WHITE PAPER

PRIIPS - THE QUEST TO RECREATE THE KID HOW TO OVERCOME THE CHALLENGES OF PRIIPS REGULATION

Author Patricia Myles (CPA, Dip. IFRS), Manager: Regulatory Solutions at RR Donnelley

CONTENTS FOREWORD INTRODUCTION CREATING A LEVEL PLAYING FIELD FOR INVESTMENT PRODUCTS

01

PART 1: BACKGROUND

02



THE PURPOSE OF THE PRIIPS REGULATION

02



IMPLICATIONS FOR THE INDUSTRIES INVOLVED

02

PART 2: REQUIREMENTS

03



THE PRIIPS KID REQUIREMENTS – WHAT YOU WILL NEED TO PROVIDE

03



DEFINITIONS AND SCOPE

03

PART 3: CHALLENGES

05



NO TRANSITION PERIOD AND LIMITED TIMEFRAME FOR IMPLEMENTATION

05



KEY PRIIPS KID CHALLENGES

06

PART 4: RECOMMENDATIONS

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ACT NOW TO GAIN COMPETITIVE ADVANTAGE

08 08

CONCLUSION

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GLOSSARY

10

ABOUT RR DONNELLEY

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PRIIPS - THE QUEST TO RECREATE THE KID

FOREWORD I am delighted to introduce RR Donnelley’s PRIIPS white paper. PRIIPS is an important piece of legislation that is essential to the integration of the financial markets in Europe, and to the benefits of investor protection, by creating a level playing field between financial products disclosures towards retail investors. European investors need to have access to efficient and reliable information on investment products, all the more with our ageing population. The objective of the PRIIPs regulation is to provide a single document to ensure comparable information is made available to the investors. It promises greater transparency and greater protection. The general principles of the legislation have already been defined and approved by the European Parliament and the Council of Ministers. Different consultation papers have been issued by the European Supervisory Authorities, draft Regulatory Technical Standards (RTS) on the PRIIPs regulations were recently issued on November 11, 2015. The PRIIPs regulation will come into force in January 2017, as this is a regulation no national transposition is required to be fully enforced on January 2017. To make the most of the PRIIPs regulation, the financial industry will need to continue to work on a number of important issues, in particular on cost and risk disclosure. Creating a single market where retail investment products will be made easily comparable for retail investors across insurance, banking and asset management is the key focus for the European Supervisory Authorities. The industry will have to deal with these challenges collectively. The path to the single European market may be long and complex but it is well under way and PRIIPs is a great milestone in its advance. I trust you find this paper interesting and enjoyable, and it helps in your understanding and decision-making for the future.

Rafael Aguilera Ernst & Young Executive Director - Directeur Associé EMEIA Wealth & Asset Management Product Strategy and Distribution Leader

INTRODUCTION CREATING A LEVEL PLAYING FIELD FOR INVESTMENT PRODUCTS

Key Information Document (KID) – a “standardised and simple document giving key facts on the investment product”.

From January 2017, providers of investment products will need to give retail investors a Key Information Document (KID) – a “standardised and simple document giving key facts on the product”. The KID will need to explain clearly, in three pages, everything the potential investor needs to know to make a sound investment decision. The new rules will apply to Packaged Retail and Insurance-Based Investment Products (PRIIPs). The regulations cover not only collective investment schemes but also other ’packaged’ investment products offered by banks and insurance companies (although pensions, non-life insurance products and instruments that are directly purchased by the retail investor such as corporate shares and sovereign bonds are out of scope). The new PRIIPs regulation represents a major challenge for manufacturers and distributors of financial products right across the banking, insurance and asset management industries. The new documents will be costly and time-consuming to create and any inaccurate, out-dated or misleading information could lead to non-compliance. This white paper will: ✤✤ Explain

the history and background to the new rules out the requirements and show what products and services are affected ✤✤ Show the timeframe for implementation ✤✤ Discuss the challenges that manufacturers and distributors of financial products will need to overcome ✤✤ Make recommendations for action that will help to minimise the manual processes, lengthy data gathering and lack of automation in place at some financial institutions. ✤✤ Set

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PRIIPS - THE QUEST TO RECREATE THE KID

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PART ONE: THE BACKGROUND THE PURPOSE OF THE PRIIPS REGULATION Since the financial upheavals of 2008, the European Commission has been working on reform of the investor protection regulation with the aim of creating a safe, responsible and growth-enhancing financial sector within Europe. The PRIIPs regulation has been in the pipeline since 2009 when the European Commission put forward the first set of legislative proposals. The regulation will come into force for all EU member states in January 2017.



