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PRIIPs KID Performance Scenarios

January 31, 2018

What happened?

The FCA has recently issued a statement related to concerns raised by the industry about the performance scenarios in the PRIIPs Key Information Document (KID). This can be viewed here.

The Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation has applied from 1 January 2018. Since then, PRIIP manufacturers have been required to prepare and publish a stand-alone, standardised document, a KID, for each of their PRIIPs. Firms that advise a retail investor on a PRIIP, or sell a PRIIP to a retail investor, must provide the retail investor with a KID in good time before the transaction is concluded.

The KID details risks, performance scenarios, costs and other pre-contractual information in a standardised way. The KID is required to be accurate, fair, clear and not misleading. How information in the KID should be calculated is set out in the PRIIPs Regulatory Technical Standards (RTSs), available here.

Both the PRIIPs Regulation and related RTSs are directly applicable European legislation.

The FCA’s rules require firms to ensure that their communications with clients are fair, clear and not misleading (Principle 7 of the Principles for Business). They are also required to act honestly, fairly and professionally, in accordance with the best interests of their clients (the client’s best interests rule in COBS 2.1.1R).

The FCA understands that some firms are concerned that, for a minority of PRIIPs, the ‘performance scenario’ information required in the KID1 may appear too optimistic, and so has the potential to mislead consumers. There may be a number of reasons for this; the strong past performance of certain markets, the way the calculations in the RTSs must be carried out, or calculation errors.

Where a PRIIP manufacturer is concerned that performance scenarios in their KID are too optimistic, such that they may mislead investors, the FCA is comfortable with the manufacturer providing explanatory materials to put the calculation in context and to set out concerns for investors to consider. Where firms selling or advising on PRIIPs have concerns that the performance scenarios in a particular KID may mislead their clients, they should consider how to address this, for example, by providing additional explanation as part of their communications with clients.

There are four scenarios for predicting PRIIP performance, in a KID, namely:

  • unfavourable
  • moderate
  • favourable
  • stress

How can Thistle help you?

Please contact Thistle if you need assistance in relation to any of these issues. For more information on this topic, visit our blog on the PRIIPs Policy Statement.