EU PRIIPs Regulation – Impact on EU and Non-EU Fund Managers

Application to EU and Non-EU Fund Managers

A PRIIP is an investment where, regardless of its legal form, the amount repayable to the retail investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets that are not directly purchased by the EU retail investor. An investment fund share or unit would typically be classified as a PRIIP.

Although certain investment funds, in particular alternative investment funds, are typically marketed only to professional investors, EU retail investors might nonetheless be invested in such funds. This could be the case where, for example, nominee vehicles in the name of EU private banking or wealth management firms invest in the fund on behalf of beneficiaries that are EU retail investors.

Although the PRIIPs Regulation is not explicitly stated to apply to non-EU fund managers, a communication² from the European Commission states that the PRIIPs Regulation will apply to all PRIIP manufacturers, including non-EU manufacturers, if the PRIIP is made available to EU retail investors. The UK Financial Conduct Authority (FCA) has confirmed that, subject to further clarification from the EU authorities, a non-EU manufacturer of a PRIIP will be required to produce a KID.³  

What is a ‘Retail Investor’?

A retail investor, for purposes of the PRIIPs Regulation, is a ‘retail client’ as defined under MiFID II;⁴ in essence, a retail client is any client that is not a professional client. ‘Professional client’ is in turn defined under MiFID II to mean certain clients that are professional by their status (e.g., financial institutions, pension funds, governments, central banks and certain large entities), or retail clients that elect (or ‘opt-up’) to be treated as professional clients.

In order for retail clients to be classified as professional clients, they must be assessed as having expertise, experience and knowledge such that they are capable of making the relevant investment decisions and understanding the risks involved.

It should be noted that, under MiFID II, local authorities will be classified as retail clients rather than professional clients. This presents a particular issue for fund managers that have UK local authority pension funds as investors in their funds. Pension funds would typically be classified as professional clients by their status (see above). However, in the UK, a local authority pension fund is not separate from the local authority itself, and so would fall under the retail client categorisation of the local authority. Accordingly, a UK local authority pension fund would be a retail investor for the purposes of the PRIIPs Regulation, unless it opts-up to be treated as a professional client.⁵ 

Obligations of PRIIPs Manufacturers

The manufacturer of a PRIIP has the legal obligation to produce the KID. A fund manager would be considered to be the ‘manufacturer’ of its funds; accordingly, to the extent that a fund is made available to EU retail investors, the relevant fund manager will be required to produce a KID for that fund.

Separately, any person advising on, or selling, a PRIIP to EU retail investors must provide a KID to those retail investors. Such a person might be the fund manager itself, or any distributor of the fund. This will include EU financial institutions that are advising, or otherwise acting for, EU retail investors.

Application to Existing Retail Investors

The PRIIPs Regulation is not entirely clear on whether KIDs need to be provided to existing EU retail investors in a fund. The prevailing market view is that KIDs only need to be provided to existing investors where such investors make new investments from the time the PRIIPs Regulation applies; i.e., from January 1, 2018. Equally, a KID would need to be provided to any new EU retail investors investing in new or existing funds from January 1, 2018.

Steps to Take

Fund managers that do not wish to prepare a PRIIPs KID will need to ensure that any EU retail investors already invested in their funds either make no further investments beyond January 1, 2018, or (where possible) opt-up to be treated as professional clients before making any further investments. Such fund managers may also wish to consider amending their offering and subscription documents to make clear that the fund is available only to professional clients (including beneficiaries of investments made by such professional clients).

Fund managers that wish to continue to receive investments from EU retail investors from January 1, 2018 onwards will need to produce a KID in accordance with the PRIIPs Regulation. Fund managers that are required to prepare KIDs will need to publish the KIDs on their websites. Such managers should work with institutions distributing their funds (including institutions that invest as nominees for underlying EU retail investors) to coordinate the KIDs process, including establishing whether there is a need to translate the KID into the national language of the investor.

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¹ Delegated Regulation (EU) 2017/653 can be found at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R0653&from=EN.

² See Commission Communication 2017/C 218/02: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52017XC0707(02)&from=EN.

³ See FCA Policy Statement PS17/6: https://www.fca.org.uk/publication/policy/ps17-06.pdf.

⁴ See Sidley Update: MiFID II – Implications for EU and Non-EU Investment Managers (updated May 2017).

⁵ The UK FCA rules contain a specific regime for ‘opting-up’ UK local authority pension funds.