The main aim of the PRIIPs regulation is to protect investors and to improve transparency in the investment market.

The new PRIIPs rules are seen as a way to deliver greater transparency to the increasingly complex set of product categories within the retail investment market. Evidence suggests retail investors find it increasingly difficult to understand the components of investment products and often make investments without fully understanding the associated risks and costs. This exposes retail investors to unnecessary risk. The aim of the new rules is to protect investors and to improve transparency in the investment markets. The new key information documents (KIDs) will be uniform disclosure documents providing standardised information about financial products. This will enable investors to compare like-with-like and assess the products for suitability and value. IMPLICATIONS FOR THE INDUSTRIES INVOLVED The new rules will present a number of significant challenges for the financial services and investment sectors. PRIIPs will represent the core of the retail investment market, including investment funds, structured products (including structured deposits) and insurance-based investment products. The asset management industry has a head start because it has been dealing with Key Investor Information Documents (KIIDs) since 2011 as part of the EU rules related to UCITs (Undertakings for the Collective Investment in Transferable Securities). For the banking and insurance industries, however, this is new and has the potential to create a large amount of additional work both in producing the KIDs and in preparing for their introduction. The new regulation also contains certain ambiguities that are yet to be fully worked out and resolved. For example, complex financial structures often lie behind the packed and structured products offered to retail investors. Showing this complexity in a meaningful way that gives true insight into the likely risks and returns will be no simple matter. It is something that will need to be resolved in the Level 2 measures, which are still at the proposal stage. There are also questions as to whether standardisation of disclosure can be achieved in a way that is genuinely useful to retail investors, given the huge variety of different types of products that fall under the new regulation. There is no doubt that the scale of the impact on the industry is huge: in 2009, the European Commission estimated the PRIIPs market to be almost €9 trillion in value within the EU. There will be a strain on resources with responsibility for creating and maintaining PRIIPs KIDs while meeting rigorous standards of disclosure and accuracy.

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The costs are a concern and so are the timescales. Massive amounts of data must be captured and put into a regulatory compliant PRIIPs KID production and distribution platform. There’s no time to lose, and no better time to make a start than right now. This white paper has been created to help guide you along the arduous journey to the fast approaching go-live date of January 2017. It outlines the important steps you can take now to gain competitive advantage and be fully prepared to meet the requirements of the PRIIPs KID regulation.

PART TWO: THE REQUIREMENTS According to estimates by the European Commission, the PRIIPs market is worth €9 trillion in value.

THE PRIIPS KID REQUIREMENTS – WHAT YOU WILL NEED TO PROVIDE The regulation introduces a new form of standardised product disclosure in the form of a KID (Key Information Document). The regulation applies to PRIIPs manufacturers and anyone advising on, or selling, PRIIPs. The document must be given to the retail investor before they are bound by any contract. The KID must be: ✤✤

✤✤ ✤✤ ✤✤ ✤✤

A pre-contractual, plain language document containing specific information in relation to the product being offered A three page document, A4 size A standalone document, separate from other marketing material (so simply cross-referencing other brochures is not an option) Accurate, fair, clear and not misleading Available in the official languages, or in one of the official languages, used in the part of the Member State where the PRIIP is distributed

The rules also suggest that where complex products are being offered, a comprehension alert should be inserted in the document.

DEFINITIONS AND SCOPE A "manufacturer" is defined in the regulation as "any entity that manufacturers PRIIPs" or "any entity that makes changes to an existing PRIIP including, but not limited to, altering its risk and reward profile or the costs associated with an investment in a PRIIP." A "person selling" a PRIIP is defined as a person offering or concluding a PRIIP contract with a retail investor.

