Introduction to PRIPs and IMD2 TISA - 20 June 2013 Bruno Geiringer, Partner Pinsent Masons LLP PRIPs/IMD2/RDR interaction EU Commission s legislative package aimed at rebuilding consumer confidence in financial markets Part of wider package of reforms from the EU Commission PRIPs Regulation and IMD2 (in addition to UCITS V) A new pan-eu pre-contractual product disclosure document for PRIPs called the KID Some cross-over between IMD2 and PRIPs in relation to insurance investment products 1
What are PRIPs? A PRIP is a product where the amount payable by the investor is exposed to fluctuations in the market value of assets or payouts from assets, throughh acombination or wrapping of those assets, or other mechanisms than a direct holding (European Commission proposed definition in November 2010 consultation) they are investment products marketed to retail investors; within which any returns are exposed to fluctuations in value; and such exposure is derived from some form of packaging or an indirect holding of the investment. What are PRIPs? (continued) Some examples: Life insurance policies and pensions packaged as investments All investment funds (closed/open-ended) Structured products (securities and deposits) Derivative instruments Key exceptions: Di tl h ld h /b d Directly held shares/bonds Pure protection (including GI and term assurance) products (no surrender value) 2
Why is legislation necessary for PRIPs? Significant uncertainty about purpose of the KID Retail investors Risk magnified by PRIPs being manufactured Information asymmetry Conflicts of interest Uncoordinated existing regulation (UCITS/IMD/MiFID) Rules derive from regulations with varying focus Non-uniform requirements for range of PRIPs Increased likelihoodlih of investor detriment t PRIPs Regulation to be directly applicable and be even level of investor protection Proposed PRIPs disclosure regime Key Information Document (KID) Regulation for PRIPs KID is a pre-contractual disclosure document that all retail investors in PRIPs should receive when considering investment Consolidation of existing disparate rules on form and content Technical standards/implementing legislation to set out detailed requirements for the various types of PRIP Product manufacturer, or person making significant alterations to its key features, responsible for the KID 3
Proposed PRIPs timeline This year - EU council and Parliament to consider proposals for the Regulation on KIDs for PRIPs under co-decision procedure e 23 October 2013 indicative date for plenary vote Mid 2015 likely implementation date for the Regulation on KIDs for PRIPs PRIPs what is the likely impact? Legal/compliance sign off of KIDs in advance of implementation date Increased competition more info provided to customers and customers better able to compare features of different products/providers Large number of KIDs keeping up to date data quality will be key. Important to have strong processes in place. System changes? Extensive staff training will be required producing/managing g g KIDs 4
IMD2 Insurance Mediation Directive under review ( IMD2 ) applies to the distribution of GI and life products 3 July 2012, EC published proposals for IMD2 to improve consumer protection, market integration and competition IMD2 likely to have greater impact on general insurers than life insurers, especially for remuneration disclosure MiFID-style sales standards for investment insurance products but limited impact on life insurers due to RDR IMD2 (continued) Key changes under IMD2: Inclusion of direct sales by insurers within scope in addition to insurance intermediaries Intermediaries including tied intermediaries must disclose nature of their remuneration under the insurance contract: fee/commission based? full amount? whether the commission is target based? Insurers and intermediaries must disclose if employees receive variable remuneration based on sales Simplified process for cross-border entry to insurance markets 5
IMD2 (continued) IMD2 to include rules on sale of insurance PRIPs that are consistent with MiFID position on conflict of interest and conduct of business Some member states believe all mediated insurance sales should involve advice Art 25 - Assessment of suitability requirements will apply to nonadvised/execution-only sales: Determine extent of customer s knowledge/experience of the relevant investment field Warn customer if product/service is not considered appropriate in consideration of customer s knowledge/experience IMD2 what is the likely impact? Execution-only sales new assessment test requirement is this workable? Ban/restriction on non-advised sales in some member states Ban on tying Requirement will extend IMD2 to insurers/reinsurers Remuneration disclosure - impact on GI increase cost Remuneration disclosure - timing delay for GI - views polarised across EU member states New sales requirements placing insurance investment products at a disadvantage to non-insurance? Training on new rules will be vital to ensuring compliance 6