I. INTRODUCTION
The law of 17 April 2018 on key investor documents for packaged retail and insurance-based investment products (the “2018 Law”) was published in the Mémorial A on 19 April 2018 and entered into force on 23 April 2018. This law provides for additional rules to those of Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance based investment products [1] (the “PRIIPs Regulation”), which the EU Member States were required to integrate in their respective national systems.
In Luxembourg, the three main industries that are directly or indirectly concerned by the PRIIPs Regulation are the insurance, investment funds and banking sectors.
The main purpose of the PRIIPs Regulation is to enable retail investors to receive better, uniformed and more transparent information on the products that are proposed to them, which can be complex and difficult to understand. This information is contained in standardised pre-contractual disclosure documents entitled “Key Investor Document” (“KID(s)”) which must be drawn up by PRIPs manufacturers (e.g., fund managers, insurance undertakings, credit institutions and investment firms) within the European Union (“EU”) according to the specifications laid down in the PRIIPs Regulation. Furthermore, new obligations are imposed on the persons selling PRIIPs to retail investors and those advising on such products.
The measures contained in the PRIIPs Regulation have been adopted in response to the financial crisis, in parallel with other sets of rules developed at European level, such as directive 2014/65/EU on markets in financial instruments [2] (“MiFID II”) and directive (EU) 2016/97 on insurance distribution (recast) [3] (“IDD”). The PRIIPs Regulation also shares some similarities with the KIID (key investor information document or “KIID(s)”) regime that was introduced for undertakings for collective investments in transferable securities (“UCITS”) by directive 2009/65/EC [4] (the “UCITS Directive”).
The PRIIPs Regulation has been supplemented by a series of explanatory documents, such as:
Commission delegated regulation (EU) 2017/653 [5], which contains some information on the presentation and content of the KIDs (the “Delegated Regulation”);
guidelines prepared by the European Commission in July 2017 [6] regarding the application of the PRIIPs Regulation (“EC Guidelines”); and
a questions & answers document published by the European Supervisory Authorities (“ESAs”) published in July 2017 and last updated in November 2017 (“Q&A”).
II. SCOPE OF THE PRIIPS REGULATION
1. Material scope
The scope of the PRIIPs Regulation encompasses products which are manufactured (i.e. whereby certain assets are wrapped together as a result of a “packaging” process) before they are offered to retail investors.
According to article 4(1) of the PRIIPs Regulation, these “packaged products” (known as “PRIIPs”) can be of two kinds:
packaged retail investment products, which are investments [7] where, regardless of their form, the amount repayable to the investor is subject to fluctuations because of exposure to reference values or to the performance of one or more assets which are not directly purchased by the investor (e.g., securities of investment funds or structured products or deposits); or
insurance-based investment products [8], which are insurance products that offer a maturity or surrender value, where such value is wholly or partially exposed, directly or indirectly, to market fluctuations (e.g., life insurance policies with an investment element).
Article 2 of the PRIIPs Regulation further provides for a number of exemptions relating to certain categories of products (such as (i) any assets that can be directly held by investors (e.g., shares of companies and sovereign bonds) instead of being held through the PRIIP, (ii) deposits other than structured deposits, (iii) non-life insurance products, (iv) life insurance contracts where the benefits under the contract are payable only on death or in respect of incapacity due to injury, sickness or infirmity, (v) officially recognised occupational pension schemes, and (vi) individual pension products for which a financial contribution from the employer is required by national law and where the employer or the employee has no choice as to the pension product or provider).
2. Personal scope
The PRIIPs Regulation applies to “PRIIP manufacturers” and “persons advising on, or selling, PRIIPs” to “retail investors”. The content of these three notions is of key importance to determine which persons are concerned by the new rules and can be summarised as follows:
A “retail investor” is either (i) a retail client within the meaning of MiFID II, as opposed to a professional client [9] (such as credit institutions, pension funds, some large undertakings, national and regional governments), or (ii) a customer within the meaning of IMD, as long as it does not qualify as a professional client under MiFID II. [10] Consequently, investments funds that are not available to retail customers but only dedicated to institutional investors are not concerned by the PRIIPs rules.
A “PRIIP manufacturer” is any entity that manufactures PRIIPs or any entity that makes changes to an existing PRIIP (e.g., by altering its risk and reward profile or the costs associated with an investment in a PRIIP).
A “person selling a PRIIP” comprises any person offering or concluding a PRIIP contract with a retail investor. [11] However, the PRIIPs Regulation does not provide for any definition of “person advising on a PRIIP”.
