Industry applauds 12-month Priips delay

Firms say Mifid alignment will minimise legal risks of key information documents

The European Commission was initially reluctant to extend the Priips deadline

The European Commission's decision to delay regulations for packaged retail and insurance-based investment products (Priips) for 12 months will allow time for significant revisions, as well as lining up the legislation with the larger, overlapping second Markets in Financial Instruments Directive (Mifid II), according to legal experts.

"There are just so many uncertainties with Priips, which is unusual, so we really need this 12 months to get more clarity from the regulators, especially as they have included such a high fine in the legislation," says Penny Miller, a partner at law firm Simmons & Simmons in London.

The EC announced on November 9 that the Priips regulation will be delayed until January 2018, the same date as Mifid II implementation. The delay will allow more time for lawmakers to revisit regulatory technical standards (RTS) rejected by the European Parliament, and also address the legal risk of following rules referring to definitions in the currently incomplete Mifid II.

"The penalty of up to 3% of the total annual turnover of the legal entity is such a huge fine that we cannot have any lack of clarity. Priips is not based on a 'reasonable efforts basis'. It says the KID [key information document], a three-page document, must not be misleading, inaccurate or inconsistent when read together with a 400-page prospectus. So there's a lot of risk in that document," Miller adds.

Industry victory

The delay to Priips is a win for the industry, which had been pushing against a reluctant EC for more time based on fears that the RTS would not be ready by the year-end implementation date after the European Parliament's vote to reject the RTS in September. The EC had originally contended that firms could start to issue KIDs based on the information in the Level 1 legislative text, and were reluctant to grant the delay, not least because it requires introducing legislation that reopens and alters the Priips Level 1 text.

In a meeting between the European Parliament Committee on Economic and Monetary affairs (Econ) and the EC on November 7, representatives agreed to ensure that nothing except for the date of entry into force would be changed when the law was reopened. According to a memo describing the meeting from MEP Sven Giegold, if all goes well and changes to the RTS are satisfactory for Econ, they could get the green light from parliament as early as spring 2017.

What the industry will be waiting for next is the official delay of the implementation date in the legislative text, which would need to be in place before the end of the year to address the legal risk of issuing products without a compliant KID.

The concern is that an investor buys a product in January and there isn't an official delay, and a court says: 'Well, you should have been issuing the KID anyway'
Legal expert in London

"The commission will say: 'We are delaying it,' but you must have the legislation to change the date of adoption in time for December 31. First, even though it would be absurd for a regulator to take action, the penalty is very high. Second, we are dealing with retail investors, who are highly litigious. The concern is that an investor buys a product in January and there isn't an official delay, and a court says: 'Well, you should have been issuing the KID anyway'," says one legal expert in London.

Although some, including the European Insurance and Occupational Pensions Authority (Eiopa), had favoured a shorter delay, pushing implementation out to January 2018 was favoured by industry advocates because of fears about the overlap with Mifid II. Some of the fundamental terms underlying the Priips regulation are defined in Mifid II, such as the definition of a retail investor and the "target market" to which a firm can sell a certain product.

Colin Brockman, Investec

"There is certainly a good degree of overlap between the two. Under Mifid you have to be able to identify suitable target-market clients, and then monitor whether or not the right ones bought a product. Then on an ongoing basis you need to monitor whether that product is suitable for them in terms of risk. If there is a mismatch, you may find you have given a client the wrong product for their risk tolerance under Mifid II when it gets finalised. So in an ideal world you would have it all coming out at the same time," says Colin Brockman, head of retail distribution for structured equity derivatives at Investec in London.

The delay will also address industry concerns about having enough time to get systems in place to produce KIDs.

"The key issue is that industry implementation can only begin once there is legal certainty over the new rules, which means when the level 2 measures are finalised. For Priips, in practice, once the RTS are final, the industry would need enough time to adapt and test IT systems and processes to ensure that the introduction of the Priips KID is a success," says William Vidonja, head of conduct of business at Insurance Europe.

Targeted changes

The EC has asked the three European Supervisory Authorities (ESAs) to make targeted changes to address the concerns behind the RTS rejection: performance scenarios, the comprehension alert, treatment of multi-option products and the presentation of insurance-related costs. According to MEP Giegold's office, the commission says they will add a stress scenario so that performance scenarios reflect the impact of extreme market changes, and will provide more guidance on the comprehension alert required for complex Priips.

The EC also asked the ESAs to develop parallel guidance on the application of credit risk mitigation factors for insurers. The summary risk indicator meant to indicate the level of risk of an instrument is based on market and credit risk. Insurance firms have said the EC should take into account credit risk mitigating factors in insurance products such as insurance guarantee schemes.

The ESAs now have six weeks to resubmit the revised RTS to the EC. If the commission adopts the standards, they will have to go through parliament again, as well as the European Council. The EC says it expects the process to finish in the first half of next year.