3L3 Task Force on Packaged Retail Investment Products Consolidated Report 20100622 v0.2[1] BdP

8/8/2019 3L3 Task Force on Packaged Retail Investment Products Consolidated Report 20100622 v0.2[1] BdP

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Final Report of the 3L3 Task Force on Packaged Retail

Investment Investments (PRIPs)

Executive Summary

1. On 29 April 2009, the European Commission published a Communicationon Packaged Retail Investment Products (PRIPs), in which it committed todevelop a common level of consumer protections for packaged retailinvestments.1 This would be delivered by a µhorizontal legislative approach¶ regarding pre-contractual product disclosures and selling practices for

PRIPs.

2. The Communication provided that PRIPs could µtake a variety of legalforms which provide broadly comparable functions for retail investors:

y µThey offer exposure to underlying financial assets, but in packagedforms which modify that exposure compared with direct holdings;

y µTheir primary function is capital accumulation, although some mayprovide capital protection;

y µThey are generally designed with the mid - to long-term retail market

in mind; and

y µThey are marketed directly to retail investors, although may also besold to sophisticated investors.¶

3. PRIPs were grouped into four indicative µproduct families¶ for the purposesof the Communication:

y investment (or mutual) funds;

y investments packaged as life insurance policies;

y retail structured securities; and

y structured term deposits.

4. With regard to pre-contractual product disclosures, the Communicationprovided that the recent work on developing a Key Investor Informationdocument (KII) for UCITS provided µa clear benchmark of the standard formandatory disclosures«, though these disclosures would need to beadjusted to reflect the particular features and legal forms of otherproducts.¶

5. With regard to conduct of business and conflicts of interest provisions,

MiFID was considered by the Commission as a clear benchmark whichwould form the basis for a common PRIPs sales regime.

6. Since the April 2009 Communication, the three Level 3 Committees (CESR,CEBS and CEIOPS) have worked to develop their thinking on this subject

with a view to providing input to the Commission in the further

1 http://ec.europa.eu/internal_market/finservices-

retail/docs/investment_products/29042009_communication_en.pdf



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development of its proposals. The first output of the Level 3 Committees

work was the joint submission of three sectoral reports to the Commissionon 18 November 2009. It was in this context that the Level 3 Committee

Chairs agreed on 17 November 2009 that, in order to reach a commonposition across the Level 3 Committees, and recognising the inherentlycross-sectoral nature of the PRIPs workstream, a joint Level 3 Task Force

on PRIPs should be established.

7. In conducting this work, the Task Force has focused on three centralareas:

y the scope of the PRIPs regime;

y the product disclosure requirements for PRIPs; and

y other selling practices.

8. Throughout this paper, we use terminology based on the Commission¶scommunications on the PRIPs project. We refer to the firms that produce

PRIPs as manufacturers, firms that sell PRIPs as distributors and PRIPcustomers as investors.

Scope

9. In terms of scope, a majority of the Task Force considers that PRIPs canbe defined as:

A PRIP is a product whose amount payable to the investor (periodic income and/or final pay off) is exposed to the fluctuation of the market value of other assets or to the payoffs of other assets, through the

combination of other assets, the wrapping of a single asset or other mechanisms than a direct holding of those assets.

10. It is agreed that this definition would exclude (among other things):

y pure banking deposits and capitalisation policies in which the bank or

insurer pay the investor a fixed and pre-determined interest rate;

y life insurance policies in case of death or life, where the amountpayable to the beneficiaries in case of death or survival ispredetermined (e.g. 200.000 euros);

y plain vanilla shares and bonds (both fixed-coupon and floating rate).

11. The Task Force considered whether some kinds of pension-relatedproducts (especially when concluded by private individuals) could andshould be covered by the PRIPs regime. However, a majority of TaskForce members believe that it is better not to cover pension products(including annuities) within the scope of PRIPs. The Task Force recognises

the focused work on pensions that is being undertaken by CEIOPS and theCommission, which it believes can best deliver appropriate but consistentstandards.

12. Most Task Force members believe that derivative products should be

included. Task Force members have different views on whether sometypes of life insurance policies (notably µwith-profits¶ and µtraditional¶ lifepolicies) would be caught by this definition or should be caught.



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13. The Task Force has also considered whether there would be value in

supplementing a legal definition of a PRIP with a non-exhaustive indicativelist of types of products that would fall within the definition. As explained

in this report, a majority of Task Force members see some advantages inhaving such a list.

Product disclosure

14. The Insurance Directives, the UCITS Directive and MiFID all containexisting standards and specific requirements on the content and the

presentation of product disclosure information. These should be taken intoaccount in developing any common regime for PRIPs.

15. The Task Force agrees that, in principle, the concept of Key InvestorInformation provided through a Key Investor Information document (KII),as developed for UCITS, could usefully be applied to PRIPs. However, thedetail of the information that would be contained in such a documentwould not cover precisely the same areas as the proposed KII template for

UCITS, since some information is specific to UCITS.

16. The purpose of pre-contractual disclosures is to enable investors to makeinformed investment decisions by focusing on key information. Thedisclosure should be fair, clear, and not misleading. The format and

language should be investor friendly and presented in a format whichallows for comparison between products.

17. The Task Force believes that the key principle is that the client mustalways receive the necessary relevant information about the underlying

assets and the impact of the µwrapper¶/packaging (including e.g. the costsand charges of the underlying and the wrapper and how they worktogether).

18. The legal requirements on the pre-contractual disclosure should be guidedby common principles, supplemented where necessary by detailed

requirements (i.e. at Level 2). The detail of what this entails for differenttypes of PRIPs should also be developed at Level 2. A certain amount of tailored information will also be required by investors for some types of PRIP.

Selling practices

19. The Task Force discussed a number of areas where the PRIPs regime islikely to need to set requirements for the distribution of PRIPs products.

20. In terms of client categorisation, while it was felt that the MiFID categories

were appropriate for MiFID instruments and structured deposits, theymight not be valid for insurance-based PRIPs. The Task Force considersthat investors buying insurance-based PRIPs should generally be regarded

as retail clients.

21. The Task Force recommends that the MiFID suitability framework form thebasis of requirements for firms distributing PRIPs. However, the PRIPsadvice standards should take account of additional investor protectionsoffered by the IMD. In particular, the Task Force considers it desirable torequire distributors to disclose the basis of their service before providingadvice and to confirm recommendations, in writing, to investors.



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22. There was some discussion as to whether advice can be given if an

investor refuses to provide all relevant information. A minority of membersargued that this was possible but that responsibility for the advice being

suitable should be reduced by a corresponding degree to the informationthat the investor withholds.

23. There were differences of opinion as to whether it should be possible forPRIPs to be sold on a non-advised basis. A majority thought that thisshould be possible, in principle, based on the MiFID model, but a minoritysaid that this would represent a loss of investor protection in the insurancemarket when compared to the Insurance Mediation Directive.

24. The Task Force agrees that the MiFID inducements provisions are a good

starting point but believes there may be scope to improve the wording soas to explain more clearly their application to insurance -based PRIPs.

25. MiFID is generally seen to provide a good framework for conflicts of interest provisions and the general responsibility on all firms to act in the

best interests of their clients, which is core to the proposed PRIPs regime.



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Section 1: Scope

Definition and general approach to defining the scope of the PRIPs regime

26. The 3L3 Task Force has considered how best any future EU legislation

might define the range of instruments that should be considered as PRIPs,and also whether a definition including general criteria for PRIPsinstruments could usefully be supplemented by a non-exhaustive and

indicative list of specific types of products that would be regarded asPRIPs.

Criteria to define a PRIP

27. In its issues paper for the Technical Workshop held in October 2009,2 theCommission proposed conditions to be fulfilled by a PRIPS, which included:

(a) PRIPs expose consumers to the performance of assets or otherfinancial measures indirectly ± through other mechanisms than adirect holding of the assets or exposure to the financial measure bythe consumer;

(b) PRIPs serve a purpose of capital accumulation; and

(c) investors in PRIPs bear the investment risk fully or partially.

28. Then, in its Update paper of 16 December 2009,3 the Commissionproposed that the definition of PRIPs should be based on three elements,each of which must be satisfied for a product to be fulfilled:

(i) an element of packaging;

(ii) a product capable of meeting an investor need for capitalaccumulation; and

(iii) a product that creates exposure to investment risk for the investor.

29. The Task Force has considered these features, alongside various relatedquestions the Task Force identified for its own work.

Packaging element

30. The first of the criteria proposed by the Commission to define PRIPs is thepresence of an element of µpackaging¶.

31. The Task Force considers it crucial to have a cross-sectoral definition of µpackaging¶ that can apply to different products in different sectors (e.g.securities, banking and insurance) and can be sufficiently clear to avoidlegal uncertainty and risk of regulatory arbitrage.

32.

According to the Commission, µpackaged¶ products are those that exposeinvestors to the performance of assets or other financial instruments

2 http://ec.europa.eu/internal_market/finservices-retail/docs/investment_products/2009-10-

22_prips_en.pdf

3 http://ec.europa.eu/internal_market/finservices-

retail/docs/investment_products/20091215_prips_en.pdf



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indirectly, through other mechanisms than a direct holding. This definition

could be regarded as too general for the purposes of creating a PRIPsregime, since it does not capture the link between the performance

(negative or positive) of the underlying assets or reference values that arecombined in the PRIP and the related payoff for the investor. Task Forcemembers consider that this link is the key element from the investor¶s

perspective because the direct or indirect investment risk borne by theinvestor (either wholly or in part) through the PRIP depends on the

fluctuation of the market value of the underlying assets combined in thePRIP (or, according to a majority of Task Force members, the µpayoff¶ return to the investor from the PRIP) .

33. A PRIP investor is exposed to other assets or reference values throughother mechanisms than a direct holding of the assets. The Task Forceagrees that the indirect holding mechanisms should include, but not berestricted to, the combination of other assets and the wrapping of a single

asset. The Task Force explored the possibility of limiting the PRIPdefinition to the products which result from the combination or wrappingof other assets (or single asset), which would include UCITs and unit -

linked insurance policies within the PRIPs regime. But the Task Force feltthat, in the non-insurance sectors, it was not clear that many securitiesproducts which have gone through a structuring process, such asstructured notes, or structured deposits, would be covered by such alimited definition.

