Two key pieces of regulation that impact how firms demonstrate transparency to clients when interacting with them throughout the lifecycle of a relationship, went live this week: Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation and the Markets in Financial Instruments Directive II (MiFID II) which became effective across EU member states on 1 January 2018 and 3 January 2018, respectively.
Broadly both regulations aim to increase investor protections, by ensuring that investors can better understand and compare the key features, risks, rewards and costs of different products. The key overlap between the two regulations and their common purpose to offer increased transparency to investors in respect of the various services offer by firms.
PRIIPS and MiFID II apply to manufacturers of products, and those who advise on, or sell financial products to their clients. A PRIIPS manufacturer will be required to prepare a Key Information Document (KID) for each PRIIP produced and then publish the KID on its website in a durable format (e.g. Excel, PDF, Word etc.). This requires the firm to undertake a detailed analysis of the costs and charges in respect of their services and to be transparent about the cost of each aspect of the product. Running alongside PRIIPS requirements, MiFID II requires that in-scope firms provide potential and existing clients appropriate details of all costs and charges within good time of purchasing a product or service, both before investing (Ex-Ante) and after purchase, trade or settlement and periodically (Ex-Post). This means that effective processes for the publishing and communication of costs and charges will have to be established, directly impacting product manufacturers (i.e. those who create, develop, issue or design products, including when advising corporate issuers on the launch of a new product).
Illustrations also need to show the cumulative effect of costs on the return from investments. The disclosures have to be provided to prospective and existing clients, which include:
- one off costs;
- ongoing costs (transaction costs incurred when trading);
- incidental costs (performance fees)
Firms should therefore not consider the two regulations in isolation; they are intended to be complementary. We would advise that if firms have not already done so, they should look jointly at their response to the challenges posed by both PRIIPS and MiFID II and try to dovetail any resulting changes in the business, or changes required to investor disclosure.
We have been working with a number of our clients on ways in which they can implement both PRIIPs and MiFID II, so please get in touch with a member of our
Regulatory Consulting team.