With the PRIIPs Regulation's implementation date approaching—31 December 2016—there are still some questions unanswered for the insurance industry. Specifically, doubts have arisen regarding the existing portfolio of contracts that will be still in force on 1 January 2017. In this article, we will aim to shed some light on the debate surrounding this issue.

The main question posed by the market players affected by PRIIPs is very often linked to legacy: do manufacturers need to provide a KID to investors who signed contracts before 1 January 2017 that are still in force? Considering the pre-contractual nature of the KID, would it be reasonable to assume they do? Taking into account the considerable number of existing contracts held by many stakeholders (more than 20,000 in some cases), these seem to be very pertinent questions.

The PRIIPs Regulation does not contain a clause on grandfathering, and the draft RTS admits to multiple interpretations of how to approach these existing contracts. This ambiguity raises debate on which path the industry should take to be fully compliant and, more importantly, to have the means and resources to even be able to be fully compliant.

The story

At the ESAs Public Hearing on PRIIPs on 9 December 2015, EIOPA mentioned that the Regulation did not make any reference to grandfathering, and therefore they could not confirm that older contracts were excluded. At the same conference, the ESAs asked market players to collaborate in providing information on the impact that the absence of grandfathering provisions would have on their business. Therefore, the existence (or not) of grandfathering rules is still under the ESAs' consideration, and, we hope, will be included in the texts the industry is currently expecting (which, at the time of this present article's publication, are Q&A documents).

Amidst such uncertainty, the industry did receive a clarification on the treatment of PRIIPs traded on secondary markets. In a letter sent by the European Commission to several industry groups on 17 February 2016, the European Commission expressly stated that, with regards to PRIIPs offered prior to 1 January 2017 that are traded on secondary markets, the PRIIPs Regulation does not provide any grandfathering provisions and therefore all PRIIPs in this category are under scope regardless of whether they are new or previously existing.

When the ESAs were asked (at the aforementioned conference) about their approach in cases where the manufacturer was in run-off (i.e. where it does not sell new products but manages the existing book only), they answered that PRIIPs Regulation would not apply in such cases. This approach mirrors the UCITS KIID regime for companies in liquidation established in the ESMA Q&A of September 2012. Nevertheless, a case-by-case analysis would be needed.

The above clarification may be useful to a certain extent: the debate on the existing PRIIPs not traded on secondary markets is still open and the coverage of such products by the Regulation remains unclear.

Industry members weigh in

The ambiguity of the Regulation makes the industry wonder: how should I approach my existing business? PRIIPs manufacturers claim that a grandfathering clause would release them from producing the KIDs for a considerably large number of contracts, and that this would entail a wide range of advantages:

  • lower costs and less time to implement the Regulation
  • more certainty that the application deadline will be met (which is another controversial topic surrounding PRIIPs)
  • fewer human and technical resources dedicated to the KID production
  • fewer legacy issues, as non-digitalised contracts are difficult to adapt for the new framework
  • easier and cleaner communication mechanisms possible with clients, since a specific PRIIPs-compliant selling/distribution process could be set up for new business from 1 January 2017
  • stricter compliance with the pre-contractual nature of the KID under the PRIIPs Regulation: since the investors in the contracts forming part of the existing portfolio will already have taken a decision on which product to buy, the pre-contractual objective cannot be achieved.

Nevertheless, several stakeholders also argue that the PRIIPs Regulation's consumer protection objectives would not be achieved by the addition of a grandfathering clause, in the sense that the documentation consumers will get would be less detailed with regards to the product they bought.

Understanding how the PRIIPs Regulation applies to legacy contracts is a key milestone in the application of the Regulation and a key challenge facing industry players in the absence of clearer indications from the ESAs.

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