34. The Task Force also considered how these concepts might apply toproducts within the insurance sector (see also paragraphs [83±91] later).

35. One view within the Task Force is that, where a product has either direct

or indirect investment risk for the investor, it should be treated as a PRIP.This risk is not limited to the investment return on, or the profits emerging

from, a specified fund or reference value, but may be in relation to theoverall profitability of the business of a life assurance firm itself (forexample, in the case of a mutual firm). Furthe rmore, profits or return

mean not just the investment return on assets but also profits and lossesin relation to other elements of a fund ± for example mortality profits andlosses in the case of some life funds. Using these criteria, with-profits and

traditional life insurance products might be classed as PRIPs (though lifeassurance products where the purpose is clearly to provide protection ± for

example, on death ± should be outside PRIPs scope). For more discussionon with-profits and traditional life products see also paragraphs [83-91].

36. Another view within the Task Force is that in order to include a lifeinsurance contract within PRIPs scope, it is necessary to consider whether

the market value of the underlying assets determine s the value or thereturn on the policies, so that the policyholder is exposed to thefluctuation of the market value of these assets. Other variables (likeparticipation in technical profits or to profits realized by the insuranceundertaking in performing insurance activity) that do not expose theinvestor to an investment risk should not be considered as criteria to

define whether the insurance contract is a PRIP. According to this view,with-profits and traditional life insurance products are unlikely to be

classed as PRIPs.



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Investment risk element

37. The Task Force also considered the investment risk criterion (and in this

context also considered the element of capital accumulation).

38. As a consequence of the indirect holding mechanisms, the amount payableto the PRIPs investor (including periodic income and/or final payoff), andtherefore the investment¶s value, is exposed to the fluctuation of themarket value of the underlying assets (market risk). 4 This exposes theinvestor to the consequent investment risk and determines the uncertaintyabout the payoff for the investor.

39. It has been suggested that existing European legislation for the insurancesector (for example the Consolidated Life Directive and Solvency II),already include a clear concept of µinvestment risk borne by thepolicyholder¶: the investor bears the investment risk because the market

value of the underlying assets is used to determine the value or the returnon the product that will be paid to the investor. In considering the conceptof µinvestment risk¶ for the purposes of PRIPs, existing definitions should

be taken into account in order to avoid the introduction of a new anddifferent notion of µinvestment risk borne by the investor¶ that isinconsistent with the legal concept already existing in other Europeanlegislation.

40. The Task Force agrees that investment risk should be understood as theuncertainty about the amount payable to the PRIP¶s investor ( includingperiodic income and/or final pay off) due to the fact that this amountdepends on the fluctuation of the market value of other assets 5.

PRIPs definition

41. Taking into account the previous conditions, the Task Force has developedthe following revised definition for PRIPs (though, as indicated, there is notunanimity on all elements of th is definition):

A PRIP is a product whose amount payable to the investor (periodic income and/or final pay off) is exposed to the fluctuation of the market

value of other assets or to the payoffs of other assets, 6 through thecombination of other assets, the wrapping of a single asset or other

mechanisms than a direct holding of those assets.

42. In addition, even under this revised definition, Task Force members havesome different views about which products would, and should, be caught.

43. For example, it is agreed that this definition would (and should) exclude:

y pure banking deposits and capitalisation policies in which the bank orinsurer pay the investor a fixed and pre -determined interest rate;

4

Some members would also include exposure µto the credit risk of the payoffs generated by otherassets¶ as a factor in defining investment risk here.

5Some members would also include exposure µto the cash flows or income generated by other assets¶

as a factor in defining investment risk here.

6 A minority of Task Force members disagree with the inclusion of the reference to µto the payoffs of

other assets¶, since they feel this makes the scope too broad and would capture some insurance

products whose risk profile does not justify inclusion.



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y life insurance policies in case of death or life, where the amount

payable to the beneficiaries in case of death or survival ispredetermined (e.g. 200.000 euros);

y plain vanilla shares and bonds (both fixed-coupon and floating rate).

44. Most Task Force members believe that derivative products should beincluded within PRIPs scope.

45. As indicated above, Task Force members have different views on whethersome types of life insurance policies (notably with-profits policies) shouldbe caught.

Other points on the definition

46. The Task Force discussed whether possible complementary elements couldand should be added to the PRIPs definition and criteria .

µRetail¶ element

47. There was discussion of including a µretail¶ element in the definition. Thatis, whether the intention to market PRIPs products only to retail clients isnecessary for a product to be a PRIP.

48. There was a general consensus among Task Force members that the retailelement should not be explicitly included in the legal definition of PRIPs.

49. Nevertheless, it is clear that this element is relevant to the scope andfocus of future PRIPs regulation, as the PRIPs requirements should only be

triggered and applicable when a product falling under the scope of thePRIPs regime is to be promoted or sold to retail investors (or a relatedservice provided, involving a PRIP). There is further discussion on this

point in the selling practices section of this paper.

C ombined commercialization of products

50. It is the view of the Task Force that the concept of packaging goes beyond

the simple combined sale of products (including µtied¶ products) whereeach product keeps its respective original features. In consequence, theTask Force believes that the simple combined sale of products should not

lead to these products being regarded as PRIPs. A PRIP is a single productthat assumes a packaged form, whereas a combined sale/offering results

in a situation that should be tackled within regulations applicable to µbundling¶ and µtying¶.

51. For example, the separate sale of an ordinary deposit and a contract fordifferences (where the investor is effectively the depositor and theinvestor in the CFD) is not a PRIP, whereas a structured deposit (that canbe viewed as a combination of a deposit and CFD contract) may be a PRIP.

52. The Task Force believes that the eventual PRIPs approach should avoid theresult that the simplest plain vanilla products could fall within PRIPs scope

just because they are sold together with other products.



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Guarantees

53. After consideration and discussion in the Task Force, the majority of the

Task Force members believe that the concept of guarantees (whethercapital guarantees or other kinds of guarantee) should not form acondition or part of the legal definition of a PRIP.

54. However, some Task Force members take the view that guarantees shouldbe recognized in defining the scope of the PRIPs regime because they

regard capital guaranteed products as inherently less risky than productswithout guarantees. These members believe that some kinds of

guarantees for some products, especially in the insurance sector, provideadditional safeguards for investors. They take the view that the presenceof guarantees can justify the exclusion of these products from PRIPs scope

when the following conditions are simultaneously met:

y the guarantee covers the capital at maturity, a minimum interest rateconsolidated year-by-year and provides a guaranteed surrender value

at any time;

y the cost of the guarantee is not paid by the investor but is borne bythe insurer according to the mutuality principle (sharing the costamong present and future investors).

55. Other Task Force members have however suggested that these criteriamay not relevant for securities products. For example, these regulatorswould not wish to exclude a product that offers capital protection and aminimum of 0.001% of interest. In addition, for the securities sector, theadoption of this additional criterion could potentially exclude from thePRIPs regime certain products, such as structured notes issued by creditinstitutions, which are considered as meeting the two previous conditions,except that the capital and interest rate are not guaranteed in case of redemption before the maturity of the product. Thus, i f capital guaranteedsecurities were excluded from the scope of PRIPs, simply because of this

feature, it would create an unlevel playing field to the detriment of non -capital guaranteed products or a distortion in favour of µcapitalguarantees¶, while some of the latter pose significant risks for retailinvestors.

56. In addition, fFor the banking sector the introduction of this additionalcriterion in the PRIPs definition could would have major implications forthe considerations regarding structured deposits. If the full capital

guarantee (or capital protection of initial capital) feature were consideredan element to exclude products from the PRIPs scope, then (and given theexistence of deposit guarantee schemes) the effect shouldwould be to take

all structured deposits out of scope .. Furthermore, when consideringguarantees and the level of risk that each product presents for investors

as additional criteria for the PRIPs definition, it should also be taken intoaccount that the existence of deposit guarantee schemes implies thatdeposits present, in addition to its capital protection features, an overall

level of protection to investors higher than other products where suchschemes do not exist and/or do not cover the product provider¶scounterparty risk. But if structured deposits were excluded from the scopeon the ground that they provide a capital guarantee, the effect could be tocreate a distortion to the detriment of structured securities/notes and infavour of structured deposits.

Comment [FPC1]: This is not the reason. The

reason for the exclusion of deposits is that deposi

have full capita l protection. Deposit guarantee

schemes are an additional level of protection



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Possible use of a µwhite list¶ to complement the legal definition of a PRIP

57. The Task Force has considered the pros and cons of the use of a non-

exhaustive indicative white list of types of products that should beregarded as PRIPs to complement a legal definition. A strong majority of the Task Force can see the value of such a list, as long as any risksrelating to national µlabelling¶ of products (and differences in interpretationbetween Member States) are addressed and that the list is sufficientlyflexible to accommodate future changes.

58. The main advantages of using such a list are seen as:

y The current suggested legal definitions of a PRIP under discussion are

quite high level and will raise questions of interpretation on the part of investors, firms, regulators and others, as to which particular productsare intended to be caught by the criteria.

y Having a non-exhaustive indicative list of products that fall in (and

possibly out of) PRIPs scope could assist:

o investors in knowing where they can expect PRIPsprotections;

o firms in knowing when they must comply with the

obligations applying to PRIPs;

o regulators in knowing how to apply the regime and how toanswer questions about its scope;

o others (e.g. Ombudsmen, consumer groups, industrygroups) who need to know to which specific products the regimeapplies when they are handling particular cases.

y For these reasons, a white list approach to supplement the legal

definition should also minimize the scope for fundamental national

differences in interpretation and resulting potential regulatoryarbitrage.

y MiFID includes such a list in its Annex I of Level 1, which serves to

confirm the scope of the Directive. It is indicative to the extent that itincludes categories of instruments rather than every type of instrument. Where further clarity is needed, the Directive includes a

definition of the category referred to ± e.g. transferable securities ormoney market instruments. This approach could be fol lowed forproducts such as with-profits policies if greater clarity is required as to

which are to be treated as PRIPs.

y A further good example under MiFID, where an indicative list hasproved useful, is in respect of types of MiFID instruments that shouldbe treated as non-complex or complex for the purposes of the MiFID

appropriateness test. This exercise, undertaken by CESR, has beenwell received by the industry and other stakeholders, for the reasons

given above.

