Reviewing the Key Information Documents (KIDs)Salvus Team
In January 2018 two upgraded frameworks were introduced – the Markets in Financial Instruments Directive (MiFID) II and the regulation of Packaged Retail Investment and Insurance-based Products (PRIIPs).
The MiFID II concentrates on investor protection, and the Key Information Documents (KIDs) under the PRIIPs regulation aim to define the pre-trading rules of each investment product for the retail investors to make informed investment decisions. The KIDs must be clearly distinguished and separated from any marketing materials. The details of the KIDs provided by the product manufacturers to the distributors must be published on their website. Despite the fact that the KIDs are under a separate regulation of MiFID II, they complement the enhanced product governance, the appropriateness assessment and the best execution responsibilities of the investment firms.
CySEC released – for the first time since the KIDs requirement introduction a year and a half ago – their findings for their implementation by investment firms (CIFs) in Cyprus. By publishing their findings, the regulator aims to ensure all firms act in compliance and in accordance with the law. In this article we discuss the results of the review and provide tips for the firms to ensure compliance with the PRIIPs regulation.
Findings related to the format and language used
It is identified that firms do not publish a separate document for each investment product, while the size of the document and language used does not meet the PRIIPs regulation.
Compliance Tip 1: The retail investors can make an informed decision on the product about to be traded only once complete information is available to them. This information includes the assumed risk and the related costs. Thus, it is important for the firms to publish a comprehensive document that includes this information for each asset class and to clarify the peculiarities of each investment product. All these must be presented within a maximum of three A4 pages for each product.
Compliance Tip 2: The investors must be able to read the key information document in the official language of the member state they reside. Therefore, the distributor must translate the key information documents in these languages. This is to ensure investors understand the information presented.
Findings related to the content provided
The purpose of producing the document and the product details must be explicitly mentioned on each KID, while the content of the document should not be part of any marketing or promotional activity.
Compliance Tip 3: Firms must disclose that
the purpose of the document is to help the investor understand the nature, risks, costs, potential gains and losses of the product about to be purchased and allow the investor to compare it with other products.
Then, the investment product name, type and its specifics shall be mentioned along with the distributor (provider) details.
It is important to provide all the appropriate warnings in relation to the product, as some investment products offered are complex and thus difficult to be understood. Such a warning could explain to the investors that they should have high-risk tolerance and they may lose 100% of their capital.
In addition to providing information on the risks involved, the investors should also be presented with information on the upside potential of each product.
Compliance Tip 4: In summary
– the relevant risk indicators must be explained within the document as the investor may lose the entire investment 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 loses
– a stress scenario representing an extreme adverse scenario for the investor.
The Investor Compensation Fund (ICF)
CIFs have the responsibility to make reference to the Investor Compensation Fund (ICF) within the key information document, as the investors need to be aware of how they can be covered in case the firm is unable to pay them.
Compliance Tip 5: The upgraded legal framework of the investor compensation fund was published mid of March 2019, thus firms need to update their key information documents where appropriate.
CIFs must explicitly state the direct and indirect costs related to the investment product, including the one-off costs as well as the recurring costs.
Compliance Tip 6: The total costs must be expressed in both monetary and percentage terms in order 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 they can hold an investment product and what happens upon withdrawal.
Compliance Tip 7: The document must explain if there is a cooling off or cancelation period along with the relevant fees or penalties if any. Further, a reference on the withdrawal procedure and conditions shall be made within the document.
It is important for investors to be informed on how they can lodge a complaint in case they are dissatisfied by the services provided by the firm.
Compliance Tip 8: The postal and email address to which complaints can be submitted must be included in the key information document. Further, the firm shall direct clients to the relevant sections of their website to submit their complaints. In case the decision of the complaint does not satisfy the complainant’s demands, the investor may maintain the complaint through the Financial Ombudsman.
In concluding, the regulator urges firms to review their key information documents and ensure they are in alignment with their policies and arrangements. The regulator further stresses that firms not complying with the regulatory requirements will encounter enforcement actions.
Feel free to ask any question or clarification at [email protected] Also, read our previous article for more on 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.