Are Investment Managers Going to Have More KIDs?
Let us be clear…. we’re actually talking about the potential increase in production of point-of-investment disclosure documents for investment managers.
The complications and stress of Brexit just got a whole lot more real for many UK- and EU-based investment management companies that are subject to rules requiring production of UCITS KIID (Key-Investor-Information-Document) and PRIIPs KID (Key-Information-Document) document. Why so? On the 30th of July, HMT published proposed plans to bring forward legislation to improve the functioning of the UK’s implementation of PRIIPs regulation in the UK. There were two key points in the HMT plan:
- An indication that the ‘performance scenarios’ in the KID will be replaced with ‘appropriate information on performance’
- A proposal to statutorily extend (in the UK) the UCITS exemption in PRIIPs by up to five years – noting the current exemption expires on December 31st 2021, up to which point UCITS funds can use the UCITS KIID instead of the PRIIPs KID.
This update from HMT followed an announcement earlier in July where the EU’s ESAs informed the EU Commission of the result of the EU PRIIPs review following the consultation paper that they issued last year.
Only two of the three ESAs approved the proposed RTS, with the EBA and ESMA adopting it via a qualified majority, while in EIOPA the adoption proposal did not receive a qualified majority. The result is that the ESAs cannot formally submit the proposed draft RTS (which they published here) to the European Commission. There was broad support for the re-architecture of the PRIIPs performance scenarios to use past-performance as outlined in the ESAs letter to John Berrigan at the Commission.
It would appear this clear divergence on PRIIPs is a signal of the way two regulatory regimes (UK and EU) will follow, post the failure to arrive at a declaration of equivalence in July.
Where does this leave UK and EU management companies? The quick answer is – a very tough spot. The reality is that most firms have cross-border distribution that means UK firms sell product in the EU, and EU firms sell product in the UK. Those products had a common rule book and a single set of documents to produce – be that the UCITS KIID or the PRIIPs KID.
Going forward it looks like the content of the PRIIPs KID will be different in UK vs. EU, while the expiration date for when UCITS KIID must be replaced by a PRIIPs KID will be different. As it stands, a cross border (UK:EU / EU:UK) firm would need to produce both a UCITS [UK flavour] KIID (or a PRIIPs [UK] KID) and an EU PRIIPs KID.
Not to be outdone, the US also looks to be getting in on the act. Before the SEC’s Chair Clayton departs for the DA’s office in New York, he announced that the agency voted 4-0 to propose a rule regarding pre-investment disclosure documents and client communications.
The proposed rule would lead to a new type of disclosure document that would be more visually engaging and concise in comparison to current shareholder prospectus documents. The new documents would contain particularly important information on the fund’s fees, expenses, performance and holdings. These changes sound suspiciously like a form of KID/KIID, albeit with an SEC mandated flavour to the content and analytics.
This is a lot to take in, and EU, UK and US managers are rightfully fearful of the impacts these changes will have. Divergence and conflict in regulation is never a good thing, and with the Brexit power struggle being played out in the halls of Brussels and Whitehall, the investment managers are the pawns in the battle.
The result could mean the duplicate effort with cross-border products to try and satisfy two regimes with regulations that sound similar but are structurally different. It will lead to multiple documents being produced, where in the past there was one. How can management firms protect themselves? A key aspect of insuring against divergence is working with a vendor community that is acutely in tune with the path the various regimes are taking, who invest as heavily in regulatory knowledge as they do in technology, operate long and short range regulatory radar, and that have a proven pedigree in the delivery of strategic platforms that are one step ahead of the next crisis.
For more information on how CSS can help navigate the complexities around global fund reporting, please email us at email@example.com.
- UK – United Kingdom
- EU – European Union
- UCITS – Undertakings for the Collective Investment in Transferable Securities
- KIID – Key Investor Information Document
- PRIIPs – Packaged Retail and Insurance-based Investment Products
- KID – Key Information Document
- HMT – Her Majesty’s Treasury
- ESAs – European Supervisory Authorities
- EBA – European Banking Authority
- ESMA – European Securities and Markets Authority
- EIOPA – European Insurance and Occupational Pension Authority
- RTS – Regulatory Technical Standard
- US – United States
- SEC – Securities and Exchange Commission