The European Union's vision of a single market for financial services has come a long way in harmonising rules and regulations across borders. However, as financial products become more sophisticated and as focus has turned more to consumer protection and transparency, the complexities of cross-border fund distribution and compliance within the EU have become increasingly challenging.
Take a step back to this time last year when fund groups were sprinting towards the long anticipated integration of UCITS funds into the PRIIPs regime. This milestone required almost any packaged investment product being sold to retail investors, having to be preceded by a key information document or PRIIPs ‘KID’.
PRIIPs KIDs aim to provide retail investors with clear and easily understandable information on a wide range of ‘packaged’ investment products. The key objective is to enable retail investors to compare products, understand risks, and make informed investment decisions. While this regulation was well-intentioned, it has brought a multitude of challenges, not least when it comes to cross-border distribution.
The Dreaded Annual Review
Many UCITS fund managers will recall the dreaded UCITS KIID annual update, with the regulation dictating that the document must be updated within the first 35 business days of the year.
A key difference however is that PRIIPs KIDs, unlike the UCITS KIID, does not contain any historical data, so does not need to be updated annually as long as the information remains valid. This has led to confusion among both UCITS managers and national regulators around what had been an annual filing process, creating uncertainty for fund managers looking to distribute their products across borders.
According to the PRIIPs regulatory technical standards, the content of the PRIIPs KID must be reviewed at least every 12 months following the date of the initial publication. As most UCITS funds issued their PRIIPs KIDs on or around the 1st of January 2023, fund manufacturers are quickly approaching the first 12-month deadline.
As those asset managers distributing in multiple EEA countries will know too well, not all EEA regulators obligated to adopt the ESMA legislation will do so in a uniform way. You only need to cast your minds back to the adoption of the Cross Border Distribution Framework to see the divergence in application from country to country.
Ambiguity lies in the fact that the regulation does not explicitly state that the PRIIPs KID needs to be filed or approved by the Home/Host regulator. Again, it’s no surprise that regulators have differing views.
To provide clarity to our clients, FE fundinfo’s Global Funds Registration (GFR) team are in discussions with select regulatory bodies and National Competent Authorities (NCAs) to establish how this 12-month review is going to be put in practice. A matrix is available for existing clients which provides detail from each regulator. Please contact the GFR team if you wish to access further information.
Charlotte Williams, Senior Registration Consultant at FE fundinfo, summarised:
'The common consensus is that the 12-month review is the responsibility of the fund or Management Company and that no filing needs to accompany this review if no changes have been made, only if the data or date has been updated. One point to highlight is that this is the common consensus but does not apply to all.’
Market and Investor Expectations
There is also a need to consider market and investor expectations and perceptions should the fund manufacturer deem the information disclosed accurate but choose not to republish their PRIIPs KIDs with a revised date. Implications on user confidence in the documentation and information cannot be ignored.
Feedback from distributors and vendors in relation to PRIIPs KIDs is that while asset managers producing PRIIPs KIDS are not obligated to undergo a regulatory update if the information is unchanged, KIDs with dates older than a year may be questioned. There is a definite disconnect between the regulatory perspective and the market expectation.
In conclusion, from a regulatory perspective, an Asset Manager is not obligated to update their PRIIPs KIDs on an annual basis, only ‘review’. Provided the content remains accurate, there is no risk of non-compliance or sanctions. However, the market expectation is that documents are republished regularly with a revised date (evidencing a review) for the market to remain confident in the information. This republication, even if this is only to reflect a new date, as a rule of thumb, results in the regulatory requirement to file the updated documents with the Home and Host market regulators prior to distribution.
Cross-border fund distribution within the EU is rife with complexities that challenge the growth and stability of the European financial market. These complexities may not only increase the administrative and compliance burden on asset managers but also impact the availability of retail investment opportunities for investors.
Contact us to find out how you can partner with FE fundinfo to circumnavigate the complexities of cross-border fund distribution and compliance with a multi-faceted approach leveraging quality investment fund information, connected technology and managed services.
