European Union: New Disclosure Requirements Applying To EU Fund Distribution In 2018

Last Updated: September 22 2017
Article by John Young and Kirsten Lapham

Asset managers located inside and outside the European Union ("EU") must comply with the new "point of sale" disclosure requirements that will apply when they distribute financial products, and investment services, to EU investors and clients.

These requirements derive from the next iteration of the Markets in Financial Instruments Directive ("MiFID II") (applying on 3 January 2018), and the EU Packaged Retail Investment and Insurance Products Regulation (applying on 31 December 2017) (the "PRIIPs Regulation").

This Alert provides an overview of the impact on the new requirements that relate to fund distribution in the EU. The precise application of the rules will depend on the types of funds distributed in the EU, the distribution channels used, and the types of investors targeted.

Firms subject to the requirements – encompassing many firms that distribute investment products in the EU – must consider the form of the disclosures that they are required to make and the data required. In particular, firms may need to obtain a large amount of data on existing funds (in relation to, for instance, funds' transaction costs incurred to date) in order to produce the disclosures, and should consider starting this data-gathering exercise well in advance of the application date of the new requirements.


MiFID II requires an EU "investment firm" (which is an EU firm regulated by MiFID) to provide appropriate information to clients in relation to a financial product (including any fund) that is recommended or marketed to a client of the firm. There are requirements on the manner in which information on past and predicted future performance is presented, and various prescribed items of information to be provided about the firm and the service, including risks. The firm must also disclose all costs and related charges relating to the investment, to allow the client to understand the overall cost as well as the cumulative effect on return of the investment, with an itemised breakdown of these costs and charges. The costs and charges that must be disclosed include any "one-off" fees paid to the supplier of the product on initial investment, ongoing management and performance fees and all transaction costs. In a fund context, the distributor must disclose costs such as broker commissions paid by the fund in relation to its underlying transactions, related transaction taxes and foreign exchange costs. Transaction costs also include the interest costs of the fund's borrowings and the cost of research, if borne by the fund or client. The amount of performance fees, if any, will also need to be estimated. In practice, the amount of transaction costs and performance fees will depend upon future management activities and cannot be ascertained up front. A firm will need to use actually incurred costs as a proxy for expected costs, or make a reasonable estimate of these costs. Unlike under the PRIIPs Regulation (see below), MiFID II does not prescribe a particular methodology for calculating these costs, or a template disclosure.

All these types of costs will need to be aggregated and presented to the investor both as a percentage and as a cash amount (based on a standard investment in a fund of, say, EUR 1,000). The firm will also need to provide an illustration (such as a graph) that shows the cumulative effect of costs on return over an average holding period.

As well as providing this information at point-of-sale, where a firm has an "ongoing relationship with the client", the firm must provide ongoing information on costs on at least an annual basis during the life of the investment, based on actual costs incurred and on a personalized basis.

The information must be provided "in good time" where the firm recommends or markets financial instruments to clients, or where a firm providing any investment service under MiFID is required to provide clients with a UCITS key investor information document ("KIID") or PRIIPs key information document ("KID").

In practice, the obligation will apply where an asset manager (within or outside the EU) appoints an intermediary in the EU to distribute a fund, on the basis that the distributor will be conducting its distribution activities under a MiFID authorization and subject to MiFID rules. The obligation may also apply where an asset manager distributes its own products in the EU under a MiFID authorisation.

PRIIPs Regulation

The PRIIPs Regulation applies to the distribution of any fund to a retail investor in the EU, regardless of whether the distributor (or manager, referred to in the Regulation as the "manufacturer") is in the EU. It does not apply to distribution to professional investors.

A manufacturer or distributor of a fund must draw up and make available a pre-contract disclosure document (a "key information document" or "KID") before making the fund available to a retail investor in the EU. The KID must be concise and no longer than 3 pages of A4 and follow a prescribed format. It contains a summary of the product and investment objectives, the type of investor to whom the fund is marketed, various modelled future performance scenarios, estimates of total costs (including underlying transaction costs) and the effect of costs on performance. It also includes a "comprehension alert" (where applicable, for "complex" products), a summary risk indicator, reference to liquidity risks (if relevant) and a description of the fund's risk and reward profile. The summary risk indicator is based on an assessment of the fund's market risk and credit risk (if any). The PRIIPs Regulation includes methodologies for determining the product's market risk and credit risk, and estimating future performance. As it presents this information in a strict format, the KID will allow a retail investor to make like-for-like comparisons across a range of products when making an investment decision.

Similar to MiFID II, the KID also includes costs disclosure, encompassing both directly incurred costs such as management fees and performance fees, as well as transaction costs. The requirement to model a fund's future transaction costs will involve considerable work. The rules require an estimate of future transaction costs based on an average of the transaction costs incurred by the fund over the prior three years. Transaction costs must also take account of the difference between the price of the instrument at the time a sale or purchase order is transmitted to a broker for execution (the "arrival price") and the net realized execution price, including all commissions and taxes. The Regulation includes a methodology for applying this to derivative positions (OTC and exchange traded) and foreign exchange, and to illiquid assets. For new products, transaction costs are calculated based on an estimate of the portfolio turnover in each asset class, using a methodology based on reference indices.

The product manufacturer must keep the information in the KID under regular review and update it at least annually, by reference to, for instance, new market data or changes in investment strategy.

UCITS managers are under an existing obligation to provide a UCITS key investor information document (KIID) as pre-sale disclosure. UCITS managers are exempt from the obligation to produce a PRIIPS KID until 31 December 2019.

Other than for UCITS funds, there is no grand fathering for existing products or existing fund raisings. However, where a product is no longer made available to retail investors and there is no subsequent change to the product's terms and conditions, a KID is not required.

A manufacturer or distributor could incur liability for a misleading KID, either to an investor (which will largely be a matter of local law) or to an EU competent authority.

Whilst the PRIIPs rules primarily effect the provision of alternative investment funds, structured securities and deposits and derivatives with a retail focus in the EU, asset managers within and outside the EU should be wary of the incidental impact of the rules where a fund is sold to one or a small number of retail investors.

Overlaps between MiFID II and PRIIPs

Both MiFID II and PRIIPs require a firm to calculate and disclose underlying transaction costs. PRIIPs sets out a detailed methodology for this exercise, including, for instance, the treatment of fund anti-dilution mechanisms, the approach to estimating transaction costs for new funds and the approach for calculating transactions costs for funds (such as feeder funds or funds of funds) that invest in other funds. MiFID II does not set out any particular methodology.

Whilst PRIIPs excludes UCITS from its scope, the requirements in MiFID II will apply to UCITS funds. This will require UCITS distributors (governed by MiFID in the EU) to obtain information on costs (including transaction costs) from the UCITS manager.

EU asset manager industry associations have worked with the industry to come up with various methods for a complete disclosure which addresses MiFID II and PRIIPs, although firms will need to consider their own approach, based on their products, target investors and distribution channels.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions