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What the divergence in EU and UK decisions regarding the PRIIPs exemption for UCITS and NURS means practically

  • United Kingdom
  • Financial services and markets regulation - Briefings and articles
  • Investment funds and asset management

23-11-2021

UCITS Exemption Extension: Overview

UCITS Exemption Extension: Overview

On 1 June 2021, HM Treasury announced an extension of the exemption for Undertakings for Collective Investment in Transferable Securities (“UCITS”) and Non-UCITS Retail Schemes (“NURS”) from complying with the Packaged Retail Investment and Insurance-based Products (“PRIIPs”) regulation (EU/1286/2014), which was due to expire on 31 December this year, for 5 years until 31 December 2026.  This is in marked contrast to the European Commission which has extended the exemption for UCITS and NURS from PRIIPs for only 6 months to 1 July 2022.  

However, on 26 October 2021, the European Parliament’s Committee for Economic and Monetary Affairs approved legislative proposals to extend the exemption until 1 January 2023.  The European Parliament is expected to adopt the extension this month, following which it will need to be approved by the Council.

Background: PRIIPs regulation

The intention of the PRIIPs regulation was to allow retail consumers to compare two structurally different products: i) packaged retail investment products (“PRIPs”), and ii) insurance-based investment products (“IBIPs”), by means of a universal Key Investor Document (a PRIIPs “KID”).

The PRIIPs regulation defines a PRIP as “an investment where, regardless of its legal form, 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 that are not directly purchased by the retail investor”. This includes investment funds, such as UCITS and NURS.

In contrast, an IBIP is defined as “an insurance product which offers a maturity or surrender value which is wholly or partially exposed, directly or indirectly, to market fluctuations”. This includes unit-linked and with-profits policies.

The difficulty with treating these as equivalent is that UCITS retail funds have their own, long established universal Key Investor Information Document (a UCITS “KIID”), which is both recognised by markets and investors and significantly different to the KID.  NURS have a document equivalent to a KIID known as a Key Investor Information document (a NURS “KII”), which is more similar to a KIID than a KID.  

While regulators and industry generally supported the policy intention behind PRIIPs, implementation was fraught with difficulties.  See our previous client briefing, “Growing Pains: the many problems facing PRIIPs”.

In an attempt to clarify and improve the PRIIPs regulation the EU began a lengthy consultation process which is still ongoing and is expected to be finalised in 2022.  Since the UK left the regulatory ambit of the EU on 31 December 2020, it has undertaken its own review of the PRIIPs regulation. In July 2021, the FCA published a consultation paper, “CP21/23”, which sets out its proposals to amend the PRIIPs regulation.

Differences between UCITS KIIDs and PRIIPs KIDs

Past Performance

The intention of the PRIIPs regulation was to use the KID to enable the comparison of PRIPs and IBIPs.  However, it has proved difficult to consolidate information about the two product types into a universal format. This has been a major point of contention during PRIIPs consultations and review periods.

One significant issue with the KID is that PRIPs (UCITS/NURS) and IBIPs disclose fund performance in different ways.  UCITS KIIDs and NURS KIIs highlight past performance (with risk warnings) and do not use forward-looking statements, whereas insurance products are often sold on the basis of projected returns, calculated by an actuarial assessment of past events and the probability of future events.  Currently, under the Commission Delegated Regulation 2017/653 of 8 March 2017 (a regulation brought in to provide supplementary measures on the presentation and context of the PRIIPs KID), the performance scenarios required by the PRIIPs regulation can only be forward looking, with inclusion of historic performance data prohibited.  This goes against the grain of the marketing of UCITS and NURS products, for which past performance against a benchmark (typically of an index comprised comparable funds, so a UK small cap fund would likely be benchmarked against the performance of the IA UK Smaller Companies Equity Sector Average (GBP)) has been the principal way in which the industry and consumers judge fund manager competence.

The ESAs’ “Final Report following consultation on draft regulatory technical standards to amend the PRIIPs KID”, submitted to the Commission in February 2021, recommended the inclusion of past performance information either within the KID, or in a separate document to which the KID refers. The Commission has not yet said whether it will accept the suggestion, which would require regulatory change to extend the length of the KID from the current 3 A4 sheets maximum.

In contrast, inclusion of past performance is not part of the FCAs current proposal, as not all PRIIPs would be able to provide this information. Instead, the FCA is proposing to remove the performance scenarios section from the KID and replace it with a narrative description of performance, which would describe the factors likely to affect future performance. However, the FCA has acknowledged that the exclusion of past performance has been an industry concern, and it has requested views on its approach during the consultation period.