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PRIIPS - THE QUEST TO RECREATE THE KID

The PRIIPs regulation captures a broad range of products. The regulations state that a "packaged retail investment product" is an investment “where the amount repayable to the investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the investor”. An “insurance-based investment product” is an “insurance product which offers a maturity or surrender value and where that maturity or surrender value is wholly or partially exposed, directly or indirectly, to market fluctuations”.

There is no transition period and plenty of challenges to overcome.

The following non-exhaustive list of products fall within the definition of a PRIIP:

Investment funds

Structured term deposits

Life assurance-based investment products

Retail structured securities (including instruments issued by securitisation institutions and corporate bonds)

Derivatives

Convertible bonds and other structured securities embedding a derivative

There are a number of products explicitly excluded from these definitions. In summary, these include: ✤✤ ✤✤ ✤✤ ✤✤ ✤✤ ✤✤

Non-life insurance products Pure protection products (Non-structured) deposits Vanilla shares Government bonds Pension products recognised by Member States as retirement vehicles

Many providers may choose to become early adopters in the marketplace.

Delayed introduction for UCITS UCITS (Undertakings for Collective Investments in Transferable Securities) provide a single European regulatory framework for an investment vehicle. This makes it possible to market the product across the EU. UCITS are already covered by the requirement for key investor information documents (UCITs KIIDs). The new regulations therefore include a grandfathering period until December 2019 before UCITS products will be subject to the PRIIPs KID regulation. However, many providers may choose to become early adopters in the marketplace.

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PART THREE: THE CHALLENGES The KID must be available to retail investors before any contract is agreed.

NO TRANSITION PERIOD AND LIMITED TIMEFRAME FOR IMPLEMENTATION The go-live date to meet the requirements of the PRIIPs regulation is January 2017. However, the final regulatory technical standards will not be made available by the European Supervisory Authorities "ESAs" until approximately March 2016. This potentially will leave those affected with a little less than nine months to adapt their operational structure to the new regulation. There is no transition period, not much time to take action, and plenty of challenges to overcome before you can put the KIDs into operation.

PRIIPs Timeline

LEVEL 1 MEASURES

PRIIPs Regulation enters into force

ESAs publishes responses to its first Discussion Paper on PRIIPS KID

ESAs publishes responses to its second Discussion Paper on PRIIPS KID

Consultation paper on Draft Regulatory Technical Standards

Deadline for providing draft Regulatory Technical Standards to the European Commission on Articles 8, 10 & 13

Dec' 14

Feb '15

Aug ‘15

Nov ‘15

Mar ‘16

Note:

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Date of application of the regulation and Regulatory Technical Standards

Jan ‘17

The European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) collectively known as the European Supervisory Authorities (ESAs).

PRIIPS

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LEVEL 2 MEASURES

PRIIPS - THE QUEST TO RECREATE THE KID

COMPLETE

AUDIT TRAIL

IN-HOUSE LANGUAGE

SOLUTIONS COVER ALL EU TRANSLATIONS

IN SCOPE

TOTAL MANAGEMENT

OF YOUR

KIDS

KEY PRIIPS KID CHALLENGES Content of the KIDs To create content for the KIDs, the following steps are recommended: ✤✤ Analyse the products in scope ✤✤ Produce a plain language document for each ✤✤ Translate the content as necessary for use in different EU markets This will be a time consuming process, to put it mildly. You will need to follow the standard template layout, condensing the narrative of the products in scope and dealing with space restrictions – no more than three pages. Each KID should include answers to the following: ✤✤What

is this product? are the risks and what could I get in return? ✤✤What are the costs? ✤✤What happens if (X) is unable to pay out? ✤✤How long should I hold it and can I take money out early? ✤✤How can I complain? ✤✤Other relevant information ✤✤What

The KID will need to be free from jargon and complex terminology. A new methodology will be used for the Synthetic Risk Indicators (SRI) calculation – for which you may need to reconsider the data points. You will also need to gather the data points to show full transparency regarding cost disclosure. Some of these data points might be captured already. However, you may need to extract additional data points from your existing systems. To do this, you may need to create and develop new processes. Effective version control will be essential, but complex – because different KIDs and different versions of KIDs will need to be managed for a single product. You’ll need to keep appropriate records for each KID produced.

