Zurich, June PRIIPs Regulation on key information documents for packaged retail and insurance-based investment products

Transcription

1 Zurich, June 2016 PRIIPs Regulation on key information documents for packaged retail and insurance-based investment products

2 Content 1 The PRIIPs KID overview 3 2 PRIIPs KID content structured along sections 9 3 Provision and review of the PRIIPs KID 14 4 How we may support you 17 Slide 2

3 The PRIIPs KID an overview

4 By when do you require a KID? What is a KID? What is a PRIIPs KID? Specific requirements regarding the content and layout KID = Key information document Maximum of three A4-sized pages when printed Stand-alone document, focusing on the key information needed by retail investors Accurate, fair, clear and not misleading Consistent with any binding contractual documents Written in the official language where the PRIIPs is sold Separate from marketing materials (no cross-references allowed) Presented and laid out in a way that is easy to read (characters of readable size) Colors used shall not diminish the comprehensibility of the information when KID is printed in black and white Corporate branding or logo not to distract from the information contained Products other than funds: December 31, 2016 UCITS: December 31, 2019 AIFs (for retail): December 31, 2016 unless national KIID equivalence required 1) The transition period for UCITS creates gaps in relation to MiFID II Several PRIIP items require data time series of up to five years backwards, thus requiring some data since Sections of the PRIIPs KID Introductory statement (comprehension alert & identity info) 2 What is this product? 3 What are the risks and what could I get in return? 4 What happens if the PRIIP manufacturer is unable to pay out? 5 What are the costs? 6 How long should I hold it and can I take money out early? 7 How can I complain? 8 Other relevant information PRIIPs lays down uniform rules on the format and content of the key information document in order to enable retail investors to understand and compare the key features and risks of the PRIIP 1) UCITS KIID equivalence in target country; 2) Introductory statement: Including comprehension alert and identity information Slide 4

5 Product scope 1) Application Application and scope of PRIIPs Ensuring comparability between similar products The regulation applies to the manufacturer of PRIIPs and persons advising on, or selling packaged retail and insurance based investment products The PRIIP manufacturer needs to establish a key information document (KID) in accordance with requirements of the regulation The PRIIP distributor is responsible to provide the retail client with the KID not exhaustive Products in scope Investment funds Structured products Insurance products Life insurance products that hold an investment element Derivative investments Structured deposits Packaged retail investment product (PRIP) means an investment [ ] regardless of the legal form[ ] where 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 which are not directly purchased by the retail investor Insurance-based investment product [ ] offers [ ] maturity or surrender value and where that maturity or surrender value is exposed, directly or indirectly, to market fluctuations Products out of scope Corporate shares held directly Sovereign bonds held directly Non-life insurance products Life insurance products where the benefits are payable on death or incapacity Various pension products PRIIPs manufacturers have to establish a PRIIPs key information document (KID), wherease distributors are in charge to provide the retail client with the corresponding KID in accordance with the new regulation 1) Extract derived from the definition Slide 5

6 PRIIPs KID decision tree When do your products require a PRIIPs KID or data for other additional information? i All products sold to EEA retail clients are in scope In scope of PRIIPs No Product Product sold to retail clients? Yes Product sold to EEA domiciled clients? Yes Product excluded from PRIIPs? Yes No No Out of scope of PRIIPs i Even products not in scope of PRIIPs may require data for other PRIIPs KIDs (re-packaging, lookthrough) Product type? Underlying of any PRIIP? No Products other than funds Funds Yes Is investing PRIIP a UCITS? AIF UCITS No Yes Underlying of any PRIIP? No Yes UCITS KIID equivalent? Yes Is master PRIIP a UCITS? No Data ready as of KID ready as of i Some members states require KIID for non-ucits retail share-classes KID ready as of i Products advised to all EEA clients require MiFID product documentation from Yes Data ready as of No KID or KID data required Decision tree based upon the draft regulatory technical standards in combination with product information requirements under MiFID II Slide 6

7 today Regulatory timeline PRIIPs is expected to apply within EU Member States on December 31, 2016 December 29, 2014 Regulation came into force November 11, 2015 Consultation paper setting out draft RTS March 31, 2016 Draft RTS provided to EC on Article 8(5) Review of DRTS 1) by EU Commission Review by EU Parl. & Council December 31, 2016 Application of the new PRIIPs rules and the RTS Reactions by the industry: timeline is simply unrealistic a number of fundamental questions are still unresolved in the final draft RTS 3 months 1 month The EU Commission has 3 years from to adopt delegated acts Exemption period for UCITS until June 26, 2015 Separate technical Discussion Paper on more complex aspects of the RTS December 31, 2015 Draft RTS provided to EC on Art. 10(2) &13(5) April 04, 2016 ESA s Final Draft Regulatory Tech. Standards (DRTS) August, 2016 Earliest adoption of RTS January 03, 2018 Entry into force of MiFID II December 31, 2018 Review of the regulation by the EU Commission MiFID II product disclosure requirements also relevant for products not in scope of PRIIPs or UCITS Due to the tight deadline and still unresolved regulatory questions, industry requested a postponement of the application date. 1) DRTS: Draft regulatory technical standards Slide 7