These categories are not exclusive of each other as a PRIIP manufacturer can also be the person advising on a PRIIP or the person selling a PRIIP, if it carries on any of these activities directly to retail investors.
3. Territorial scope
The PRIIPs Regulation applies as soon as a PRIIP is made available to retail clients who are located within the European Economic Area (“EEA”), even if the PRIIP manufacturer is located in a country other than a Member State of the European Economic Area (a “Third Country”). [12]
4. Temporal scope
The PRIIPs Regulation is applicable as from 1 January 2018.
Nevertheless, the application of its provisions is delayed until 31 December 2019 in relation to undertakings for collective investment in transferable securities (“UCITS”). Therefore, self-managed UCITS, UCITS management companies, and the persons advising on, or selling, securities issued by UCITS are currently not subject to the obligations relating to KIDs. This transition period was justified by the fact that the UCITS Directive already contains rules regarding the preparation of KIIDs whose content and form are akin to those of KIDs under the PRIIPs Regulation. Similar provisions are also available under the PRIIPs Regulation in case of non-UCITS funds offered to retail investors, insofar as they are required to publish documents complying with the rules applicable to KIIDs under the UCITS Directive. [13]
On 31 December 2018, the European Commission will perform a review of the PRIIPs Regulation and among other things, will assess whether the transitional period available for UCITS and non-UCITS funds complying with the KIID rules should be extended or whether other rules should be adopted in this respect.
III. DRAFTING OF KIDs
The most important requirement imposed by the PRIIPs Regulation consists in the drafting of KIDs by PRIIP manufacturers before the PRIIPs are marketed to retail investors. [14]
KIDs must contain all pre-contractual information regarding a PRIIP, whose disclosure to retail investors is required by the PRIIPs Regulation. Such information must be accurate, fair, not misleading and the language and style used by the PRIIP manufacturer must be easily understandable by retail investors. The KID must also be consistent with the other documents relating to the PRIIP (such as a prospectus or the terms and conditions of the PRIIP).
From a drafting perspective, the KID must be drawn up in the standardised format imposed by the PRIIPs Regulation and the Delegated Regulation. In particular, the following requirements concerning its structure and content must be complied with by each PRIIP manufacturer:
A KID must be drafted as a stand-alone document which does not exceed three pages under the A4 format. [15] If this is not possible because of the wide range of investment options offered by a PRIIP, the KID must include at least a generic description of the underlying investment options and an indication as to where more information regarding the PRIIP can be found. [16]
The KID must comply with the language requirements defined in the PRIIPs Regulation. [17]
The title “Key Information Document” must appear prominently at the top of the first page of the KID.
The beginning of the document must state the name of the PRIIP, the identity and contact details of the PRIIP manufacturer, information about the competent authority of the PRIIP manufacturer and the date of the document.
Each KID must include an explanatory statement imposed by the PRIIPs Regulation, which must appear directly underneath the title of the document. [18]
Where a PRIIP appears to be difficult for investors to understand, the KID must contain a warning in that respect. [19]
A KID must comprise eight sections in total, whose content and title are defined in the PRIIPs Regulation and the Delegated Regulation.
PRIIP manufacturers are responsible for the content of the KIDs that they have elaborated. Therefore, they must ensure that the information contained therein remains accurate and, where appropriate, will have to revise it and make the updated KID available promptly to retail investors. [20]
If it is impractical for the manufacturer to draw up the KID, this task may be delegated to a third party. [21]
IV. DISSEMINATION OF KIDs TO RETAIL INVESTORS
Once the KID has been drawn up by the PRIIP manufacturer, the following additional steps must be complied with before this document is made available to retail investors:
The PRIIPs Regulation does not grant an EEA passport for the marketing or sale of PRIIPs. As permitted by the PRIIPs Regulation, the authorities which are competent in Luxembourg to ensure compliance with the PRIIPs Regulation (namely the Financial Sector Supervisory Authority (Commission de Surveillance du Secteur Financier or “CSSF”) and the Insurance Commission (Commissariat aux Assurances or “CAA”)) can decide whether or not KIDs should be notified to them in advance. [22]
The KID must be published on the website of the PRIIP Manufacturer. [23]
Once these conditions are met, any person advising on or selling a PRIIP (or their intermediaries) are allowed to provide any potential retail investor with the relevant KID, free of charge and in compliance with the rules set out in the PRIIPs Regulation.
