The problem with KIIDs?

9 Jan 2018

Much like the piece of paper you find in any pack of medicine, the KIID documents were meant to be something that the investors could read before investing in order to check that the investment fund in question would suit their needs. They were meant as a document to be consulted independently of what an investment adviser might tell you.

The good old-fashioned KIIDs were put in place back in 2011 and have not been revised since then. Compared to today’s standard, they are woefully incomplete. KIIDs omit a significant part of the costs involved, they do not lay out which customer segment and risk profile a given fund is targeting, they do not contain a “recommended holding period”. Alternative Investment Funds were sort-of not subject to the regulation. KIIDs are usually produced only once a year. And so on.

The PRIIPs KID regulation introduced in 2018 was meant to correct several of the weaknesses in the KIID document. In particular the new KIDs were meant to cover a far larger selection of “pre-packaged” investment products: AIFs, structured products and life insurances with an investment content were now to be covered by the obligation to inform the clients about the risks and the costs.

While the financial sector largely managed to produce the documents for the new products by the deadline, the UCITS was a quite different story. UCITS funds had a 2-year derogation, meaning that only at the beginning of 2020 such funds would have to publish the new, far more detailed KIDs (Between you and I, UCITS is short for Undertaking for Collective Investments in Transferable Securities or plain vanilla investment funds).

Successful lobbying on the part of the fund industry did, however, in late 2018 lead to a further two-year delay in introducing the new documents. The bread-and-butter product of the investment industry got away with not publishing key information about costs and risks.

Or did they? The PRIIPs KID regulation and the MiFID 2 are two separate regulations. While the UCITS fund industry escaped the demands for enhanced transparency contained in the PRIIPs KIDs, they are still subject to very nearly the same demands from the MiFID2 regulation.

It means that an investment advisor must provide the same information to the client that would otherwise have been contained in a PRIIPs KID. Per the MiFID 2, this information must be provided prior to the investment decision, and it must be documented that the client has received the information.

But how should the investment advisor provide this detailed information when no PRIIPs KID is produced for a UCITS fund?

In most countries this is solved by the fund manufacturers providing a file to the investment advisors, the so-called EMT – European MiFID Template. The investment advisor is then by MiFID 2 obliged to present the information contained in the EMT in a “human-readable” form to the client. The client must confirm the receipt of this information before investing.

This means that “only” clients who decide on an online investment in a UCITS fund are not protected by the requirement to the fund manufacturer to provide the enhanced information. To help those clients, some – but far from all – fund manufacturers have chosen to modify the KIIDs with better cost information.

To continue the analogy of self-medication: if you go to the pharmacy and buy a product, the information sheet in the package has the form it has had since 2011. But if you see your generalist, and he recommends the same product, he is obliged to give you the better information.

Be aware of possible conflicts of interest. If the investment advisor is also the fund manufacturer, they may “forget” to provide the information contained in the EMT.

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