59. The main disadvantages of using such a list are seen as:



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y It is unnecessary because the stated criteria define clearly what is tobe included within the PRIP regime so that a product will be in or outof scope solely on the basis of those criteria.

y If the criteria do not catch all the products that should fall withinscope, this is a problem with the criteria and one ought not to forceproducts into scope but to redraft the criteria.

y A list of products established in the EU legislation may not be flexibleenough to accommodate product innovation, and could becomeoutdated. The time taken for formal EU legislative procedures mightrestrict the ease by which a white list could be updated. For example,if it were proposed to amend the IMD and MiFID Directives to includePRIPs requirements, it may not be easy to update a list of instrumentsin an Annex to the Directives.

y Products marketed under a specific label/designation in more than

one Member States may have different characteristics (e.g. with -

profits policies, variable annuities, etc.). If such a list is only based onthe label/designation of the product, for all the products, withoutconsidering the differences they present in different EU markets, therecould be a risk of regulatory arbitrage.

y In life insurance (and when compared to non-life insurance), thesegmentation/division between types of products is not so clear (forinstance, we could have different divisions depending on the purpose:accountability vs. commercial approach). Building from a cleardefinition and adopted selected criteria, Member States should be ableto identify which national products fall into the concept of PRIP.

60. As an exercise into the feasibility of coming up with such a list, the TaskForce discussed which products they would expect to see within scope.7

There was unanimity that the following product types should fall within

scope:

y structured investments issued under the form of bonds and otherforms of securitized debts (including both capital guaranteed and non-guaranteed products);

y structured deposits;

y structured products written as insurance policies;

y UCITS including ETFs and UCITS providing capital protection/

guarantees;

y non-UCITS including closed end funds;

y non-UCITS ETF funds providing capital protection/guarantees);

y unit-linked life insurance policies (with or without guarantees); and

y index-linked life insurance policies (with or without guarantees).

7 The development of this list has also taken account of the work already done by each Level 3

committee individually, and by the European Commission.



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61. A strong majority of Task Force members also believed that the following

products should fall within scope:8

y asset-backed securities;

y collateralised debt obligations;

y covered bonds;

y callable and puttable bonds;

y derivatives and options;

y warrants and covered warrants; and

y convertible shares and convertible bonds.

62. There was less agreement over the following products (although still witha majority stating that these investments should be regarded as PRIPs):

y with-profits life insurance;

y variable annuities;

y hybrid life insurance products (combining, for example, unit-linked lifeinsurance elements with investments in traditional insurance funds);

y capital redemption operations linked to investment funds; and

y with-profits capital redemption operations.

63. And, the following investment products had a majority of Task Forcemembers who felt that the products should be out of scope:

y subordinated bonds;

y non-financial spread bets (e.g. sports spread bets);

y traditional life insurance investment products;

y pensions; and

y endowments.

64. If a white list is to be used, therefore, there are certain product types forwhich there is wide agreement and others that are more controversial.The white list could be limited to reflect the products for which there isunanimous or strong majority agreement. Where there is less agreement,it may be that these products should not form part of the white list butshould be considered in relation to the criteria.

8 All members agreed that these products include high risks to retail investors. The reason for some

members not wishing to include them within PRIPs scope is that labelling a product as such recognises

implicitly that they are suitable for retail investors when this may not be the case . The products are

already subject to MiFID and members who argued they should not be within PRIPs scope felt that the

customer protections in that directive are appropriate.



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Other points concerning PRIPs scope

Pensions products and annuities

65. In principle, certain kinds of pension scheme (e.g. personal plans based on

UCITS principles) seem to be substitutable with PRIPs from an economicviewpoint. On the other hand, other kinds of pension plans (e.g.occupational Defined Benefit plans) are very different from non -pension

PRIPs, as they lack the µretail¶ element (being attached to the employmentrelationship and not being sold on the market) and may lack (for Defined

Benefit and hybrid schemes) a close link to the performance of theunderlying investments.

66. The Task Force has considered whether some kinds of pension-relatedproducts (especially when purchased by private individuals) could andshould be covered by the PRIPs regime. However, a majority of TaskForce members believe that it is better not to cover pension products(including annuities) within the scope of PRIPs, and to allow national

discretion to extend appropriate and similar standards to such products at

the implementation stage, together with any additional necessary nationalmeasures. At the same time, the specificities of pension productsdistribution are to be addressed in specific, solely pension-focusedinitiatives such as planned IORP Directive review and the Green and Whitepapers on pensions announced for 2010 and 2011 by the Commission.

67. The reasons for this majority view include:

y if the PRIPs proposals are concerned with substitutable products, then

a product that cannot be surrendered or µcashed in¶, and has to beused solely or mainly for provision of retirement benefits, is not reallysubstitutable for, for instance, a five-year structured investment

product or an insurance bond;

y since it is difficult to distinguish between types of pension product ±

e.g. personal pensions, occupational pensions, state second pensions ±and there are often close inter-linkages, it may be simpler to excludeall from the scope of PRIPs;

y national pension and benefit characteristics mean that maximumharmonisation (as envisaged for PRIPs) is not an appropriate approachto pension products.

68. Furthermore, in occupational Defined Benefit pension schemes, DefinedContribution schemes with guarantees and hybrid schemes, protectionfrom investment risk is often provided by specific mechanisms includingsome form of employer or scheme administrator sponsorship of guarantee.Other protection mechanisms (such as mandatory pension protectionfunds, mutually instituted or managed by public entities) may also play a

role in ensuring the level of benefits, decoupling it from investmentperformance.

69. At the same time, it should be borne in mind that all pension schemes(including those that are, in principle, most similar to PRIPs) are part of

national pension systems and that there are often close inter-linkagesbetween private and public mandatory schemes. These are manifested viapossible opting-out clauses, or auto-enrolment mechanisms that may



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make public and private pensions substitutes for each other ± much more

than non-pension PRIPs.

70. The CEIOPS work to date shows that private pension landscape in EUMember states is very diverse. In general it includes occupational andpersonal schemes (also known as second pillar and third pillar pensions).Occupational schemes are further split between Defined Contribution andDefined Benefit schemes (and possibly intermediate, hybrid categories)according to whether the members, the sponsoring employer, and/or themanufacturer bear all or part of the risk. The CEIOPS work also shows thatthe overall cross-border activity in the occupational pensions sector acrossthe EEA is fairly low. The number of cross-border active Institutions for theOccupational Retirement Provision (IORPs) amounted to 48 in January2007, 70 in June 2008 and 76 in June 2009. At the same time, thenumber of members and beneficiaries of IORPs that started to operatecross-border in the period between June 2008 and June 2009 ranged from

zero to 350. These figures demonstrate that a genuine single market foroccupational pensions has not yet been established. This also implies thatif occupational pensions are excluded from the PRIPs scope, the risk of

regulatory arbitrage at the European level will be minimal.

71. Unlike non-pension PRIPs, pension plans are subject to national social andlabour law and to the national tax treatment. Within the current state of affairs, the EU legislative framework recognizes (according to the principle

of subsidiarity) the competence of individual Member States in both of these areas. Members States also remain responsible for the overalldesign of their pension systems. Harmonisation of pension products mightrequire close consultation with all Member States and has a potential of considerably slowing down the process of developing PRIPs legislation.Furthermore, for some types of pension there is a possibility that a PRIPsmaximum harmonisation approach could decrease existing nationalregulatory standard.

72. Considering the above, it is suggested that pensions are left out of PRIPs

scope for the moment and that, later on, taking advantage of other EUinitiatives on pensions, more work is done to explore how consumerprotection may be improved in this sector (having regard to the future

PRIPs regime as a benchmark).

Structured deposits and structured investment products

Structured deposits

73. The Task Force believes that, in principle, structured deposits should be

within the scope of PRIPs work, though with appropriate differentiation inhow specific requirements apply in order to reflect the risks posed bystructured deposits and structured investment products.

74. Unlike other investment products, deposits (including structured deposits)are considered a safe product by retail investors. Consequently, two

aspects should be reflected in the future PRIPs regulation:

y the notion of structured deposits without capital protection should notbe allowed ± products that do not provide full capital protection are not

deposits; and



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y in spite of some similarities between structured deposits and other

structured investments, it is beneficial to clients to clearly understandwhen a PRIP is a deposit and when it is another type of product.

75. For the purposes of the scope of the PRIPs work, the Task Force thereforeproposes a definition of structured deposits along the following lines, inorder to achieve a clear distinction between structured deposits andstructured investment products:

Structured deposit: a deposit that is fully repayable, on terms under which

any interest or premium will be paid (or is at risk) according to a formulawhich involves the performance of (i) an index or combination of indices,excluding variable rate deposits whose return is directly linked to e.g.

EURIBOR, LIBOR or another interest rate index; (ii) a MiFID financial instrument or combination of such financial instruments; or (iii) acommodity or combination of commodities; (iv) a foreign exchange rate or

combination of foreign exchange rates.

76. Fixed rate deposits are therefore excluded from the definition of structured

deposits (and, in consequence, excluded from PRIPs scope). Variable ratedeposits should also be excluded from PRIPs scope as these are µplain

vanilla¶ products that follow the market interest rates ± the link to moneymarket indices should not be considered as an indirect exposure to theperformance of assets or other financial measures (the same applies to

Floating Rate Notes).

77. The Task Force also believes that a key consideration will be to establish aclear distinction between structured deposits and structured investmentproducts. This is particularly important so that customers understand the

different protections that apply for deposits and investments under EUlegislation. Knowing whether a product is a deposit or an investment

product is particularly important when products are passported acrossborders and for the purposes of identifying applicable compensation coverunder either the Deposit Guarantee Schemes Directive or the Investor

Compensation Directive. For this reason, the definition of structureddeposit for the purposes of the PRIPs work should ideally be consistentwith the definition of deposit under the Deposit Guarantee Schemes

Directive.

