Lessons from Conversion to UCITS PRIIPs KIDs
As Q1 2023 ended, we have seen our fair share of UCITS PRIIPs KIDs conversions by now. Without entering the broader debate about the position adopted by the UK and the fact that UCITS KIIDs will continue to have to be produced by all UCITS managers distributing in the UK, it is a fair conclusion that PRIIPs KIDs are here to stay for the long term, at least in Europe.
Whilst it is notorious that PRIIPs regulation has not been immune to criticism and revisions – implemented or simply proposed – its application to UCITS has added an additional layer of complexity for anyone dealing with the formalities surrounding European cross-border distribution of these funds. Where UCITS KIIDs were a product of the UCITS Directive, UCITS PRIIPs KIDs remain an adaptation of a distinct and omni comprehensive disclosure regime to a specific product, with related integration presenting challenges, some less apparent than others.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with conversion to UCITS PRIIPs KIDs.
Ex-ante Notification of UCITS PRIIPs KIDs
Notwithstanding the changes brought about by the Cross-border Distribution of Investment Funds Directive, specifically the one-month advance notice for all changes to marketing arrangements and fund documentation, certain distribution-related formalities were easier to comply with for as long as only UCITS KIIDs were around. Managers and promoters did not have any additional notification or reporting requirements to worry about other than the ones dictated by the UCITS directive. More specifically – with a month in advance or not – the process for notification of UCITS KIIDs across EU domiciles of distribution, whether updated or in case of changes to local marketing arrangements, was a simple operation carried out with the fund passporting dedicated home and host state national competent authorities.
The landscape for European cross-border distribution of UCITS becomes slightly more intricate with the advent of UCITS PRIIPs KIDs. This is mostly because of the so-called ex-ante notification requirement. That is a mechanism of notification imposed in anticipation of a PRIIPs being made available in an EU domicile. PRIIPs regulation leaves EU member states at liberty of implementation of the requirement. So far, only a handful of EU member states did introduce this mechanism, mostly for supervisory purposes and with complexities related to the notification that range from the simple to the labour intensive, depending on the specific part of Europe at issue. In some cases, the ex-ante notification requirement applicable to UCITS PRIIPs KIDs entails that the documents, possibly renamed according to a specific naming convention, are forwarded to a specific email address. In some other cases, like in Italy, the ex-ante notification is a more labour-intensive endeavour, with a dedicated portal where UCITS PRIIPs KIDs have to be uploaded and additional specific data provided, extrapolated from the documents.
The ex-ante notification mechanism comes into play also for what concerns the launch of new UCITS funds or sub-funds. This is the case where, as part of the authorisation process, it is necessary to produce a sample of the retail documentation to be used for that specific fund. The Central Bank of Ireland has been very proactive on the point, clarifying that UCITS PRIIPs KIDs will be treated similarly to UCITS KIIDs for what concerns the process of document noting in advance of the authorisation of a new UCITS fund or new sub-funds. Whilst that is not necessarily akin to having introduced an ex-ante notification requirement in Ireland, it clarifies the issue just in time for the UCITS PRIIPs KIDs being produced as of 2023.
Institutional Investors Only. Missed Opportunity?
The ex-ante notification requirement is only one of the aspects involved in the conversion to UCITS PRIIPs KIDs. A bigger question remains surrounding the cases of UCITS offered exclusively to investors other than retail (i.e. professional/qualified investors). As clarified by EU Authorities well in advance of the deadline for the introduction of PRIIPs, it is still possible to continue to produce UCITS KIID for funds offered to investors other than retail. That is based on a literal interpretation of the concept of PRIIPs being essentially retail products, with related disclosure required only in case of offer to this type of investors.
As it often happens in these cases, many have been tempted to follow the advice that in case of UCITS offered to investors other than retail, there is no need to worry or bother about doing the work to produce PRIIPs KIDs. To the many who might have adopted this approach, most often than not on the back of advice strictly based on literal interpretation of the rules, we wanted to offer another perspective to the issue. Whilst from a mere regulatory perspective this approach might be acceptable, it is clearly mono dimensional. It does not look at the issue from the commercial angle of distribution. In a data dependent world, competition is won based on the wealth of data and information that can be made available to distributors. Passing on the opportunity to make available PRIIPs KIDs will clearly place in a disadvantageous position all these UCITS which, for the sake of being in principle offered to non-retail investors, are currently not able to provide the additional data that comes with PRIIPs KIDs. Suffice to say that UCITS were conceived to be retail products, yet they became the preference of institutional investors. We cannot exclude that soon institutional investors might develop a taste for PRIIPs KIDs and a specific requirement too.
Conclusions
Where the UK is on track to scrap the PRIIPs regulation and start a completely new chapter on retail disclosure, more digital and investor friendly in nature, Europe seems instead to have finally embraced the regulation, with all the related costs and challenges. In our view, all UCITS managers and promoters should acknowledge the change in the standards applicable to disclosure and align themselves to the new requirements, whether they plan to target retail investors or not in Europe.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with conversion to UCITS PRIIPs KIDs.