Disclosure costs

The PRIIPs KID:

  • includes a section on portfolio transaction costs, which is a significant additional disclosure
  • presents costs in a reduction in yield (“RIY”) format, which measures the impact of total costs on the investment return over time

In contrast, the UCITS KIID presents charges as a percentage of net asset value.

The disclosure of costs as RIY potentially conflicts with MiFID II, which states that fees and one off costs must be presented in a manner in which it is possible to ascertain charges on an annual basis.  The Final Report proposes a different cost disclosure, more closely aligned to MiFID II, for products covered under the MiFID II product scope, but it is likely that the RIY will still need to be prepared for IBIPs which use funds covered by MiFID II, such as Unit-Linked policies. This means that costs will most likely need to be calculated and presented in 2 different ways.

The FCA has announced plans to amend the way portfolio transaction costs are calculated to take anti-dilution into account (where a fund passes costs of buying or selling investments in response to flows into or out of the fund onto its investors). It has also suggested that a data calculation exemption be put in place for UCITS, which may solve some of the above issues.

Which investor document do I need to prepare?

 

UK and EU UCITS marketed in the UK

 

UK and EU UCITS marketed in the EU

NURS marketed in the UK

NURS marketed in the EU

 

Until 30 June 2022

 

UCITS KIID

UCITS KIID

NURS KII

NURS KII

 

1 July 2022 to 31 December 2026*

 

PRIIPs KID**

PRIIPs KID**

 

After 31 December 2026*

 

PRIIPs KID**

PRIIPs KID**

*Subject to change following the UK fund disclosure review.  It is widely assumed that following the expiration of the exemption, the requirement for the UCITS KIID and NURS KII will be removed.

** PRIIPs KIDs are not required for funds which only target professional clients.

As shown in the table above, after 30 June 2022 UK UCITS, EU UCITS and NURS marketed in both the UK and EU will need 2 different investor documents to satisfy requirements. However, it is likely that a waiver will be put in place, to prevent the production of multiple investor documents for the same fund.

Preparing a PRIIPs KID – What should I do now?

Although PRIIPs KIDs will not be required until at least 1 July 2022 in the EU and 1 January 2027 in the UK, fund managers should be prepared for the significant administrative burden of producing PRIIPs KIDs.

A separate PRIIPs KID will be required for each share class of each fund, in addition to translations where appropriate.  This is a large volume of documents to produce, and we anticipate that the demand will exceed the capacity of third party service providers to assist.

Fund managers should ensure they are informed about the ongoing PRIIPs review and have a proactive plan in place for the end of the respective exemption periods.

Application of PRIIPs to Luxembourg fund structures

UCITS – until J July 2022

Until 1 July 2022 Luxembourg manufacturers of UCITS which are offered or sold to retail investors and persons advising on or selling units of such UCITS must either: (i) comply with the requirements of the PRIIPs Regulation and issue a PRIIPs KID, or (ii) on the basis of exemption provided in Article 32(2) of the PRIIPs regulation draw up a UCITS KIID subject to requirements laid down in the Luxembourg Law of 17 December 2010 on undertakings for collective investment in transferable securities.  

UCITS – after 1 July 2022

As of 1 July 2022 Luxembourg manufacturers of UCITS which are offered or sold to retail investors and persons advising on or selling units of such UCITS will need to issue a PRIIPs KID. This obligation will not apply to offer and sale to retail investors are located outside of the EEA, unless the applicable laws of the third country in which marketing takes place provide otherwise.

Non-UCITS - until 31 December 2021

Until 31 December 2021 Luxembourg manufacturers of non-UCITS undertakings for collective investment (UCIs) which are offered or sold to retail investors and persons advising on or selling units of such UCIs must either: (i) comply with the requirements of the PRIIPs Regulation and issue a PRIIPs KID, or (ii) issue a UCITS KIID in accordance with Article 2 of the Luxembourg law of 17 April 2018 on key information documents for packaged retail and insurance-based investment products and comply with the same requirements as UCITS manufacturers issuing a UCITS KIID.

Non-UCITS – after 31 December 2021

As of 1 January 2022, Luxembourg manufacturers of non-UCITS UCIs which are offered or sold to retail investors and persons advising on or selling units of such UCIs will need to issue a PRIIPs KID. This obligation will not apply to UCIs which are solely offered or sold to professional investors, in which case the offering document must include a clear statement that no PRIIPs KID is made available to investors. Moreover, a PRIIPs KID is not required for offer and sale to investors outside of the EEA, unless the applicable laws of the third country in which marketing takes place provide otherwise.

How can Eversheds Sutherland help?

If you would like support in drafting KIIDs and KIDs, or advice on UCITS and PRIIPs, whether in the UK or EU, please get in touch with our team.