Plans for European ‘key information documents’ for investment products published

Key information documents (KIDs), containing standardised product information in a consumer-friendly format, must be made available for all packaged retail and insurance-based investment products (PRIIPs) sold on or after 31 December 2016. The European Banking Authority (EBA), European Insurance and Occupational Pension Authority (EIOPA) and European Securities and Markets Authority (ESMA) have now set out proposals covering the content and format of these documents.

ESMA chair Steven Maijoor, who heads the European supervisory authorities’ joint committee on regulatory initiatives of common interest, said that the proposals were a “major step forward” for ordinary retail investors within the EU.

“[The consultation sets] out clear proposals on the contents of the KID, which are aimed at improving safeguards and transparency around investment products,” he said. “The KID, once implemented, aims to safeguard retail investors’ interests by ensuring they receive sufficiently clear, concise and understandable information to allow them to make better informed investment decisions.”

The consultation closes on 29 January 2016.

KIDs are being introduced as a legal requirement through the EU’s PRIIPs Regulation, which came into force on 29 December 2014. The new requirement will apply to a wide range of retail and insurance-based investment products whether offered by banking, insurance or securities firms. Affected products will include structured deposits, unit-linked and with-profit insurance products and all kinds of investment funds, a market worth an estimated €10 trillion in the EU.

Each KID would have to use a common mandatory template, including text and layout, to make it easy for retail investors to compare the different features of different products, according to the supervisory authorities’ proposals. The document would have to be no more than three pages long, and the authorities have proposed specific layouts and contents for those products offering multiple options that cannot be effectively covered in this length.

The KID would have to contain details of product costs in a specified format, with product charges and transaction costs displayed separately. Entry costs, recurring costs and exit costs would all have to be included in the product costs calculation, which would have to be displayed in both cash and percentage terms. Transaction costs would be calculated based on an average of the past three years, according to the proposals.

Providers would have to display a summary risk indicator in the ‘risk and reward’ section of the KID, ranked between one for low risk and seven for the highest risk. The consultation paper sets out a proposed methodology for assigning each product to one of the seven risk classes. Possible performance over a range of time periods and at least three performance scenarios would also have to be included.

The KID would have to be provided “sufficiently early” during the sales process to enable an investor to “take its contents into account when making an investment decision”, according to the consultation paper. It would have to be revised and republished at least annually.