MiFID II Product Governance and KIDs for PRIIPs

Since January 2018 all European Investment Firms must have been adhering to the regulatory obligations of the 2^nd Markets in Financial Instruments Directive (MiFID II) and with the Key Information Documents (KIDs) for Packaged Retail Investment and Insurance-based Products (PRIIPs) regulation.

MiFID II, KIDs and PRIIPs aim is to achieve greater investor protection and to enable retail investors in making informed investment decisions.

In this commentary, the Compliance team at SALVUS explains how these complement each other, and how our team supports firms in ensuring compliance with them.

It all starts with Client assessment

Investment firms are required to conduct a suitability or appropriateness assessment, before onboarding a client. Thus, firms must obtain the necessary information to compose an appropriate economic profile based on each client’s investment profile and risk tolerance. The firm must ensure it understands its clients’

• knowledge on the offered investment products,
• experience on the proposed investment products,
• financial profile,
• risk tolerance and the ability to bear losses.

Then, with the assessment of the target market

Under MiFID II product governance obligations, investment firms are required to understand and analyze the specifications of the investment products before their distribution to clients. Therefore, the manufacturer firm needs to

1. identify the target market (and also identify the groups of clients for whom the investment products are not compatible with their needs, characteristics, and objectives – ‘Negative Target Market’)
2. analyze the type of clients for whom the products are to be distributed
3. assess the relevant risks
4. ensure the proposed products match its clients’ profiles.

Manufacturers create, develop, issue, design and/or advise for the launch of the new investment products.

Distributors offer or sell investment products and services to clients.

* In cases where the manufacturer is not a distributor as well, then it is the responsibility of the distributor to ensure the products offered to its clients’ meet the identified target market of the manufactured product.

And then with production of the pre-trade KIDs,

The Key Information Documents (KIDs) and their specifications must be provided by the product manufacturers to the distributors. Each investment product category, must have its respective KID and this document must appear on the distributor’s website.

How to construct a KID for the proposed investment product

A. Format and language

The product specifications must be comprehensive and clarify the peculiarities of each investment product, including the assumed risk and related costs. Nonetheless, the KID must be a maximum of three A4 pages for each product.

All retail investors must have access to this document for them to make an informed decision on the product about to purchase, and in the official language of the member state, they reside.

B. Content

The purpose of producing the document and the product details must be explicitly mentioned on each KID.

• the purpose of the document is to help the investor understand the nature, risks, costs, potential gains, and losses of the product about to purchase and allow the investor to compare it with other products.
• the investment product name, type, and specifics shall be mentioned along with the distributors’ details.

The content of the document should not be part of any marketing or promotional activity.

C. Warnings and risks

All warnings and risks related to the product must be provided as a product offered might be complex and difficult to be understood.

• a relevant warning (risk indicators) shall be provided to allow the investor to understand that this product may carry high-risk tolerance, which may result in losing 100% of the invested capital.
• indicative performance scenarios shall be included to demonstrate the possible outcomes subject to future market fluctuations. The scenarios shall include
  • a favorable scenario representing the positive return for the investor
  • a moderate scenario describing a minor positive return or a breakeven scenario
  • an unfavorable scenario in which the investor may bear losses
  • a stress scenario representing an extreme adverse scenario for the investor.

D. Costs

KIDs must explicitly state the direct and indirect costs related to the investment product, including one-off and recurring costs. The total costs must be expressed in monetary and percentage terms to show the aggregated result of the investment.

• the one-off costs shall include the entry and exit costs of the transaction, including the spreads and commissions charged
• the ongoing costs shall include the swap fees and any other fees charged on a daily basis.

* Investors must be informed on how long one can hold on an investment product (if there is a cooling off or cancelation period along with the relevant fees or penalties if any) and what happens upon withdrawal.

E. Investor Compensation Fund (ICF)

KIDs must refer to the Investor Compensation Fund (ICF) for the investors to know how they can be covered in case the firm is unable to pay them.

F. How to Complain

• The postal and email address to which complaints can be submitted must be included in the KID.
• The firm shall direct clients to the relevant sections of the website to submit complaints.
• Contact details of the Financial Ombudsman, in case the decision of the complaint does not satisfy the complainant’s demands.

Should you be interested to understand more about PRIIPs, KIDs, and Product Governance, our Compliance team at SALVUS has designed a self-study course that educates you on the PRIIPS regulatory framework and guides you in complying with MiFID II Product Governance.

Please contact us at info@salvusfunds.com for more information, or register online on our Workshops.

SALVUS is comprised by professional trainers and through the relevant workshops ensure that all candidates are fully equipped with the knowledge necessary to fulfil their assigned duties with competence. We would be excited to meet you at one of our workshops.

Should you be interested to read about relevant topics on the MiFID II and PRIIPs regulation, please visit the selected articles below:

• The 5 Areas of Regulatory Compliance
• Client Categorization and Investor Protection under MiFID II
• Suitability and Appropriateness Assessment on Product Governance
• The Enhanced Product Governance under MiFID II
• Are you complying with Best Execution obligations?
• Are you Ready for a Best Execution Inspection?
• Complying with the MiFID II Reporting Obligations of RTS 27 & RTS 28
• MiFID II Ex-Post Information on Costs and Charges
• The Upgraded Legal Framework of the Investor Compensation Fund

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.