78. Additionally, structured investment products present higher risks forinvestors than structured deposits. In fact, whereas the capital invested inother structured investment products may be (all or partially) lost as aresult of the performance of the underlying variables, in structureddeposits at least the initial capital deposited should be repaid after an

agreed period. This difference in risks should be immediately perceived byinvestors by being clearly disclosed in the pre-contractual information.

79. Generally, 3L3 Members¶ domestic regulatory frameworks distinguishbetween structured deposits where the initial capital deposited must be

repaid after an agreed period and structured products where the initial

capital invested may not be returned in full. The Task Force believes thatthis distinction can be a useful one in distinguishing structured deposits

and structured investment products. This also seems consistent with theCommission¶s view of which instruments are potentially covered by MiFID(the second type) and which are not (the first type).

Structured investment products



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80. A number of types of structured investment products meet the criteria tobe considered as PRIPs:

y they expose consumers to the performance of assets or other financialmeasures indirectly;

y they serve a purpose of capital accumulation; and

y investors bear the investment risk fully or partially.

81. However, for clarity, a definition of structured investment product mayalso be useful, particularly in order to distinguish structured investmentproducts from structured deposits. This is particularly important so thatcustomers understand the different protections that apply for deposits andinvestments under EU legislation. Knowing whether a product is a depositor an investment product is particularly important when products arepassported across borders and for the purposes of identifying applicable

compensation cover under either the Deposit Guarantee Schemes

Directive or the Investor Compensation Directive.

82. For these purposes, a possible definition of a µstructured investmentproduct¶ might be:

Structured investment product: a product, other than a structured deposit or a MiFID derivative, which provides a defined level of income or growthover a specified investment period and involves the followingcharacteristics:

o the return of initial capital invested, at the end of the investment period, is linked by a pre-set formula to the performance of (i) an

index, a combination of indices; (ii) a MiFID financial instrument or combination of such financial instruments; (iii) a commodity or

combination of commodities; or (iv) another factor or combination of

factors; and

o if the performance is within pre-set specified limits, initial capital invested is repaid. If not, the investor could lose some or all of theinitial capital invested.

Insurance products other than unit-linked and index linked life policies

83. There is general agreement that unit-linked and index-linked life insurancepolicies should be included under the PRIPs scope because they sharecommon features with the typical retail investments of the securities andbanking sectors. However, the following products were identified as within

the µgrey area¶ by the European Commission in the PRIPs IndustryWorkshop held in Brussels on 22 October 2009:9

y non unit-linked/index-linked life insurance such as with-profits life

insurance/endowments; and

y traditional life insurance products.

9 http://ec.europa.eu/internal_market/finservices-retail/docs/investment_products/2009-10-

22_prips_en.pdf



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84. As already indicated, the Task Force is not agreed on whether these

products should be within scope or not.

85. A number of members feel strongly that these products should not betreated as PRIPs. Their arguments are that life insurance policies otherthan unit and index linked products show different characteristics. In thesepolicies, the premiums collected by the insurer are invested by the insurerin order to have the financial resources to cover contractual obligations forpolicyholders. The market value of the underlying assets is not used todetermine the value or the return on the policies. They argue that in thesepolicies, the policyholder does not bear an investment risk.

86. These members argue that this is true both of µpure-protection¶ life policies

(which simply offer a fixed amount in case of death or in case of survivalat the term) and of the other life insurance policies, generally called µwithprofits¶ policies or traditional life insurance products.

87. However, it is argued that, within Europe, the term µwith-profits¶ covers

many different types of policy, whose features vary significantly across

Member States. The term µwith-profits¶ focuses on a common element: allthese policies offer to the policyholder a participation in the profits realizedby the insurance undertaking in performing its insurance activity. Thismeans that these policies offer to the policyholder a surplus or an extragain in respect of the initial assured benefit that the insurer is committedto pay in respect of the premium paid by the policyholder (a benefit that iscalculated on the basis of demographic and financial hypotheses).

88. It is argued that, in other words, these policies are similar to bankingdeposits, because they offer a fixed return interest rate and, in addition tothis, an extra sum that may allow the policyholder to participate in thepositive results of the insurer.

89. As mentioned before, there are many differences across Member States

regarding the characteristics of the so-called µwith profits policies¶. The

differences include the following.

y The source of the profits: in some States the profits are µfinancialprofits¶, since they arise from the assets in which the insuranceundertaking has invested the premiums, while in other States they are µtechnical profits¶, since they arise from the positive result of technicalitems (such as the death hypothesis or expenses hypothesis); in someother Member States they are a mix of technical as well as financialprofits as they arise from the overall performanc e/profit of theinsurance undertaking itself in a specific period.

y The treatment of the profits already assigned: in some States the

profits assigned year-by-year are permanently allocated to thepolicyholder, even in the case of early surrender; while in other Statesthey are not consolidated in this manner.

y The treatment of the sum payable in case of surrender (orwithdrawal): in some cases the policyholder has the right to receivethe accumulated profits, while in other States the surrender value isnot guaranteed (so that the insurer can decide to pay a reduced sumif, at that time, the financial position of the company is weak).



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90. However, it is argued that, even if with-profits policies vary across the

Member States, they share a common feature: the policyholder does notbear the investment risk, because there is no direct and linear correlation

between the fluctuation of the market value of the assets in which theinsurer has invested the premiums and the amount or return of the policy.

91. As already indicated, other Task Force members believe that the scope of PRIPs should also cover insurance products other than unit-linked andindex-linked life policies. Under this view, where a product has eitherdirect or indirect investment risk for the investor, it should be treated as aPRIP. This risk is not limited to the investment return on, or the profitsemerging from, a specified fund or reference value, but may be in relationto the overall profitability of the business of a life assurance firm itself (forexample, in the case of a mutual firm). Furthermore, profits or returnmean not just the investment return on assets but also profits and lossesin relation to other elements of a fund ± for example mortality profits and

losses in the case of some life funds. With-profits and traditional lifeinsurance, judged against these criteria, may be PRIPs (though lifeassurance products where the purpose is clearly to provide protection ± for

example, on death ± should be outside PRIPs scope).

Derivatives (options, futures, financial contracts for difference etc.)

92. Arguably, some derivative instruments satisfy at least two of the generalcriteria to be fulfilled by PRIPs proposed by the Commission. 10

93. As may be seen from the earlier discussion on the white list (paragraph[61]) an overwhelming majority of the Task Force regard derivatives asbeing within scope. The argument for inclusion is that, althoughderivatives do not fulfil the criteria for being packaged , derivatives arehigh-risk instruments and retail investors can buy and sell them in thesecondary market. A number of Member States have also reported thatCFDs are being marketed directly to retail investors.

94. On the other hand, some members argue that the fact that derivatives donot meet the packaging criterion, should mean that derivative instrumentsthemselves should not be treated as PRIPs in their own right. Derivative

instruments are covered by MiFID which sets an appropriate regulatoryregime for these products (only the KII would not be mandatory underMiFID).

95. Most derivative instruments are not retail products, and it may bedangerous in terms of investor perceptions to present derivatives in thisway, as substitutable products for other retail investments. They are not.

96. If, in some Member States, derivative instruments have been specificallydeveloped for a retail investor base, then (as suggested earlier in this

paper) there is an argument that they could be covered as PRIPs.However, this approach would need to be considered against the dangers just noted of labelling them as PRIPs. This is particularly true when the

only µgap¶ in the existing MiFID regime covering derivatives seems to be aKII. This specific gap could be rectified under the MiFID review, if there isa good case for doing so and if the KII would deliver practical benefits forretail investors using these products.

10 By derivative instruments we mean those instruments covered by MiFID Level 1 Annex 1, Section C,

points 4-10 (e.g. futures, options, swaps, FRAs, CFDs, c redit risk derivatives).



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Section 2: Product Disclosure

97. The Task Force has considered the desirable common features of a regime

for pre-contractual disclosure of information about all PRIPs products toinvestors or potential investors.

98. The Insurance Directives, the UCITS Directive and MiFID all containexisting standards and specific requirements on the content and the

presentation of product disclosure information. These should be taken intoaccount in developing any common regime for PRIPs.

99. The Task Force agrees that, in principle, the concept of InvestorInformation provided through a Key Investor Information document (KII),as developed for UCITS, could usefully be applied to PRIPs. However, thedetail of the information that would be contained in such a documentwould not cover precisely the same areas as the proposed KII template forUCITS, since some information is specific to UCITS.

100. The detail of information (and the level of detail) to be included fordifferent types of PRIP should be developed further at Level 2 of the EUlegislative framework. In developing specific requirements, it will also be

important to adhere to the principles of proportionality and materiality .Disclosure should be a concise body of relevant (and comparable)

information which can be understood by the investor and does notoverwhelm or confuse the investor with too much information. Specificsuggestions on the possible content of such core information are set out

below.

101. In addition, for PRIPs that are admitted to trading on a regulated market,it will be important for KII product information to be appropriately alignedwith the information made available to investors through the requiredProspectus and Simplified Prospectus.

102. The Task Force has also considered who should be legally responsible for

producing a PRIPs KII and who should be legally responsible for deliveringthe KII to the investor.

A common framework

103. The purpose of the pre-contractual disclosures is to enable investors tomake informed investment decisions by focusing on key information. Thedisclosure should be fair, clear, and not misleading. The format andlanguage should be investor-friendly and presented in a format which

allows for comparison between products.

104. The legal requirements on the pre-contractual disclosure should be guidedby common principles, supplemented where necessary by detailedrequirements (developed at Level 2). A certain amount of tailoredinformation will also be required by investors for some types of PRIP.