8 Key challenges How prepared are you? PRIIP manufacturer PRIIP distributor Data availability Availability of underlying data to calculate the required PRIIPs KID information Volume of the KIDs to be produced and the correlated automatization of the process PRIIPs provision How is the KID provided in good time before the investment decision is made by the retail investor and what does this means for your front office processes? Internal vs. external provider Which production strategy will be chosen? Internal set-up including on boarding of systems and calculation methodologies External set-up with a provider, still requiring interfaces and data readiness Distribution process Which systems and routing processes are impacted and what is your strategy to prevent distribution of PRIIPs without KID Languages Complex distribution structures require multiple languages What is your strategy in terms of different PRIIPs languages? Product shelf What implications does the PRIIPs KID have on the product range of your product shelf and how is ensured, that all data is available? Product information strategy Unaligned regulatory product information obligations create uncertainties which requires assessment to react accordingly to market developments Training of staff To ensure business readiness, a comprehensive roll-out needs to be planned How do you ensure the adequate training of your staff advising or selling PRIIPs? PRIIPs manufacturers and distributors are facing challenging questions regarding the implementation of the new regulation. How prepared is your organisation to face the new reqirements and challenges? Slide 8

9 PRIIPs KID content structured along sections

10 The KID can be split in eight sections Some of the sections are highly complex and require additional attention Section Complexity Elaboration 1 2 Introductory statement (comprehension alert & identity info) What is this product? Low Medium Standard text Depending on the complexity of the PRIIP, the explanation is challenging due to the simple language to use 3 What are the risks and what could I get in return? High Complex risk models need to be calculated 4 What happens if the PRIIP manufacturer is unable to pay out? Low Standard text based on the type of PRIIPs and jurisdiction 5 What are the costs? High Complex cost structures that require a sound data architecture 6 How long should I hold it and can I take money out early? Medium Standard text based on the type of PRIIPs 7 8 How can I complain? Other relevant information Low Low Standard text depending on the complaints process Other relevant information needs to be legally assessed and correctly reffered to in the PRIIPs The next slides focus on the requirements of the more complex sections of the PRIIPs around cost and risk disclosure 1) See appendix for the PRIIP categorization framework Slide 10

11 What are the risks and what could I get in return? (1/2) Overview of the Summary Risk Indicator (SRI) Market Risk Measure (MRM) Credit Risk Measure (CRM) Summary Risk Indicator (SRI) 7 market risk classes Calculation mechanism depending on PRIIP category 1) For most PRIIPs modified (Cornish- Fisher) Value at Risk (VAR) at 97.5% is calculated on historical returns and VaR-equivalent volatility (VEV) is derived Five years of price data required Risk class assigned according to specified table 6 credit risk classes Required only if PRIIP return or underlyings depend on creditworthiness of a manufacturer or party paying the investor Look-through required where underlying investments or exposures entail credit risk Policy to define credit rating agencies, whose assessment serves as reference for the CRM assignment Allocation of credit assessments to an objective scale of credit quality steps Representation in one of seven categories Aggregation of MRM and CRM via conversion table into single SRI figure Risk section to include SRI and narrative explanation Narrative explanation to cover other risk categories if relevant (e.g. liquidity risk, currency risk) SRI Narrative explanation 1) See appendix for the PRIIP categorization framework Slide 11

12 What are the risks and what could I get in return? (2/2) Overview of the performance scenarios Principles & methodology Presentation Presentation to be fair, accurate, clear and not misleading in order to enable retail investors to understand possible outcomes under different market conditions Three different scenarios: unfavourable, moderate, favourable (plus additional scenario if significant negative impacts not sufficiently covered by these three scenarios) Calculation at recommended holding period (RHP) and two interim periods (depending on RHP) Scenarios to be accompanied by a narrative text (indicating, where applicable, conditions for returns to retail investors or performance caps Similar baseline methodology as MRM, calculating the PRIIP value at the 10 th, 50 th, 90 th percentile Adjustments to baseline methodology depending on PRIIP category 10 th percentile 50 th percentile 90 th percentile RHP < 1 year: No intermediate periods RHP 1-3 years: 1 year and RHP RHP > 3 years: 1 year, 0.5 RHP (rounded), RHP Derivatives and structured products have to show their performance scenarios in form of a payoff-structure graph For every price of the underlying value, the graph shows the resulting profit or loss and at which price of the underlying value the profit or loss will be zero The performance is an estimate of potential gain and loss for different holding periods under various market scenarios, based on past returns Slide 12

