Legal Updates

On 24 May 2023, the European Commission published its much-anticipated Retail Investment Strategy (Strategy) which proposes significant changes to a number of European directives including the MiFID Directive and the Insurance Distribution Directive, as well as proposing targeted changes to the UCITS and AIFMD frameworks in the area of undue costs[1].

As part of the Strategy, the European Commission has also proposed targeted changes to the PRIIPS Regulation which are intended to improve information for investors and their ability to take well-informed investment decisions as well as adapting disclosures to the digital environment[2].

In this briefing, we provide a brief overview of some of the key proposed changes to the PRIIPS Regulation which are likely to be of relevance to in-scope investment funds.

Additional sustainability-related disclosures

The Commission has proposed that the PRIIP KID contain a specific section titled “How environmentally sustainable is this product” which is intended to complement the existing EU sustainable finance disclosure framework.

Under the proposals, all in-scope funds will be required to disclose the minimum proportion of investments in taxonomy-aligned investments as well as the expected greenhouse gas emissions intensity associated with the relevant fund.

The approach taken by the European Commission in this regard is somewhat surprising for the following reasons:

• The proposed disclosures do not align with the concept of “sustainability preferences” which is relevant to the MiFID II suitability assessment process;
• Under the SFDR, many funds categorise themselves as falling within the scope of Article 8 or Article 9 of the SFDR on the basis that they either promote one or more social characteristics or they invest in sustainable investments which contribute to a social objective. The proposed disclosures put forward by the European Commission are much narrower in focus and only allow funds which are environmentally sustainable to disclose information in the sustainability section of the PRIIPS KID; and
• The European Commission notes in the Strategy that the proposed amendments to the PRIIPS Regulations “complement” the SFDR and should avoid “additional reporting costs”. However, there is no existing obligation on funds to disclose the expected greenhouse gas emissions intensity associated with their portfolio under the SFDR, yet this is now information which it is proposed be provided to investors in the PRIIPs KID.

While this may indeed be a deliberate policy decision on the part of the European Commission to encourage investment in Taxonomy-aligned activities, if implemented as proposed, ESG funds which contribute to a social objective or otherwise invest in sustainable investments which are not Taxonomy-aligned may be left at a significant disadvantage. The inconsistencies with the MiFID rules on sustainability preferences would also seem to be problematic.

New Dashboard of Key Information

The European Commission has proposed that the PRIIPs KID should include a dashboard of key information entitled “Product at a glance” on the first page. This dashboard is intended to assist investors in understanding the key characteristics of the relevant fund and will include information on the following:

• The summary risk indicator;
• A “Total Costs” figure;
• The recommended holding period for the relevant fund; and
• A statement that the fund does not offer any insurance benefits.

Adapting Disclosures to a Digital Environment

The European Commission has proposed that the PRIIPS KID must be provided in electronic format unless the retail investor requests a paper copy.

In order to allow the investor to fully benefit from the provision of the PRIIPs KID in an electronic format, the proposed amendments also provide for the possibility of “personalisation” on the part of the investor to allow them, using an online tool, to personalise information such as the holding period in order to simulate expected costs which should facilitate their understanding of the fund in question. In order to reduce the “visual overload” of retail investors and to facilitate their understanding of the relevant fund, the Commission has also proposed that the information contained in the PRIIPS KID can be presented in “layered” format. In such circumstances, the dashboard of key information must appear in the first layer.

Obligation to review the PRIIPS KID

The European Commission has suggested that the existing review provisions should be revised to address the scenario where a PRIIPS KID is no longer made available to retail investors.

Conclusion

The legislative proposals put forward by the European Commission must now be considered by the European Parliament and the Council of Europe. Many fund management companies will be monitoring the progress of the legislation carefully given the approach taken by the European Commission in the area of sustainability-related disclosures.

We will keep you updated on relevant developments however in the meantime, if you have any questions arising from this briefing, please get in touch with any of the authors or your usual contact in Dillon Eustace.

Footnotes:

[1] For an overview of what may change for UCITS management companies and AIFMs in the area of costs and fees if the targeted changes to the UCITS and AIFMD rules are implemented in the manner proposed in the Strategy, please refer to our separate briefing on this topic.

[2] This follows a call for advice from the European Commission to the ESAs in July 2021 on proposed amendments to the PRIIPS Regulation which culminated in the ESAs issuing their recommendations in a final report published in April 2022.