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OPTIMISE PERFORMANCE BY

PROCESS RE-ENGINEERING

AND AUTOMATION

WE HAVE HELPED PRODUCE

70% OF ALL UCITS KIIDS

IN THE MARKET PLACE

Timings

A PRIIPs KID must be produced before the PRIIP is made available to investors and must be published on the website. Regulators can demand to see the KID before you begin marketing the PRIIP. The KID must also be made available to retail investors before any contract is agreed. The regulations say it must be made ‘in good time’ but without defining exactly what this means. The KID must be kept up-to-date. If there are any changes to the PRIIP, you will need to review the KID. Conditions for updating disclosure have not yet been finalised.

Production

Many organisations will be faced with the task of producing a huge volume of documents. These will need to be well written, accurate, translated into a range of languages, following a specific format and available in both print and on websites (the regulations say that when selling PRIIPs face-to-face, paper should be the default option). Updating systems and processes will incur significant costs. You could also find yourself facing the annual update for the UCITs KIID during the implementation of the PRIIPs KID.

Data management and automation

The KID will include information from multiple internal sources. Key controls must be in place to ensure accuracy is maintained. Information within the KID must also be consistent with other product documents. Information gathering should involve robust processes to ensure full adherence to the PRIIPs regulation.

Translation

Cross-border distribution will require translation: you will need to translate the KID into at least one of the recognised languages of the Member State where the product is distributed. Translation will be time consuming but you will need controls in place to ensure it is accurate and in line with the regulations.

Dissemination

You will need to distribute the KID to a large number of recipients. It is a pre-contractual document, so it must reach the retail investor before they make a decision or commitment. You may also need to send it to various other distributors. Having an effective transmission process in place will be essential.

Notification to national competent authorities

EU Member states may require ex-ante notification of the KID to the competent authority in the host member states where the PRIIP is marketed.

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PART FOUR: RECOMMENDATIONS ACT NOW TO GAIN COMPETITIVE ADVANTAGE The deadline is fast approaching. Firms should use what time is available to consider the challenges and develop a PRIIPs compliance strategy. Those affected by the new regulations should begin by reviewing the current discussion papers released by the ESAs to understand the potential impact on operations. In addition, we recommend taking the following steps: PRIIPs preparatory steps

110010 1010101 1010010

Data and products in scope ✤✤ Classify the products in scope and determine how to produce the content of the KID ✤✤ Define where the data will come from and whether it is accurate and up-to-date ✤✤ Define responsibility for all touch points of the approval process In-house versus outsourcing ✤✤ Decide whether the data and publishing will be fully in-house or partially outsourced ✤✤ Determine whether your in-house production teams have sufficient capacity or if additional staff will be required; consider the cost implications compared with outsourcing ✤✤ If outsourcing, consider whether publishing and translation will be outsourced to one supplier or many ✤✤ If working with multiple outsourcing providers, consider how you will manage version control Costs ✤✤ Estimate workload for in-house production ✤✤ Consider resourcing requirements for the drafting and translation of the PRIIPs KID document, systems changes, training and dissemination – Do your people have the time, energy and skills needed to deal with the workload or would they be better placed concentrating on core business tasks? ✤✤ Produce costings for both in-house and outsourced options – and factor in quality, ability to deliver on time, responsiveness of service and experience when dealing with complex financial documentation

v1.0 v1.1 v1.2

Content management and version control ✤✤ Review your in-house systems for content creation, management and version control. Are they efficient? Is over reliance on word processing and spreadsheets creating bottlenecks in workflow and introducing errors into content? ✤✤ Assess more modern and efficient technologies and the impact they could make on your operations. While it is possible to manage and pre-process virtually any data files, the most efficient way to handle incoming data and final PRIIPs distribution is via XML. Choosing a provider with stable processes in place to move to XML is of utmost importance.

Don’t under-estimate the challenges of managing the production process.

✤

If outsourcing, consider whether publishing and translation will be outsourced to one supplier or many.