From a formal point of view, the KID must be disseminated under any of the formats authorised by the PRIIPs Regulation, namely (i) on paper, if the PRIIP is offered on a face-to-face basis (unless the investor requests otherwise), (ii) on any other durable medium (including electronic versions), or (iii) by means of a website. However, the retail investor is entitled to elect to receive the KID in paper version.
As to the timing for the provision of KIDs, the following must be noted:
KIDs must be disclosed to retail investors in a good time before any transaction concerning this PRIIP is concluded. [24]
Nevertheless, and without prejudice to the European rules on electronic commerce and distance marketing of financial services to consumers, if the transaction is carried out by means of distance communication, the provision of the KID may happen after the conclusion of a contract concerning the PRIIP, if (i) this is made without undue delay, (ii) the prior provision of this document was not possible, (iii) the retail investor was informed of this fact (and of the possibility to delay the transaction until the KID is received), and (iv) the retail investor has, on its own initiative, contacted the person selling the PRIIP, consented to the delayed provision of the KID, and concluded the transaction by means of distance communication. [25]
The obligations of prior disclosures of KIDs are simplified in case of successive transactions with a retail investor insofar as they concern the same PRIIP. In these circumstances, if the subsequent transactions are concluded according to the same instructions as those that were given to the person selling the PRIIP by the retail investor before the first transaction was carried out, there is no obligation to provide the KID again after the first transaction, unless the KID has been revised in the meantime. [26]
V. PROCEDURES AND ARRANGEMENTS
The PRIIPs Regulation requires that any PRIIP manufacturer and any person advising on, or selling a PRIIP implement appropriate procedures and arrangements regarding the handling of complaints made by retail investors in relation to KIDs. In particular, these persons must ensure that (i) retail investors have an effective way of submitting a complaint against a PRIIP manufacturer, (ii) they receive a substantive reply in a timely and proper manner regarding their complaint, and (iii) in the event of cross-border disputes, effective redress procedures are in place.
VI. SANCTIONS AND CIVIL LIABILITY
1. Sanctions and administrative measures
The PRIIPs Regulation has established a set of principles regarding the minimum administrative sanctions that can be imposed by EEA Member States in case of specific infringements to specific obligations regarding KIDs (i.e. drafting and dissemination of KIDs and implementation of internal procedures for the processing of client complaints concerning KIDs). The PRIIPs Regulation further provides that each EEA Member State is required to take effective measures to ensure that effective sanctions are integrated in their national systems to ensure compliance with the PRIIPs Regulation.
In Luxembourg, the 2018 Law empowers the CSSF and the CAA [27] to impose administrative sanctions and other administrative measures which largely mirrors the measures defined in the PRIIPs regulation. The sanctions that can be imposed by these public authorities range from a mere public warning to an order prohibiting the marketing of a PRIIP. Administrative fines can also be ordered against legal persons for a maximum amount of EUR 5,000,000 or equal to 3% of the annual turnover, and against natural persons for a maximum amount of EUR 700,000. Alternatively, if the profits made or the losses avoided as a result of the infringement can be ascertained, legal and natural persons can be ordered to pay fines equal to two times these amounts. [28]
As established in the PRIIPs Regulation, the 2018 Law requires that the CSSF and the CAA take into account a series of defined factors in the determination of the appropriate administrative sanction, such as the gravity and duration of the infringement, the existence of any previous infringements to the PRIIPs Regulation, the cooperative behaviour of the person to be sanctioned, etc. [29]
In order to ensure the compliance with the PRIIPs Regulation, the CSSF and the CAA have been granted a number of specific powers such as the right to have access to any document and data and to receive a copy of it, the right to carry on on-site inspections, the right to require the cessation of any practice contrary to the PRIIPs Regulation, etc. [30] In this context, these authorities can order administrative fines of between EUR 250 and 250,000 against any person that (i) precludes their powers of supervision and investigation, (ii) does not comply with their injunctions, (iii) has provided knowingly inaccurate or incomplete information to them, or (iv) does not comply with their directions. [31]
If the CSSF or the CAA has imposed any sanctions or taken any other administrative measures pursuant to the 2018 Law, they inform the relevant retail investors or require the PRIIP manufacturer to make such a communication. The information conveyed to the retail investors must also apprise them of where they can lodge complaints or submit claims for redress. [32]
The 2018 Law also specifies that a right of recourse exists against any administrative sanctions or measures which would be ordered by the CSSF or the CAA. The competent forum is the administrative tribunal (tribunal administratif). [33]
Finally, in order to comply with the requirements of the PRIIPs Regulation, the 2018 Law expressly states that the CSSF and the CAA will publish on their respective website any administrative sanction or measure taken by them under this law, insofar as no right of recourse has been exercised against the decision, and after the decision has been notified by the person concerned by it. The practical details concerning the publications on the websites of the CSSF and the CAA are contained in the PRIIPs Regulation, which requires that the type and nature of the infringement, as well as the identity of the persons responsible be expressly stated. Any decision published accordingly will remain available on the website of the concerned authority for a maximum period of five years (save for the personal data, which will be removed after twelve months). [34].
