The KIID – the Key investor information document will soon both come of age and retire! It came into effect on July 1st 2011 with the introduction of the Ucits-IV-directive – and its first anniversary also marks the end of the “grand-fathering” clauses contained in Ucits IV that allowed the market up to a year to fully implement the KIID. So it can be grandfathered no longer, and must now stand on its own feet and merits.
It has come into being despite the fact that not all countries have as yet transposed Ucits IV, the latest EU directive on retail investment funds, into national laws. For a number of reasons this “obligatory” step is still outstanding in certain countries – most notably Belgium, Italy and Poland. It is perhaps an indication of perceptions aroundthe KIID that notwithstanding this fairly fundamental omission on the part of some member states, the KIID has been universally introduced, and accepted, even when the enabling legislation is still missing.
Many member states have indeed gone beyond the initial scope introduced by the directive; France has adopted the KIID (or the enchantingly baptised DICI) for all domestic funds, the Netherlands has taken this idea one step further and not only embraced it for domestic funds, but extended its use to foreign funds other than Ucits – and therefore not covered by the directive –, which are distributed within its national borders. The recognition of its value has spread beyond the “internal market” for which it was conceived. Switzerland has adopted the KIID for all domestic Swiss funds (with the exception of real estate funds). Those jurisdictions that were or are reflecting along parallel lines in the realm of investor protection through codified disclosure – Canada, Hong Kong, Norway etc. –, are known to be watching the development of the KIID and the “KIID experience” with keen interest.
Ultimately the KIID could stretch well beyond the confines of Ucits. When the newly established Esma (European securities and markets authority) took on the mantle previously worn by Cesr (Committee of european securities regulators), one of its first significant endeavours was working through the technicalities of the KIID and ushering it into the new world of investor protection. Steven Maijoor, Chair of Esma, has spoken with justifiable pride of the work done on KIID and the way the Ucits KIID should set the standard for client disclosure in a much broader context and across numerous products. The long awaited draft for the Prips (Packaged retail investment products) directive addresses precisely this issue, and builds on the Ucits experience to introduce similar documents for some insurance products and other securities or like and unlike nature. (In fact while the draft for Prips leaves much to be decided by Level II consultation and recommendation, a truly Herculean task given the divergent objectives and views of different industries and the ever powerful insurance lobby, one of its few concrete provisions is the repeal of the existing articles of Ucits IV covering the KIID. If the laggard member states delay too long, or Prips by some miracle moves forward with greater speed than appears likely at the moment, some countries might never implement the KIID in its Ucits IV garb!).
So, an unqualified success? Well, perhaps. It is probably too early to tell.
In some cases KIIDS were needed as from day one – Germany required an interim document for domestic purposes before the KIID was introduced. To meet the requirements of German distributors most promoters went the route of producing KIIDs for Germany right from the start, irrespective of the theoretical grandfathering possibility. The pace of the process hasn’t been the same across the spectrum of Ucits. Service offerings from providers who position themselves at various points of the value chain in KIID production, from technical platform provision to the intellectual capital content of plain language description of investment policy or the creation of reliable SRRI (Synthetic risk and reward indicator) have evolved over time. So too has the roll-out strategy. Some groups, for example the Anglo-Saxons, have held off to launch KIIDs for OEIC’s and Luxembourg or Dublin funds at the same time, in 2012 rather than in 2011 already. Some groups have left it to the last moment to launch their KIIDs and some will not make it.
Not unreasonably the focus has been on the task of producing such a vast volume of documents; estimates vary, but figures as high as over a million individual KIIDs across Europe and almost half a million for Luxembourg domiciled funds alone are often quoted. (The number of KIIDs is driven by the number of share classes distributed in each country thereby requiring different language versions; when one considers that some funds have dozens of share classes distributed in most countries of the EU and beyond, the scale of the challenge becomes apparent). And the KIID went hand in hand with the simplified notification process also introduced by Ucits IV; that process itself has evolved as regulators have come to terms with what regulator-to-regulator initial communication might mean and how subsequent regulator-to-business interaction might take place.
There have been cases where the process itself has obscured issues around content. These have ranged from the seemingly simple issue of a regulator requiring the use of a more legible font size, and thereby giving the promoter an additional challenge of reducing the length of the proposed text to still meet the two page overall requirement, to interpretations around what is acceptable under the term “newspaper column format” that is sometimes discussed. Some challenges have been more specific. In some countries the regulator has expressed a preference for terminology that does not completely follow the translation of the text as originally expressed in different language versions of the directive. Fortunately such views have been accompanied by a pragmatic approach that the necessary changes can be implemented at the next revision rather than withdrawing the whole first batch of KIIDs – but a challenge nonetheless and underscoring yet again the need for specialist knowledge well beyond national boundaries for successful implementation.
The highly publicised events that have been playing out within the eurozone have done nothing to alleviate some of the ambiguity. Given what has been happening to government debt within Europe, even the basic definition of “risk free” rate of return has probably shifted over the period of implementation, certainly for certain funds and markets, requiring regulators, led by the CSSF to remind the market that the document is expected to capture the essential and the differentiating risks of a particular product and not be a litany of every conceivable risk – a recital designed more to protect the promoter than inform the investor.
Certain key challenges still remain to be met; how well will the investor understand the “plain language” that promoters have agonised over for so long? What are the operational best practices to be observed in ensuring that the investor has received the document before placing an order – questions that seem easy enough to resolve at first sight, but when layered through with the complexity of, for example, a switch between funds within the same umbrella structure carried out over an aggregation platform, the devil in the detail can prove genuinely challenging.
From the promoters perspective there is still much to be done; most KIID projects are precisely that, – still projects. Project managers, all the energy harnessed to meet the deadlines, all the structures put in place, will now move on. But the KIID will evolve, requirements will change, products will be modified, and the documents must be produced, perfectly, on time, taking into account any changes along the way. An alarming number of promoters have still to decide how to articulate their “business as usual” organisation.
Some promoters are already observing how much effort, energy and cost has gone into the exercise, and will continue to be needed. They are starting to question to what extent the investor will be able to make more informed choices as a result of all this effort and cost. It should have come as no surprise to anyone that the SRRI was going to be broadly similar across similar asset classes. Thus an equity investor can be faced with literally thousands of KIIDs with a similar SRRI – the “prudent” fixed income investor will be faced with a similar conundrum in that asset class. So at the end of the day will the investor be any the better off, for all the cost that will inevitably be passed on? And will the benefit for the industry, the renewed investor confidence as a quid pro quo for significantly enhanced transparency in pricing, be there to compensate all the effort and investment?
The answers to all these questions lie in the future. Some must wait until the true picture on Prips and the distorted competitive environment between funds and insurance products in particular are resolved. Some may take years to establish – how truly will the retail investor embrace the KIID as a real tool in investment planning, a potential key to ensuring an adequate retirement? And some, such as the remaining issues around production and its organisation, must be resolved as soon as possible. What can be said already is that the KIID is here to stay. Love it or hate it, it is an important consideration, another milestone in the Ucits story and one that if used intelligently could take Ucits to the next level as the cornerstone for retirement planning.