Shearman & Sterling LLP | FinReg | UK Regulator Finalizes Rules On Scope Of PRIPPs
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  • UK Regulator Finalizes Rules On Scope Of PRIPPs

    Following its consultation last year, the U.K. Financial Conduct Authority has published its final policy and rule amendments on the scope of the rules governing packaged retail and insurance-based investment products (or PRIIPs). The FCA had aimed to bring in the new rules by January 1, 2022. Instead, the final rules and Regulatory Technical Standards will apply from March 25, 2022. Firms will have until December 31, 2022 to apply the new requirements. These changes are designed to bring legal certainty to the scope of the PRIIPs regime, as it applies to corporate bonds, and mitigate risks relating to misleading performance scenarios and summary risk indicators and concerns about the transaction costs calculation methodology. It is hoped that the amendments will promote liquidity and improve choice in the retail corporate bond market, and also reduce the complexity of key information documents (or KIDs), the key information disclosure documents that must accompany PRIIPs when they are made available to retail investors.

    The U.K. PRIIPs regime is based on the EU PRIIPs Regulation and RTS, which the U.K. onshored with minor amendments following its exit from the European Union. The main U.K. legislation is the onshored U.K. PRIIPs Regulation and the Technical Standards. The U.K. Financial Services Act 2021 made some amendments to the U.K. PRIIPs Regulation, the combination of which has led to differences between the EU and the U.K. PRIIP regimes. The FCA was granted a new power to make rules specifying whether a product or product category falls within the definition of a PRIIP. In addition, performance scenario requirements were replaced with a more flexible requirement for "information on performance" to address industry concerns that in certain circumstances performance scenarios could be misleading.

    The changes being made by the FCA are to:
    • Introduce rules to clarify the scope of the U.K. PRIIPs Regulation for corporate bonds

    The FCA is proceeding with the changes as consulted on, which are detailed in our client note, the UK PRIIPs Review. The FCA has also included its view on whether certain products are in scope of the PRIIPs Regulation. The FCA confirms that it will work closely with HM Treasury on the comprehensive review of the disclosure regime for U.K. retail investors.
    • Create guidance on what it means for a PRIIP to be "made available" to retail investors.

    Under the PRIIPs Regulation, issuers must produce a KID whenever PRIIPs that they are issuing are "made available" to U.K. retail investors. There was some ambiguity in terms of the meaning of "made available," which led some firms to produce a KID even where they do not intend to sell the product to retail investors, to avoid inadvertently falling foul of the rules. To combat this, the FCA has published new guidance (unchanged from that which it consulted on) setting out the conditions in which a PRIIP will not be "made available" to retail investors, namely:
    • it is clear from the marketing materials, including the prospectus if there is one, that the financial instrument is only being offered to "investors eligible for categorization as professional clients or eligible counterparties under the FCA's rules," and is not intended for retail investors;
    • the issuer and, for the secondary markets, the distributor take reasonable steps to ensure that the financial instrument is targeted at only investors eligible for categorization as professional clients and eligible counterparties; and
    • the financial instrument has a denomination or minimum investment of £100,000.
    • Amend the U.K. PRIIPs RTS, which set out the detailed information that must be included and the methodologies for calculating and presenting the information, to
    • replace the requirements and methodologies for presentation of performance scenarios in the KID with a requirement for narrative information on performance to be provided;
    • remove the potential for some PRIIPs to be assigned an inappropriately low summary risk indicator in the KID; and
    • tackle concerns about the 'slippage' methodology when calculating transaction costs.
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