What Are Packaged Retail Investment and Insurance-Based Products?
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.
Understanding Packaged Retail Investment and Insurance-Based Products (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.