105. As indicated above, under existing EU legislation, manufacturers anddistributors of products and services have various responsibilities thathave an impact on their investors. This model should also be followed

under the PRIPs framework. In addition, consistent outcomes andprotections should be delivered for the investor whether a product orservice is provided and distributed by a single institution or by two or

more institutions. The precise responsibilities of product manufacturers



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and distributors are likely to depend on the particular actual roles or

functions undertaken by a firm in the product lifecycle. It may also bepossible for a firm to act as both manufacturer and distributor at the same

time in respect of certain products. However, in general, we can statethat:

y product manufacturers will typically develop, manage or packageproducts such as life insurance, general insurance or investmentproducts; and

y distributors will cover those persons who then make up the rest of thesupply chain taking the product or service to the investor. This couldinclude, for example, investment firms, financial advisers, credit

institutions, insurance companies, tied agents or others who sellinsurance or investment products.

106. As a general framework, the Task Force believes that the productmanufacturer should be responsible for producing a KII, and the

distributor should be responsible for delivering the KII to the

investor/potential investor.

107. There is also a general preference among Task Force members for anapproach whereby the distributor could only sell a PRIP to a retail investor

if the product manufacturer has prepared a KII. The Task Forcerecognises that this approach may raise questions of enforcement/redresswhen a product manufacturer is outside the EEA or where the legal issuer

of a product is an unregulated entity such as a Special Purpose Vehicle.These issues will need to be considered further in developing the regime.

Further detail on responsibilities

108. Product manufacturers: In general terms, in relation to productinformation disclosure, we would regard the product manufacturer¶sresponsibilities as including such points as:

y When providing information to distributors, a product manufacturer:

o should usually make clear if that information is not intended for

investor use;o should consider its target market for the product and explain this to

distributors;

o should ensure the information is sufficient, appropriate,comprehensible and updated, including considering whether it will

enable distributors to understand the product enough to givesuitable advice (where advice is given) and to extract any relevantinformation and communicate it to the investor;

o should ensure that essential information is provided in the expectedform and provide distributors with the documents and informationlegally required.

109. Distributors (whether intermediaries or direct sales by productmanufacturers): In general terms, we would regard a distributor¶sresponsibilities as including such points as:

y In its marketing of a product, a firm:

o should usually submit marketing communications and any



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modifications to the manufacturer before their circulation;

o should usually circulate only marketing communications formallyapproved by product manufacturers or by the distributor itself;

o in passing on a marketing promotion created by a manufacturer,should act with due skill, care and diligence. This may involvetaking care to establish that another firm has confirmed compliance

with the relevant detailed rules, among other things. This may alsorequire that the distributor emphasise the difference between the

marketing of a product and any financial advice provided to theinvestor.

y When providing information to a investor, a firm:

o should provide investors with documents and information in good

time;o should ask the manufacturer to supply additional information or

training where that seems necessary to understand the product orservice adequately;

o should not distribute the product or service if it does not

understand it sufficiently, especially if it intends to provide adviceand recommend the product;

o should take account of what information the investor needs to

understand the product, its purpose, the risks and costs associatedwith the product, and communicate information, includingmarketing communications in a way that is fair, clear and notmisleading;

o if advice is given to the investor, the firm must consider if theproduct is suitable for the investor;

o should consider whether investors understand the informationprovided ;

o should have in place systems and controls to manage effectivelythe risks posed by providing information to investors, includingmarketing communications.

o when providing information to another distributor in a distribution

chain, the firm should consider how the further distributor will usethe information, such as whether it will be given to investors.

110. For PRIPs not covered by MiFID, it would currently be possible for adistributor to rely on information produced by a manufacturer, unless thedistributor has reason to question whether it is clear, fair and not

misleading. For MiFID business, however, a firm must ensure that anycommunication to a client is fair, clear and not misleading regardless of whether it has been produced by a provider. MiFID does not generallypermit reliance on a provider. There are particular provisions in MiFID onproducer/distributor responsibilities in relation to product disclosure.Notably, Level 2 Recital 52 says that handing out a prospectus producedunder the Prospectus Directive does not discharge a distributor¶sresponsibility to inform a client about a product, while Article 34 says the

UCITS simplified prospectus can be used, in part, to discharge adistributor's responsibilities to inform their client.

111. Furthermore, for some PRIPs it may not be evident who the productmanufacturer is. A PRIP may include different products by differentmanufacturers. This is common regarding insurance-based PRIPs, forexample. This raises the question of which party should be defined as theproduct manufacturer and hence being responsible for the preparation of KII. We propose that the product manufacturer should in those cases be



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the party packaging the product, i.e. adding the packaging element to the

product. In addition, some product details may need to be tailored forindividual client circumstances and needs (e.g. projections, illustrations of

benefits, in the case of insurance-based PRIPs particularly). Though thistailoring can be done by the distributors who have direct contact withthese investors, the product manufacturer again should retain

responsibility for ensuring that distributors are able to do this tailoring asnecessary. Furthermore, if the distributor can vary the remuneration for

the product (e.g. whether the distributor is paid by commission on theproduct or a fee payment from the investor) and this has an impact on theproduct¶s charging structure, the disclosure must include an accurate

representation of the amount of remuneration and the impact this has onthe charging structure.

Chains of distributors

112. In some cases a PRIP can be distributed through distribution channelsincluding various distributors. This raises the question how far the productmanufacturer should control the distribution of the product. For example,

the manufacturer enters into a distribution agreement with distributor A,and distributor A enters into an agreement with distributor B. In thissituation both distributor A and B may distribute the product to retailinvestors, but distributor B does not have a contractual relationship withthe manufacturer. This issue should be tackled through the contractual

relationship, to be specified in the forthcoming PRIPs legislation.

Some questions identified about the production of KII information for certain typesof PRIPs

113. For some PRIPs structures, questions may arise about how many KIIsneed to be produced and which elements of the PRIP product the KII(s)

should cover. For example:

y an investment bond holding a number of funds;

y where one product wraps another (e.g. an investment bond holding astructured product);

y the underlying asset(s) was not intended to be sold standalone to retailinvestors but has been packaged for retail investors in a PRIPswrapper.

114. The Task Force believes that the key principle is that the client mustalways receive the necessary relevant information about the underlying

assets and the impact of the µwrapper¶/packaging (including e.g. the costsand charges of the underlying and the wrapper and how they worktogether). The detail of what this entails for different types of PRIPs shouldbe developed at Level 2.

Platforms and fund supermarkets

115. Platform operators and fund supermarkets will rely on the informationprovided by product manufacturers in respect of the funds chosen byinvestors, even where this information is µre-packaged¶ for individual

investors to cover only their chosen investments/funds out of the fullavailable range.



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116. Therefore, the division of responsibilities for product information between

manufacturers and distributors (i.e. the platform/supermarket orindependent adviser) still seems to work, in principle, for this business

model. We would expect a platform/fund supermarket operator to providethe relevant KII(s) produced by the product manufacturer to investorsinvesting via the platform if the transaction is made by the platform

operator directly (if a further intermediary is involved, responsibility fordelivery should rest with the intermediary).

117. In terms of oversight and control by product manufacturers overdistribution channels, our understanding is that, with the exception of lifeinsurance-based products (where the investor has a direct relationshipwith the life product manufacturer), product manufacturers will notnecessarily know the identities of all investors who have invested in theirfunds/products via a platform, and do not control such individual sales. Forplatform operators to provide such information to product manufacturers

to enable product manufacturer control of distribution would thereforerepresent a significant cost to platforms (and one that would probably bepassed on to investors).

Tailoring

118. The Task Force has considered whether there is a need for some furtherresponsibilities for the distributor (in addition to the delivery of the KII) to

inform the manufacturer of investor-specific factors in the PRIP. Suchfactors may include e.g.

y specific investment funds chosen by the investor from a wide rangeavailable under the PRIP; or

y a particular rate of commission taken or other charging structure

chosen;

y as well as relevant information about the investor¶s individual

circumstances (e.g. age) which may determine the benefits providedby a life insurance-based PRIP.

119. However, even where there is a need to tailor pre -contractualdocumentation to the individual investor, the Task Force considers that the

product manufacturer should retain responsibility for producing therelevant information documentation.

120. Therefore, two approaches might be considered:

(a) The KII is a standard document reflecting the product¶s features andlegal forms but which does not contain personalized information. TheKII does not take into account the individual circumstances of theinvestor. As a result the distributor cannot be allowed to introduceany changes to the KII produced by the product manufacturer.

The distributor would have to collect information from the investortailored to their situation (such as the investment amount, choice of

unit-linked/underlying assets, costs, beneficiary clause, etc) and tosubmit it to the product manufacturer. This proposal should besubmitted and agreed by the product manufacturer.



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(b) The KII is a document that recognises that different investor

circumstances and investment choices will have an impact on theproduct itself. For example, an insurance PRIP might have a different

charging structure depending on the investor's age, investmentamount or fund choice. A fully standardised KII would need to coverall variables and would supply the investor with excess information,

much of which would be irrelevant to the specific investor's needs.This would make it harder for investors to understand the

information in the KII. So, for some PRIPs at least, the KII should betailored where necessary. The product manufacturer should still beresponsible for the content of the KII but the distributor will have a

role in supplying investor details to the manufacturer to allow thedocument to be correctly tailored. The KII would remain a pre-contractual information document rather than a part of the

distributor's advice or an individual proposal. However, theinformation included would be closely tailored to the investor'sinformation requirements.

121. The Task Force¶s preference is for approach (a). A core standard KII

should not contain personalised information about the individual investor.This personalised information should be provided alongside the KII but in asupplementary document or annex at the point-of-sale. The personalised

information could be:

(i) produced by the product manufacturer on the basis of investorinformation obtained by the distributor;

(ii) approved by the product manufacturer on the basis of investorinformation obtained by the distributor, or

(iii) produced by the distributor using IT systems or software developed

and provided by the product manufacturer.

Again, detailed specific requirements to accommodate these points should

be developed at Level 2.

Prior approval of KII by competent authority

122. The Task Force has considered whether the KII should be subject to priorapproval by a competent authority. The majority of the Task Force doesnot support prior approval. Aside from the administrative burdens andpossible timing delays this approach might involve, prior approval mayshift the responsibility of contents of the KII from the product provider tothe competent authority. Furthermore, for insurance products, systematic

approval is not currently allowed under the Life and Non-Life Directives;nor under Solvency II.

