You are not alone! Practical challenges in creating KIDs

The new PRIIPS regulations come into force on 1^st January 2018. Under these, manufacturers of Packaged Retail and Insurance-based Investment Products have to provide Key Information Documents (KIDs) to new retail customers. In our previous blogs, we explained the need to carry out stochastic calculations to produce the figures required and the additional data that will need to be collected from your investment manager(s).

In this blog, we highlight some of the practical issues that companies have faced so far in generating compliant KIDs across both Category 2 and Category 4 products. To say “it hasn’t been easy” is an understatement! 

The main challenge has been interpreting generic regulations and applying those to actual products. Examples include determining:

The main challenge has been interpreting generic regulations and applying those to actual products. Examples include determining:

1. The assumptions to be used for products that can have varying features for every customer, such as taxable and tax-exempt elements.
2. The observed investment returns for an investment trust that pays dividends and has a varying discount/premium to net asset value
3. How to complete the cost tables and impact on returns for products that have significant insurance elements, such as Holloway.

There are also areas of the regulation where firms are having to make a decision on whether to follow the spirit or the letter of the law. Examples here include:

1. Whether to use historic or benchmark returns for Category 3 and 4 PRIIPS if there have been changes in investment policy over the observation period (regulations say you should for Category 2 but are silent on Category 3 and 4).  Also, what constitutes a significant change?
2. Deciding if bonuses should be included in the performance scenarios for with-profits business (regulations suggest discretionary payments should only be included in the favourable scenario but to omit them from other scenarios is often unrepresentative of actual practice)?
3. The appropriateness of the formulae given for adjustments to the observed returns for Category 2 products where the formulae given is not consistent with the description of the adjustment given.

So, what can firms do to help them make these decisions? Obviously, firms should ensure that whatever they do meets the overarching principle to provide the customers with fair, accurate, clear and not misleading information. External validation can be useful here and we are seeing a lot of companies doing this.

I have also set up a LinkedIn group for KIDs producers to discuss these grey areas and understand what others are doing. If you would like to join this group, connect with me on LinkedIn, indicating that you wish to join the group and I’ll send you an invitation. I look forward to hearing your views and seeing your specific questions.