13 What are the costs? Overview of aggregated costs over time and breakdown per year General remarks 1 Costs to be displayed as aggregate over time and breakdown per year (one-off, recurring, and incidental costs; aggregate to include exit penalties if relevant) Represented as Reduction in Yield (RIY) - difference between two percentages: Annual internal rate of return related to gross payments made by the investor and the estimated payments to the investor during the recommended holding period Annual internal rate of return for cost-free scenario Initial calculation based on comparable PRIIP or peer group, subsequent calculations based on ex-post data Separate cost calculation per share-class unless classes rank pari passu Umbrella: Separate calculation for sub-funds, fund charges to be attributed to subfunds Look-through required For UCITS/ AIF/ other PRIIP: most recent summary cost indicator For other investment products: Reasonable substitute or best estimate Transaction costs: Net realised execution price reference price ( arrival price ) Annualised average of previous three years New PRIIP (< 3 years), calculation of estimate portfolio turnover per asset class based on pre-defined methodology combined with already available data Special rules for products without an available reference price (e.g. bespoke derivatives, FX) Performance fees/ carried interest: Annualised average of previous five years Using estimated return if data unavailable Aggregated costs over time Composition of costs per year 1) Depending on the type of PRIIP, cost application or the calculation method can vary Slide 13

14 Provision & review of the KID

15 Medium of the PRIIPs KID Provision of the PRIIPs KID Provision of the PRIIPs KID Distributor responsibilities to provide the KID to retail investors PRIIP distributors are responsible to provide the retail client (or a person with written authority) with the PRIIPs KID generally in good time before an investment decision is made In case of the first transaction of the PRIIP Successive transaction (of the same PRIIP) if there was an update of the KID since the last transaction Distributor Specific requirements need to be met in order to provide the PRIIPs KID after conclusion of the transaction Different options regarding the medium of the PRIIPs KID are available, taking into account the increase of digitalisation of parts of the value chain: PRIIPS KID Paper Durable medium 2) Website Retail client Distributors are in charge to provide the retail investor with the PRIIPs KID before the transaction (default option) 2) Other than paper Slide 15

16 Review of the PRIIPs KID Manufacturer s duty to review the PRIIPs KID Manufacturer s duty to review the KID Periodic review 1) Ad-hoc review 2) KID review The 12 th month following the date of the initial publication Every 12 th month following the latest review Where the PRIIP manufacturer becomes aware of a change that affects or is likely to affect the information contained in the KID Revision of the KID Regular review of the information contained in the KID Revision of the KID where the review indicates that changes need to be made Prompt publication of the new KID on the manufacturers website Manufacturer to revise the KID without undue delay The revised document is up to date as a whole (update all information) Publication of the revised KID The PRIIP manufacturer publishes the revised key information document on its website The publication needs to occur without undue delay (5 days after the revision latest) The PRIIPs manufacturer is required toimplement a review process based on specific parameters 1) The review shall encompass a verification of whether the information contained in the KID continues to be accurate, fair, clear and not-misleading, and that it remains compliant with the requirements within Article 8(3); Slide 16

17 How we may support you

18 Front units Services & Products Trading desk Legal & Compliance IT & data management Asset Management Market acc. & corp. gov. Offering & inducements Steering committee Project management Product governance Advisory process PMO Trading & execution Internat. Locations Workstream Task Task Workstream Task Task Workstream Task Task Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar An approach tailored to your needs We would be pleased to offer you our services the way your project can profit the most Our philosophy Our service offering At Weisshorn Consulting, it is our sincere belief that every client is unique in his needs and capabilities available to direct towards the business challenge at hand. Your needs may be depending on several factors, e.g.: Goal of the project Complexity of your organisation Capabilities required Timeframe Internal resources available Setting up a project and determining the level of external support required may depend on several factors, e.g. complexity of the topic and the own organisation, availability of the right capabilities and project resources or desired resp. required project timeline. Your project setup will be depending on the identified needs: Project organisation Project timeline Therefore, we never try to deliver a «one-size fits all» approach, but intend to listen to our clients needs and combine them with our own experience in regulatory transformation projects to come up with a solution tailored to their circumstances. Our service offering thus spans across several levels of project involvement to bring our clients the right amount of support. We would be pleased to discuss with you how we may support you to achieve your goals. Our support tailored to your project requirements may include: Project execution Our experienced project managers support you driving your project forward SME 1 support Our subject matter experts bring the necessary expertise through on-site/ off-site project support Knowledge transfer Our subject matter experts enable your project team through in-depth knowledge transfer 1) SME = Subject Matter Expert Slide 18