123. However, three members of the Task Force are in favour of prior approvalof KIIs by a competent authority. One member sees a role of the

competent authority here to check whether, for listed products, the KII is

consistent with the prospectus.

Possible detailed product disclosure requirements

124. Task Force members have considered what specific common productinformation should be disclosed to investors about specific types of PRIP(e.g. on the insurance element of insurance-based PRIPs or on the issuer



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for securities-based PRIPs). The Task Force envisages that such detail

would be developed through Level 2 measures to support common Level 1high-level principles about product disclosure.

Suggested key common areas

125. The KII should aid the comparison of different PRIPs. Here, informationrequirements on some key areas are discussed, having the comparison

issue in mind. At this early stage, the KII is assumed to provideinformation about the product only, not intending to include an individual

proposal for the investor (as may be required for life insurance PRIPs, forinstance).

126. Information in the following key areas might be presented for differentPRIPs so as to aid comparisons:

y Essential information describing the product, including its investmentobjectives, explanations of how the product works and how its

performance is to be achieved, a description of the structure of the

product, an explanation of any guarantees that exist etc.

y An explanation of all relevant material r isks and the probability of suchrisks crystallising. The Task Force notes that for UCITS, a harmonized

quantitative volatility based risk rating is envisaged for the KII; whendeveloping Level 2 measures, it would need to be considered how thisconcept might be adjusted for other types of PRIPs, or how analogous

risk ratings might be developed for other types of PRIP.

y Information about past or expected future performance.

y An explanation of all costs on the product. The Task Force notes thatfor UCITS, a form of 'total expenses ratio' for costs taken from thefund is envisaged and, again, the Level 2 measures should considerhow this concept might need to be adjusted for other types of PRIP or

whether a different method of disclosing charges is more appropriate.

Description of the product, its structure and objectives

127. Though the investor should get some basic information about thefunctioning of the product (including the investment policy) it is even moreimportant to give clear information about the consequences of theconstruction to the individual investor. In particular, the KII should stressthe following features of the relevant PRIP in plain and concise language:

y a clear description of the objectives of the product, allowing investorsto distinguish between the objectives and the means used to achievethem; for example µcapital accumulation with minimum return at thedate of maturity as determined in the contract (or explicitly, minimumreturn exposed to an index such as CAC 40 at the date of maturity) ¶,

further information about insurance components (if any);

y how the invested capital/the premiums are used (at this stage, the KII

could simply state, for example, that a major part of the investedcapital/premium is actually used for investment, but a portion isneeded for the insurance component and for the costs as well ± therelevant portions may depend on specific parameters, e.g. insurancesum and age; maybe modification necessary for hidden costs etc.);



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y the main underlying or the main categories of eligible financialinstruments that are object of investment;

y a short summary of the investment strategy which shows how (or justthat) the performance of the product depends on the underlying

investment, whether or not the investor has the power to control theinvestment and what the risks for the performance are ± here, a

reference to further information sources could be inserted (forexample, for multiple unit-linked life insurance policies, there could belinks to the different KIIs of the underlying funds);

y the consequences of the product construction (such as restrictionsregarding the availability of the accumulated capital during the

contract and disadvantages/risks in the event the contract is cancelledearly or not held until maturity); and

y where relevant, there is a need for a common understanding of whatany guarantee involves. Such guarantees, their coverage, their

conditions and limitations, should be clearly explained in the KII, withdetail of these requirements developed at Level 2. Guarantees mayaffect the performance of the PRIP and its risks.

128. The description should be as standardized as possible. A glossary to the

PRIPs regulation could provide for a uniform cross-sectoral presentation,or even standard text elements to support the comparison of differentPRIPs and avoid confusion.

Risk

129. The Task Force believes that the most effective approach to disclosureabout the risks associated with a PRIP, and the probability of themcrystallising, is likely to involve a combination of some kind of overall riskrating and a narrative description.

130. The Task Force recognises that the harmonized quantitative volatility-based risk rating envisaged for UCITS KIIs is based on the well-known

statistical concept of (historic) volatility. In principle, this risk measurecould be applied to all kinds of investment. However, the specificities of

different types of PRIP have to be taken into account. The UCITS approachmay work for those PRIPs whose performance is directly linked tounderlying assets (the risk measure can be calculated for the linked

assets), but in other cases the risk measure may need to be assesseddifferently (e.g. if the PRIP may invest in a wide range of investmentfunds, it may be that from the disclosure document should discussdifferent risk profiles based on a range of sample contract structures).

131. Since some PRIPs have a maturity date it may be that the risk measurecould be complemented by an additional rating related to maturity. Thismight help the investor compare products.

132. Where the product contains a specific risk due to its

structure/construction, such as credit risk, counterparty risk, liquidity risk,or issuer risk, the KII should provide a narrative description, including theconsequences in the event the risk occurs and the likelihood of it.



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Returns and performance

133. Information on returns and performance may include information on past

and/or expected future performance, possibly utilising sample illustrations/scenarios.

134. The Task Force is aware that care is required in presenting pastperformance to ensure that it is fair, clear and not misleading, so thatinvestors are able to compare products. Investors must be clear that pastperformance is not necessarily a good guide to future performance, andfirms must not distort past performance data through unrepresentative orselective presentation of data and performance periods. Warnings will berequired to ensure that investors appreciate the limitations to pastperformance data. However, the Task Force also recognises that, if appropriately caveated, the data are likely to be of more value than simplyomitting past performance information.

135. The Task Force also recognises that it can be complicated to developperformance scenarios (whether for past or future performance) that aid

rather than confuse the investor.

136. MiFID, the Insurance Directives and the UCITS Directive contain existingstandards and requirements on the content and the presentation of performance information.

137. For example, Article 185 (5) of the Solvency II directive contains

provisions relating to information the insurance undertaking may providewith respect to the amount of potential future performance. An insurerthat wishes to present such figures has to prepare specimen calculationson the basis of three different rates of interest. The insurer must i nformthe policyholder in a clear and comprehensive manner that the specimencalculation is only a model of computation based on notional assumptionsand that the policyholder shall not derive any contractual claims from thespecimen calculation. It may be that this approach could be extended to

other types of PRIP (adapted as necessary), provided that:

y it is possible to adjust the assumption on the rates of interest or to useanother criteria such that it works for other PRIPs;

y the assumptions can be standardized and illustrate the possiblereturns of the product (that is, a stipulated optimistic, pessimistic and

neutral scenario, to be updated regularly), major returns at maturityare not included unless guaranteed; and

y the calculations should reflect the risk rating of the product and anyguarantees on performance and return.

138. In the light of CESR¶s work on UCITS, annual past performance of accumulated capital (in percentages, net of fees and other costs) may be

presented in a bar chart. Though this presentation does not give any

information about future returns, it could enable the comparison of different PRIPs regardless of any individual parameters (such as invested

capital or age). It may be that sample calculations for the life of aparticular contract could be used to illustrate the impact of guarantees andthe risk.



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Costs

139. At Level 1, it could usefully be required that KIIs for PRIPs should provide

information about all relevant costs to enable comparisons to be madebetween different PRIPs. This should include entry costs, ongoing costsand total costs (and the ratio of total costs involved in the PRIP ± similarto the µtotal expense ratio¶ required for UCITS). Further detailedrequirements, and sectoral specificities, should be developed at Level 2.

140. It should be clear to the investor how fees and other costs may reduce the

return on the investment.

Disclosure of information about insurance-based PRIPs

141. CEIOPS has undertaken significant consideration of pre-contractualdisclosure requirements for those PRIPS that could be described as µinvestments packaged as life insurance policies¶. CEIOPS¶ views were setout in Section 2 of its 2 November 2009 submission to the European

Commission. Key points included:

y CEIOPS considered how a balance might be achieved through ahorizontal approach to PRIPs disclosures which does not requireirrelevant disclosures nor lose the insurance-specific information that

will need to be disclosed for insurance-based PRIPs. CEIOPS¶ papercompared existing provisions under the CLD, Solvency II Directive,IMD and MiFID, and concluded that some of the essential information

identified by the European Commission, and by CEIOPS itself, isalready covered under existing disclosure requirements in EUinsurance legislation. Apart from the µsample calculation¶ and µcosts¶,the insurance-related Directives (CLD, Solvency II) deal with therelevant disclosures ± though some existing disclosures are insurancerelated and so would not be appropriate for all PRIPs (e.g. µpremium¶, µduration¶, µtermination and consequences¶, µsample calculation¶ and µbenefits¶).

y CEIOPS identified a non-exhaustive list of essential pre-contractualinformation for insurance-based PRIPs as including information underthe following headings:

o Name of the contracting partyo Supervisory authorityo Product category and main characteristicso The law applicable to the contracto Expected benefits and pay-out method

o Example/sample calculationo Risks of the producto Information about any guarantee and identity of any guarantoro Capital investment/fund compositiono Premiums (including current and total; method/frequency of

payment)o Costso Duration of the contract and consequences of ear ly termination

o Security (e.g. in case of insolvency)



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Product disclosure for structured deposits

142. In respect of structured deposits, the Task Force believes that certain

specific disclosures should be required under any future PRIPs regime.These are:

y information about the structure of the product, including how the returnis calculated, the identity of the deposit-taking institution and the

identity of any µguarantor¶ of the initial capital deposited. Thisinformation could be specified at Level 2, based on Article 31 of the

MiFID Level 2 Directive; and under a Level 1 provision that could mirrorMiFID Article 19(3);

y restrictions on the use of terms such as µguaranteed¶ or µcapitalprotected¶, unless effective third-party guarantees or capital protectionsexist. Deposit Guarantee Scheme coverage alone should not justify the

use of these terms. Any limits to guarantees should also be clearlyexplained. Level 2 should also explain to what extent intra-groupguarantees can be recognised. All this would be consistent with a high-

level requirement for fair, clear and not misleading communications;

y full and clear disclosure of any penalties, such as for early withdrawal,which could mean that a depositor does not get their full initial depositrepaid. When early withdrawal is not available this should also be

emphasized in the product disclosures; and

y the PRIPs regime could also usefully seek to indicate that banks shouldmove away from using names for structured deposits that could confuseinvestors by suggesting that the products are investments (such as µbonds¶). Similarly, the name µdeposit¶ should only be used relative todeposits and not other products, including products corresponding to a µpackage¶ of a deposit and another instrument.

