a sample of ten firms that offered CFD products (a term which will also include spread bets and rolling spot forex).

For the avoidance of doubt, any references to MiFID are to the current regime and not to MiFID II. However, we are cautioned that the principles and requirements underpinning the content of the paper will remain unchanged under MiFID II.

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