Packaged Retail Investment and Insurance-Based Products (PRIIPs)

What Are Packaged Retail Investment and Insurance-Based Products?

The term packaged retail investment and insurance-based products (PRIIPs) refers to a category of financial assets that are regularly provided to consumers in the European Union (EU) through banks or other financial institutions as an alternative to savings accounts. For regulation's sake, the category is intentionally broad and is intended to cover all packaged, publicly marketed financial products that have exposure to underlying assets—stocks, bonds, etc.—that provide a return over time, and have an element of risk. This essentially covers all packaged retail investment products marketed in the European Union, including insurance policies.

Understanding Packaged Retail Investment and Insurance-Based Products (PRIIPs)

As mentioned above, packaged retail investment and insurance-based products are investment vehicles that banks and other financial institutions offer retail investors in the European Union.
Some of the products that are offered as part of the PRIIPs package generally include stocks, bonds, insurance policies, as well as structured funds, structured deposits, and other structured products.

PRIIPs are normally offered when a consumer wants to achieve a specific financial goal. This may be to put toward a child's education or to buy a home. The market for PRIIPs in Europe is worth roughly 10 trillion euros, according to the European Commission.

According to the commission, these packaged products can be difficult to understand and can have problems with transparency. Institutions that sell these packaged products may provide information that's far too complicated, with too much industry information. This can make it challenging for investors to compare them to other products. The commission also points out to potential conflicts of interest, as the banks and institutions may push vehicles in order to make sales, rather than being in the best interests of their clients. As a result, new regulations were put into place as of 2018.

Special Considerations

PRIIPs regulations, in effect as of Jan. 1, 2018, set out new calculation methodologies and transparency requirements for such investment products across the EU. The decision to regulate PRIIPs was made as a result of surveys and consultations conducted by the European Commission, which found that retail investors across the EU often made investments without understanding the associated risks and costs, some of which led investors to suffer unforeseen losses.

By aiming to provide clarity about investment products being purchased, the regulation hopes to protect retail investors by allowing for better direct comparison between different products that meet a retail investor’s stated aims, such as understanding the difference between using a stock fund versus a bond fund to accumulate capital for a down payment on a house. When it introduced the regulations in 2014, the commission estimated the size of the PRIIPs market affected by these regulatory changes to be worth roughly 10 trillion euros.

The new regulations require investment product manufacturers—for example, a fund provider—to create key information documents (KIDs) for their products. These documents must be no longer than three pages and must contain outlined information, including a general description of the provider, an explanation of the main factors that the investment's return depends upon, the level of risk associated with the product (classed from 1 to 7), an indication of the possible maximum loss (including four performance scenarios), and a table explaining the costs of one's investment over time. The commission also stated that the regulation requiring standardized and simplified key information documents may be extended to other financial products beyond PRIIPs.