Packaged Retail Investment and Insurance-Based Products - PRIIPs

What are 'Packaged Retail Investment and Insurance-Based Products - PRIIPs'

Packaged retail investment and insurance-based products (PRIIPs) make up a broad 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. The category, for regulation's sake, is intentionally broad and is intended to cover all packaged, publicly marketed financial products that have exposure to underlying assets (stocks, bonds, etc.), provide a return over time, and have an element of risk. Essentially, this covers all packaged retail investment products marketed in the European Union, including insurance policies.

BREAKING DOWN 'Packaged Retail Investment and Insurance-Based Products - PRIIPs'

The term PRIIPs, created by the European Commission to regulate the underlying market, is defined as any product that is manufactured by the financial services industry, to provide investment opportunities to retail investors, where the amount repayable is subject to fluctuation because of exposure to reference values or the performance of underlying assets not directly purchased by the retail investor. As such, the PRIIPs umbrella includes, among other things, investment funds, life insurance policies with an investment element, structured products and structured deposits. It does not, however, include occupational pension schemes, direct investments (such as specific shares of a company or sovereign bonds), investment products for professional investors and life insurance products with no investment options to retail investors.
 

PRIIPs Risks and New Regulations

PRIIPs regulations, in effect as of January 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 had 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.

PRIIPs and Key Information Documents

The new regulations require investment product manufacturers - for example, a fund provider - to create key information documents (KIDs) for their products. Such documents must be no longer than three pages and must contain an outlined set of 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 has also stated that the regulation requiring standardized and simplified key information documents may be extended to other financial products beyond PRIIPs.