2. Civil liability of the PRIIP manufacturer
The PRIIPs Regulation sets out harmonised rules regarding the civil liability of PRIIP manufacturers for any KID which is misleading, inaccurate or inconsistent with the relevant parts of the legally binding pre-contractual or contractual documents concerning a PRIIP or where any of the requirements imposed by article 8 of the PRIIPs Regulation as to the content of KIDs is breached. Accordingly, damages may be awarded as a matter of national law to a retail investor who demonstrates that the loss that he/she suffered results from reliance on the KID when deciding to invest in the PRIIP. [35]
Aside from the provisions of the PRIIPs Regulation on the minimum liability exposure of the PRIIP manufacturers, retail investors are also entitled to resort to the other remedies that can be sought according to the other liability rules available in the EEA Member States.
Finally, it should be noted that even where the drawing up of a KID is delegated to a third party, civil liability of the PRIIPs manufacturer continues to rest with it. Therefore, the PRIIP manufacturer is still liable for breaches committed by its delegates in relation to their information obligations. [36]
[1] OJ L352, 9.12.2014, p. 1. The PRIIPs Regulation entered into force on 29 December 2016. While it was originally intended to apply as from 31 December 2016, its start date was postponed until 1 January 2018 by virtue of Regulation (EU) 2016/2340 of the European Parliament and of the Council of 14 December 2016.
[2] Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II) (OJ L173, 12.6.2014, p. 349).
[3] Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (recast). The IDD repealed directive 2002/92/EC of the European Parliament and of the Council of 9 December 2002 on insurance mediation, as amended (“IMD”) (OJ L352, 9.12.2014, p. 1).
[4] Directive 2009/65 of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities, as amended (OJ L26, 2.2.2016, p. 19). This directive was implemented into Luxembourg law by the law of 17 December 2010 relating to undertakings for collective investment, as amended.
[5] Commission delegated regulation (EU) 2017/653 of 8 March 2017 supplementing the PRIIPs Regulation by laying down regulatory technical standards with regard to the presentation, content, review and revision of key information documents and the conditions for fulfilling the requirement to provide such documents (OJ L302, 17.11.2009, p. 32).
[6] 2017/C 218/02.
[7] The PRIIPS Regulation specifies that such investment can include instruments issued by special purpose vehicles or securitisation special entities.
In this context, “special purpose vehicles” are entities whose activity consists in assuming risks from an insurance or reinsurance undertaking (without being themselves such an undertaking) and fully funding their exposure to such risks by means of a debt issuance or any other financing mechanism (where the repayment rights of the providers of such financing mechanism are subordinated to the entity’s reinsurance obligations). Such entities are regulated and subject to a prior authorisation by the Minister for Finance in Luxembourg.
A “securitisation special entity” is defined by reference to article 4(1) of Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on alternative investment fund managers and amending directives 2003/41/EC and 2009/65/EC and regulations (EC) No 1060/2009 and (EU) No 1095/2010, as amended (the “AIFM Directive”). This type of entity is expressly excluded from the scope of the AIFM Directive.
[8] Article 4(2) of the PRIIPs Regulation.
[9] It is worth noting that some Luxembourg alternative investment funds marketed within the EEA, such as specialised investment funds (SIFs), investment companies in risk capital (SICARs) and reserved alternative investment funds (RAIFs), will be marketed to “well-informed investors” (as defined in the relevant laws governing these investment structures). This term is construed in such a manner that not all well-informed investors are “professional clients” within the meaning of the PRIIPs Regulation. If these investors qualify as retail clients, a KID needs to be published. According to the CSSF, alternative investment funds can avoid this pitfall by expressly stating in their offering document that their products are restricted to professional clients only.
[10] At point 1 in the “General topics” section of the Q&A, the ESAs confirms that the obligation in the PRIIPs Regulation to provide a KID extends to all investors that do not qualify as “professional clients” under MiFID II, irrespective of any additional categorisation applicable under the national laws (such as “qualifying investor”, “informed investor”, or “semi-professional investor”).
[11] Article 4(5) of the PRIIPs Regulation.