Distribution ✤✤ Define the distribution model – who will get KIDs and how will you send them? Do your outsourced suppliers have integrated distribution solutions to offer? ✤✤ Determine how investors will be informed about the KID 8

OVER

200 KIID CLIENTS

BUILT-IN CALCULATION

ENGINES HANDLE

RISK, REWARD &

PERFORMANCE

IN-HOUSE LANGUAGE

SOLUTIONS COVER ALL EU TRANSLATIONS

IN SCOPE

Consistency with binding pre-contractual and contractual documentation ✤✤ Consider updating related documents (sales and application materials, prospectus, etc.) which may need to refer investors to the KID ✤✤ Carry out a KID and prospectus review – Are the KID and the prospectus consistent? Service level agreements ✤✤ Consider updating Service Level Agreements (SLAs) between manufacturer and distributor to include respective responsibilities under the regulation The asset management industry learnt a key lesson during the implementation of UCITs KIIDs: don’t under-estimate the challenges of managing the production process. Significant time and effort was spent on aggregating the data, creating content and managing translations. Providing effective resourcing for this process was a critical factor.

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CONCLUSION A more transparent marketplace will enable the retail investor to regain confidence in the financial services industry.

The PRIIPs regulation will have a major impact on the marketplace and retail investors have much to gain from the introduction of the regulations. A more transparent marketplace will enable the retail investor to regain confidence in the financial services industry. There are, however, some major hurdles to overcome to meet the implementation date of January 2017. As we await the final draft of level two technical standards to be issued by the ESAs, it is important to utilise the time available to prepare for the onset of the PRIIPs regulation and meet all the necessary requirements within the given timeframe. Challenges also represent opportunities: organisations that act quickly and decisively and put in place more modern and efficient processes to handle the workload will make a stronger impression on the marketplace and earn an opportunity to seize competitive advantage and grow market share.

GLOSSARY EC

European Commission

ESA

European Supervisory Authorities

EU

European Union of x countries or Member States

KID

Key investor document (relating to PRIIPs)

KIID

Key investor information documents (relating to UCITS)

Member State

A country member of the European Union (EU)

NCA

National Competent Authority

PRIIPs

Packaged retail and insurance-based investment products

RTS

Regulatory Technical Standards

SLA

Service Level Agreement

SRI

Synthetic risk indicator (relating to PRIIPs)

SRRI

Synthetic risk and reward indicator (relating to UCITS)

UCITS

Undertakings for the collective investment in transferable securities. A public limited company that coordinates the management and distribution of funds (unti trusts, common funds and SICAVs) among European Union Member States, provided the fund and fund managers are registered within the domestic state.

XML

Extensible Markup Language

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About RR Donnelley RR Donnelley (Nasdaq:RRD) helps organisations communicate more effectively by working to create, manage, produce, distribute and process content on behalf of our customers. The company assists customers in developing and executing multichannel communication strategies that engage audiences, reduce costs, drive revenues and increase compliance. RR Donnelley's innovative technologies enhance digital and print communications to deliver integrated messages across multiple media to highly targeted audiences at optimal times for clients in virtually every private and public sector. Strategically located operations provide local service and responsiveness while leveraging the economic, geographic and technological advantages of a global organisation. As one of the first companies to specifically address the compliance communication needs of asset management, retail banking and insurance industries, RR Donnelley employs a comprehensive team specifically focused on the regulatory requirements affecting the European markets. Our range of capabilities and superior technology, combined with process improvements, optimisation solutions and production expertise, help clients stay in compliance with changing regulations, reduce total costs and optimise the preparation, production and delivery of their documents. Our composition, production, translation, delivery and results tracking offer the complete communications solution. RR Donnelley offers a fully integrated PRIIPs KID service model, which takes into consideration the evolving regulatory requirements as they surface. Being part of ALFI PRIIPs working group, we are at the forefront of the changes and a trusted participant in this process.

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PRIIPS - THE QUEST TO RECREATE THE KID

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European Headquarters: 25 Copthall Avenue, London EC2R 7BP, United Kingdom [email protected] +44 20 3047 6200 This paper is provided for general guidance and is not legal advice. You are advised to seek independent professional advice. Information contained herein may be subject to change and RR Donnelley gives no warranty regarding the accuracy of the information contained herein.

Copyright © 2015 R.R. Donnelley & Sons Company. All rights reserved.

For more information, visit our website at www.rrdonnelley.com/EMEA