19 About us

20 About us Who we are and how you may get in touch with us Who we are How to get in touch with us Weisshorn Consulting AG Weisshorn Consulting AG is a Zurich based consulting boutique focusing on regulatory and strategic advisory in wealth & asset management. We support private and retail banks, asset managers, fund management companies and other financial institutions located in Switzerland and Liechtenstein with tailor-made solutions by combining our industry expertise with state of the art methodologies. Our individualized service offering helps our clients to stay informed about upcoming regulations, evaluate the impact on their business- and operating model and implement tailored solutions ensuring compliant operations across their organization. As a trusted sparring partner, we help our clients to navigate through the increasingly complex legal and regulatory environment. We provide goaloriented advice on their strategic re-alignment and support them in the design and execution of their business transformation. Our ultimate goal is to generate sustainable added value for our clients organizations and their customers alike. Besides our on-site consulting services we conduct technical research and provide our clients with regular updates and background analysis on regulatory developments through our newsletter and thought leadership material or deep-dive knowledge transfer workshops on selected topics. Consulting Education & Information Research & Development Huttenstrasse Zürich info@weisshorn-consulting.ch Follow us on linkedin Slide 20

21 Our experts Our consulting team combines many years of experience in regulatory transformation Stijn Vander Straeten Phone: Mobile: Sarah Meyer, Dr. iur. Phone: Mobile: Lars Grädel Phone: Mobile: Roman Emmenegger Phone: Mobile: Education CAS Financial Market Law, Faculty of Law University Zürich Swiss Certified Public Accountant Bachelor of Arts in Business economics from the University of Applied Sciences Basel Professional experience More than nine years of experience in Wealth & Asset Management Advising international top-tier private banking, asset management and investment banking firms in combining business strategy and regulatory changes, transformation, risk and controls, as well as capturing efficiencies across the value chain Providing advisory services to firms seeking to reduce operational and regulatory compliance risk, enhance internal controls, and implement global regulatory driven business frameworks Education Doctor in Law (Dr. iur.), magna cum laude from the University of Lucerne GRiM Winterschool, University of Stockholm Master of Law from the University of Lucerne Bachelor of Law from the University of Lucerne Professional experience More than five years of experience as a lawyer in the financial sector Advising Swiss and international banks, collective investment schemes and asset managers on matters of banking and financial market law, with special focus on Swiss and European financial law Areas of expertise: setting up compliance organisations; Swiss-U.S.Tax Dispute, FATCA, anti-money laundering and Know your Customer (KYC); contract law; corporate governance and internal control systems; Swiss & European consumer protection law (e.g. FIDLEG/ FINIG & MiFID II/ MiFIR, PRIIPs) Education Master of Arts from the University of Zurich Major: Political Science (focus on International Relations) 1st Minor: Economics 2nd Minor: International Law Professional experience More than four years of experience in financial services advisory with a big four company Advising financial services firms in the transformation of business and operating models to comply with regulatory requirements in areas such as consumer protection, capital markets regulation, tax transparency and US tax dispute Areas of expertise: Project management, regulatory change management, end-to-end business transformation, process design and re-engineering, requirements engineering and IT implementation Education Master of Arts in Business Administration from the University of Zurich (Focus on Corporate Finance and Entrepreneurship) Bachelor of Arts in Business Administration from the University of Zurich (Focus on Strategic Management and Accounting) Professional experience More than seven years of experience in the financial service industry and a big four company Advising international private banking and asset management firms in regulatory business transformation, optimization of the business & operating model and the definition of tailor-made advisory solutions Areas of expertise: Project management, regulatory business transformation, process design and IT implementation Regulatory focus: Consumer protection (MiFID II/ FIDLEG/ FINIG/ PRIIPs), know your customer (KYC) and US tax dispute Slide 21

22 Disclaimer This publication has been written in general terms and therefore cannot be relied on to cover specific circumstances; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Weisshorn Consulting AG would be pleased to advise readers on how to apply the principles set out in this publication to their specific situation. Weisshorn Consulting AG accepts no duty of care or liability for any loss effected to any person acting or refraining from action as a result of any material in this publication. Weisshorn Consulting AG. All rights reserved.