[12] Point 10 of the EC Guidelines. Conversely, even if a PRIIP manufacturer is located within the EEA, the PRIIPs Regulation does not apply if the relevant PRIIP is only offered to retail investors located in a Third Country.
[13] Article 32 of the PRIIPs Regulation. In this respect, the 2018 Law expressly authorises SICARs and non-UCITS undertakings for collective investment (e.g., SIFs or the so-called “Part II funds”) to prepare KIIDs, provided that they clearly indicate in this document that the information contained therein does not concern a UCITS. In this case, no KID is required to be published (article 2 of the 2018 Law).
[14] Article 5 of the PRIIPs Regulation.
[15]Article 6(2) and (4) of the PRIIPs Regulation. While cross-references to marketing materials are excluded, they can be made to non-marketing documents (such as a prospectus), provided that this only relates to the information required to be included in the KID by the PRIIPs Regulation.
[16] Article 6(3) of the PRIIPs Regulation.
[17] Article 7 of the PRIIPs Regulation. This includes, for instance, the official languages or one of the official languages used in the part of the EEA Member State where the PRIIP is distributed.
[18] Article 8(2) of the PRIIPs Regulation. Such statement indicates that the KID is not a marketing material and aims at allowing investors to understand the nature, risks, costs, and potential gains and losses of the PRIIPs proposed to them and to draw comparisons between different PRIIPs.
[19] Article 8(3) of the PRIIPs Regulation.
[20] Article 10(1) of the PRIIPs Regulation.
[21] Recital (12) of the PRIIPs Regulation. Please also refer to section VI.2 below, which concerns the consequences of such delegation of the civil liability on the PRIIPs manufacturer.
[22] Article 5 (2) of the PRIIPs Regulation and article 1 of the 2018 Law.
[23] Article 5(1) of the PRIIPs Regulation.
[24] Article 13(1) of the PRIIPs Regulation.
[25] Article 13(3) of the PRIIPs Regulation.
[26] Article 13(4) of the PRIIPs Regulation.
[27] At European level, the PRIIPs Regulation has brought the product intervention powers of the European Insurance and Occupational Pensions Authority (EIOPA) in line with those of the other two ESAs (namely, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA)). Accordingly, the PRIIPs Regulation empowers EIOPA to prohibit or restrict (i) the marketing, distribution and sale of PRIIPs being insurance-based investment products or (ii) a type of financial activity or practice of an insurance or reinsurance undertaking. The exercise of these powers is conditional upon the fulfilment of a series of conditions described in the PRIIPs Regulation.
[28] Article 24 (1) and (2) of the PRIIPs Regulation; article 5(1) and (2) of the 2018 Law. The PRIIPs Regulation expressly authorises EEA Member States to create additional sanctions or measures and to order higher fines than those stated in the PRIIPs Regulation.
[29] Article 25 of the PRIIPs Regulation; article 5(4) of the 2018 Law. A special rule also exists in relation to the calculation of the annual turnover of a parent undertaking or a subsidiary of a parent undertaking which is required to draw up consolidated financial statements (see article 24 (2), second paragraph of the PRIIPs Regulation and article 5(2), second paragraph of the 2018 Law).
[30] Article 4(1) of the 2018 Law. These powers are quite similar to those that the CSSF and the CAA can exercise vis-à-vis persons subject to their supervision (e.g., credit institutions, pursuant to the law of 5 April 1993 on the financial sector, as amended, or UCITS pursuant to the law of 17 December 2010 relating to undertakings for collective investments, as amended).
[31] Article 5(3) of the 2018 Law.
[32] Article 24(4) of the PRIIPs Regulation; article 5(5) of the 2018 Law.
[33] Article 26 of the PRIIPs Regulation; article 6 of the 2018 Law. As the PRIIPs Regulation refers to a right of appeal, the 2018 Law expressly grants the right for the judicial review of the merits of the decision taken by the CSSF or the CAA (recours en réformation), which goes beyond what a mere annulment recourse (recours en annulation) could achieve (i.e. the annulment of the decision). Accordingly, the competent tribunal can substitute its own decision to that of the CSSF or the CAA.
[34] Article 29 of the PRIIPs Regulation; article 7 of the 2018 Law.
[35] Article 11 of the PRIIPs Regulation. However, article 12 thereof provides that in case of insurance contracts, the obligations of an insurance undertaking under the PRIIPs Regulation are only towards the policyholder, excluding any beneficiary.
[36] Recital 12 of the PRIIPs Regulation.