143. Addressing these points should address some specific investor detriment

that could otherwise result in respect of structured deposits. Similar issuesmay arise in connection with some other types of PRIPs (including the useof third-party guarantees).



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Section 3: Selling practices

144.

The Task Force considered a number of areas where the PRIPs regime islikely to set requirements for the distribution of PRIPs. Its approach hasbeen to take existing MiFID provisions as the benchmark, while

recognising existing provisions in the IMD and other specificities of insurance and deposit-based PRIPs. The focus of these discussions was

primarily on the most difficult areas of selling practices, in order to providethe greatest assistance to the Commission.

Client Categorisation

145. The MiFID regime presumes that some types of client have moreknowledge or experience than others and requirements on firms dealingwith those clients are generally lighter. The IMD currently makes nogeneral distinction based on the client category and structured depositsare not currently subject to any directive requirements on sales

practices.11

146. The Task Force has considered whether there is merit in extending theMiFID client categorisation regime to PRIPs that are not currently coveredby the same approach.

y Structured deposits: the Task Force considers that structured depositscan be sold to retail or professional clients. The MiFID client categoriesare therefore likely to be relevant for these products.

y Insurance-based investments:12 where insurance contracts are basedon an individual life, the Task Force does not regard many situations

as allowing the investor to be categorised as professional.13

Capital redemption policies are used by corporate entities in someMember States, but where this is the case they tend to be non -profitpolicies and so have no investment element in them.

We note that some Member States have very recently seen capitalredemption policies being linked to unit-linked funds and sold to retail

investors. Where this is the case such policies are clearly PRIPs. Wheresold to corporate entities, unless those entities trade regularly in these

policies as part of their business activities, they are unlikely to possessthe knowledge and experience necessary to be regarded asprofessional clients.

11 The European Commission has indicated (in its MiFID Questions & Answers) that products

where the initial capital deposited could be at risk would be covered by MiFID. The Task Force

takes the view that such products should not be regarded as deposits if they are not repayable in

full.

12 This analysis is based on the understanding that pensions lie out of PRIPs scope and thatEuropean pensions regulations will be dete rmined by a separate process. It is the suggestion of

this Task Force that, where pensions are arranged by employers, the employer should be treatedon a consis tent basis. Unless all types of pension treat employers arranging schemes for their

staff as retail clients, there should be scope for employers to act as professional clients. 13 In case some insurance contracts prove to be consistently sold to sophisticated investors (like

large intermediaries directly doing business in the insurance sec tor) , a MiFID-like client

categorization could be taken into account.



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The Task Force therefore suggests that investors buying insurance-

based investments always be regarded as retail clients.

The best interests of investors

147. The foundation of the PRIPs regime and its central principle to ensure ahigher level of investor protection should be that, in everything a firmdoes, it acts in accordance with its investor¶s best interests. All other

considerations flow from this general duty.

148. MiFID currently requires that each firm must µact honestly, fairly andprofessionally in accordance with the best interests of its clients¶. The TaskForce does not think there are any circumstances in which it is acceptablefor a firm to deviate from this standard and therefore regards this as adesirable provision for all PRIPs.

Proportionality

149. The MiFID regime acknowledges that fundamental regulatory requirements

are applied to all firms but that the measures firms adopt to comply withthese requirements must be designed in a way that is best suited to thefirm¶s particular nature and circumstances. This proportionality principle isalso present in the spirit of the IMD. The Task Force believes that this is avery important concept and should apply across the PRIPs regime toensure a smooth implementation of its principles and rules, by providingflexibility according to the size, structure and nature of different firms andmarkets.

Conflicts of interest

150. MiFID conflicts of interest provisions build on the principle that firms mustact in the best interests of their investors. Allowing a conflict of intereststo lead to the detriment of an investor is clearly a breach of this principle.

The Task Force agrees that this holds true for all PRIPs.

151. Investor protection requires, among other things, that conflicts of interestare identified, managed and ± where risks to investor interests remain ±disclosed.

152. In the way they are drafted, those requirements can be regarded as

universal: they state the logical steps that a firm should take regardingconflicts of interest and thus, they appear to be readily and widelyapplicable to all PRIP distributors as well as to all PRIPs. This is further

confirmed by the fact that MiFID is shaped to address firms of differentsizes and levels of complexity.

153. Moreover, due to their nature ± these are organisational or administrativearrangements ± it seems difficult and disproportionate to require firms toset up different organizational arrangements, within the same legal entity,depending on the product they are distributing (MiFID PRIPs or non-MiFID

PRIPs, including insurance based-PRIPs).

154. At this stage, it does not appear that the high-level principles on conflictsof interest would need to be changed or adjusted in order to be applied toPRIPs outside MiFID scope. Indeed, for sales of insurance PRIPs and

structured deposits, like PRIPs within the MiFID scope, there is a need foruniform standards to protect investors from the adverse impact that could



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arise from conflicts of interests between the selling entity and its clients,

e.g. in cases where there are incentives to sell one specific product overanother.

155. When Level 2 measures are discussed in the future, to provide more detailon how these requirements will be applied to PRIPs, it will be necessary toconsider how best to provide the right level of customer protection in eachPRIP market. It may be that certain types of PRIP face particular issuesthat need to be taken into account in the provisions.

156. Some Task Force members expressed concern that, in some situations,the MiFID requirement to disclose conflicts of interest (where conflictscannot be managed in such a way that the firm is reasonably confident

that the conflict will not lead to investor detriment) may not be the bestoutcome. In some cases avoidance of the action leading to the conflictmight be more appropriate than disclosure.

157. Although subject to further work, as noted above, the Task Force

discussed a possible model for conflicts of interest provisions, based

largely on MiFID. This is reproduced as Annex 1 to this paper.

Advised sales

158. The Task Force suggests a definition of advice for the purposes of thePRIPs regime as follows:

A personal recommendation to an investor, either upon their request or at the initiative of the distributor, for a specific investment that is presented

as suitable for that person, or is based on a consideration of thecircumstances of that person.

159. Whenever these conditions are met, the advice given to the investor mustbe suitable. The standards expected in the suitability assessment should

be consistent for all PRIPs in order to ensure a uniform level of investor

protection. The following would be examples of situations in which adviceis provided.

y An investor has a face-to-face meeting with an adviser. The adviserasks for information about the investor¶s circumstances and needs,then conducts research as to which investment meets those needs.The adviser tells the investor that the recommended investment issuitable for them.

y The distributor reviews the existing client database to decide whichinvestors might be interested in a particular investment. The

distributor writes to all of these investors to explain that researchshows that the investment is suitable for their circumstances.

160. The suitability assessment (taking MiFID provisions as a benchmark) willentail the distributor gathering all relevant information from the investor

so as to be able to recommend a suitable PRIP. In order to be suitable,the investment must meet the investor¶s objectives, be consistent withtheir risk profile and the investor must have the necessary experience andknowledge in order to understand the risks involved in the transaction.

161. The Task Force also recommends that the PRIPs regime learn from theIMD where additional investor protections are desirable.



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y Before the service is provided to the investor, distributors must explain

the basis on which advice is to be provided. To meet this requirement,distributors should explain whether they conduct a fair analysis of the

market or are restricted (for example by contractual arrangements) tosell only the products of certain manufacturers.

y Where the distributor informs the investor that advice is based on afair analysis of the market, that analysis must be based onconsideration of a sufficiently large number of investments.

y There should be a requirement for distributors to provide investorswith a summary, in writing, of the underlying reasons for therecommendation, including a discussion on how the advice meets the

investor's demands and needs.

162. These conduct of business rules constitute a fundamental achievement interms of investor protection which should be granted to all investorsequally, irrespective of the PRIP that is being advised.

163. There were, however, some divergent views on whether advice may begiven if an investor does not disclose all relevant information aboutthemselves.

y The majority of the Task Force consider that, in this situation, advicemay not be given. Where advice is provided, they believe that it mustbe suitable. Without knowing all relevant facts, it is possible that theadvice is unsuitable. Unsuitable advice would result in mis-selling andthe regulatory system should not countenance this.

y On the other hand, some members of CEIOPS consider that advicemay still be provided if the investor chooses not to disclose all relevantinformation. In these cases, they say that the advice may be based onthe information that is known and the suitability standard should onlybe considered in relation to those facts.

164. A possible model for advice provisions for PRIPs has been included inAnnex 2. This is a draft model discussed by the Task Force to aiddiscussions and would need to be updated and amended to take account

of further detailed discussions, particularly at Level 2.

Non-advised sales

165. There were differing views on transactions that do not fall within the

definition of advice in paragraph [158].

y The majority of the Task Force agreed that it should , in principle, bepossible to sell PRIPs on a non-advised basis. They consider thatinvestors who have the confidence to make their own decisions shouldnot be required to pay higher charges in order to receive advice. Thefollowing would be examples of situations where the transaction is on a

non-advised basis.

o The investor goes to the manufacturer¶s website, reads theinvestment information available online and chooses to make anapplication online with no further contact from the firm.



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o The investor picks up an investment brochure in a branch office,

reads through the information, completes the application form inthe brochure and submits it, by post, to the firm.

o The investor visits a branch and sits down with a distributor. Theinvestor tells the distributor that they want to invest 100.000 eurosin a specific investment. The distributor has made no

recommendation to the investor. However, it was no ted that thissituation will be extremely difficult to manage in practice without

giving an impression that advice has been provided.o The investor visits a branch and sits down with a distributor. The

distributor provides the investor with information about available

investments and takes the investor through a guided sales pathusing a decision tree format. Each step in the decision tree isdecided by the investor. The distributor is only able to provide

information, never to offer advice as to which option is best for theinvestor¶s needs or circumstances. Again, it was noted that itwould be difficult for the firm to manage this transaction in such amanner that it is clear to the investor that no advice has beenprovided.

If at any stage the distributor offers an opinion on the suitability of aproduct or gives the impression that advice is being provided on thebasis of the customer¶s circumstances, the transaction becomes anadvised sale and the full suitability test is required.

y Other members of the Task Force pointed out that theirimplementation of the IMD means that insurance products ± includingsome products that would fall within the PRIPs regime ± can currentlyonly be sold with advice (albeit that it is these members who tend toagree that advice can be provided without knowing all relevantinformation). They consider that allowing non-advised sales of PRIPswill thus reduce investor protection.

166. Of the majority who consider that non-advised sales should be possible,

there was agreement that the MiFID-derived appropriateness test wouldoffer a sensible investor protection.

167. Where it applies, the appropriateness test requires the distributor toassess whether the investor has the necessary knowledge and experienceto be able to take an informed investment decision based on a properunderstanding of the features of the product and the related risks. It wasagreed that, if non-advised sales are permitted, such an assessment isrelevant for PRIPs as they can be difficult for the average retail investor tounderstand.

168. Of those who agree that non-advised sales should be permitted, many feltthat it should be possible for non-MiFID PRIPs to be either complex ornon-complex.

169. There is a general expectation that most PRIPs are likely to be classed as

complex products but it was felt that more work should be done at Level 2to determine the criteria on which this classification should be made. TheMiFID criteria are designed for certain investments and different criteriamay be needed for non-MiFID PRIPs. Additionally, it may be that some

types of non-MiFID investments should always be regarded as complex.



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170. On the other hand, some questioned whether the complex/non-complex

categorisation of products is useful for the PRIPs market. As most PRIPshave complicated structures, some felt that all PRIPs should simply be

regarded as complex.

171. This would have the effect of making the appropriateness test compulsoryfor all non-advised sales of PRIPs and would prevent execution-only sales(under which the distributor makes no assessment of the suitability orappropriateness of the product for the investor).

172. MiFID currently regards all UCITS as non-complex. The MiFID review maysuggest a change to this approach so that some UCITS with morecomplicated structures become classified as complex. However, this would

still mean that many UCITS are still classified as non-complex. Thisapproach might need to be adjusted to preserve the level playing field if no other type of PRIP can be classified as non -complex.

Inducements

173. It is essential that inducements are adequately regulated to ensure theproper protection of investors. They can provide an incentive fordistributors to sell one product rather than another that would be moresuitable or appropriate for the investor.

174. Inducements provisions must be regarded as complementary (and notsubstitutes or alternatives) to the requirements on managing conflicts of interest to avoid investor detriment.

175. The Task Force believes that the PRIPs regime should specify whatinducements are compatible with the general duty to act honestly, fairlyand professionally in accordance with the best interests of its clients.Inducements should cover all payments (such as fees, commissions ornon-monetary benefits) made to the distributor. This may need to besubject to a de minimis test so that, for example, stationery and other

trivial non-monetary benefits are not caught by the inducementsprovisions.

176. The MiFID inducements provisions were agreed to be a good starting point

for the PRIPs regime. However, further work is necessary at Level 2 toensure that the regime adequately accounts for market specificities fordifferent types of PRIP. In particular, it might be necessary for the non-

exhaustive list of proper fees included in MiFID Level 2 Article 26(c) to beamended to take into account the specificities of the di fferent types of

PRIPs.

177. Some members also questioned whether MiFID provisions might needfurther clarification. Where inducements are disclosed for example, is thissufficient to protect investors? Are they are able to use the information in

a meaningful manner? For example, where an adviser can earn moremoney by recommending one product rather than another, disclosure of

the remuneration from the recommended product will not necessarilyenable the investor to understand how this may have undermined thequality of advice. It may be that further work is needed at Level 2 orLevel 3 to address this problem.



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178. In addition, it is necessary to ensure that the volume of disclosures

required by the regime is not disproportionate and does not overload theinvestor with too much information.

179. Annex 3 includes the model used in discussions by the Task Force forinducements provisions that could be applied to PRIPs. This may form ahelpful basis for future work but would need to take account of the aboveconsiderations.



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Annex 1: Possible model for PRIPs conflicts of interest

Level 1 requirements

1. PRIPs firms14 must take all reasonable steps to identify conflicts of interest

between themselves and their investors or between one investor and another.

2. PRIPs firms must manage conflicts of interest in such a way to ensure, with

reasonable confidence, that risks of damage to investor interests will be

prevented.

3. Where the management of conflicts of interest cannot ensure, with reasonable

confidence, that risks of damage to investor interests are prevented, PRIPs

firms must disclose the general nature and/or sources of conflicts of interest

to the investor before undertaking the business.


4. PRIPs firms must establish, implement and maintain a conflicts of interestpolicy, set out in writing, that is appropriate to the size and organisation of

the firm and the nature, scale and complexity of the conflicts of interest.

5. The policy must identify the conflicts of interest that may lead to a material

risk of damage to the interests of one or more investors and must specify

procedures to be followed and measures to be adopted to manage such

conflicts.

6. Individuals engaged in the services that give rise to the conflicts of interest

must carry on those activities at a level of independence appropriate to the

size of the PRIPs firm and the materiality of the risk of damage to investors.

7. Effective procedures to manage conflicts include the following:

y measures to prevent or control the flow of information between relevantpersons;

y the separate supervision of relevant persons;

y the removal of any direct link between remuneration or relevant personsengaged in the activity and the remuneration, or revenues generated by,different relevant persons engaged in another activity where a conflict of interests may arise;

y measures to prevent or control any person from exercising inappropriateinfluence over the way in which investment services are carried out; and

y measures to prevent or control the simultaneous or sequentialinvolvement of a relevant person in separate services where such

involvement may impair the proper management of conflicts of interest.

8. Disclosure of conflicts of interest must be made in durable medium and

include sufficient detail, taking into account the nature of the investor, to

14 The µPRIPs firm¶ term used in this annex covers all firms (manufacturers and distributors) in the

PRIPs regime.



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enable the investor to take an informed decision with respect to the

investment service in the context of which the conflict of interests arises.

9.

A record must be kept of services in which a conflict of interests has arisenthat has entailed a material risk of damage to the interests of one or more

investors, or in which such damage may arise.

10. Common examples of conflicts of interest include:

y where a distributor has a holding, direct or indirect, representing more

than 10% of the voting rights or of the capital in a given manufacturer;

y where a manufacturer or parent of a manufacturer has a holding, direct or

indirect, representing more than 10% of the voting rights or of the capitalin the distributor;

y the distributor is likely to make a financial gain, or avoid a financial loss,at the expense of the investor;

y the distributor has an interest in the outcome of a service provided to theinvestor or transaction carried out for the investor, that is different from

the investor¶s interest in the outcome;

y the distributor has a financial interest or other incentive to favour theinterest of another investor, or group of investors, over the interests of theinvestor;

y the distributor carries out the same business as the investor; or

y the distributor will receive from another party other than the investor, aninducement in relation to the service provided, other than the standard

commission or fee for that service.



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Annex 2: Possible model for PRIPs advice


1. When providing personal recommendations or advice the distributor shallobtain the necessary information regarding the investor's or potentialinvestor's knowledge and experience in the investment field relevant to thespecific type of investment, his financial situation and his investmentobjectives so as to enable the distributor to recommend to the investor orpotential investor the PRIPs that are suitable for him.

2. Distributors shall also explain the basis on which advice is to be provided,

before the service is provided to the investor .

3. When the distributor informs the investor that it gives its advice on the basisof a fair analysis, it is obliged to give that advice on the basis of an analysis of a sufficiently large number of financial investments available on the market,

to enable it to make a recommendation, in accordance with professional

criteria, regarding which investment would be adequate to meet the investor'sneeds.

4. On the basis of the information obtained about the investor, the distributor

shall specify, in writing, the underlying reasons for the advice given to theinvestor on a given PRIP, including a discussion on how the advice meets theinvestor's demands and needs. These details shall be modulated according to

the complexity of the PRIP being proposed.

5. Where, when providing advice, a distributor does not obtain the relevantinformation required, the distributor shall not recommend a PRIP to theinvestor or potential investor.


6.

Member States shall ensure that distributors obtain from investors or potentialinvestors such information as is necessary for the distributor to understandthe essential facts about the investor and to have a reasonable basis forbelieving that the specific transaction to be recommended satisfies thefollowing criteria:

(a) it meets the investment objectives of the investor in question;

(b) it is such that the investor is able financially to bear any related

investment risks consistent with his investment objectives;

(c) it is such that the investor has the necessary experience and knowledge

in order to understand the risks involved in the transaction.

7. The information regarding the financial situation of the investor or potentialinvestor shall include, where relevant, information on the source and extent of

his regular income, his assets, including liquid assets, investments and realproperty, and his regular financial commitments.

8. The information regarding the investment objectives of the investor orpotential investor shall include, where relevant, information on the length of time for which the investor wishes to hold the investment, his preferences

regarding risk taking, his risk profile, and the purposes of the investment.



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9. Distributors shall inform their investors before conclusion of the contract of

the features of the service that is going to be provided specifying whether:

(i) they give advice based on the obligation to provide a fair analysis (Level1, paragraphs 2 and 3); or

(ii) they are under a contractual obligation to give advice exclusively withone or more PRIPs manufacturers. In that case, he shall, at theinvestor's request provide the names of those PRIPs manufacturers; or

(iii) they are not under a contractual obligation to give advice exclusivelywith one or more PRIPs providers and do not give advice based on theobligation to provide a fair analysis (Level 1, paragraphs 2 and 3). Inthat case, they shall, at the investor's request provide the names of thePRIPs manufacturers with which they may and do conduct business.

In those cases where information is to be provided solely at the investor¶srequest, the investor shall be informed that he has the right to request such

information.



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Annex 3: Possible model for PRIPs inducements provisions


1. A firm must act honestly, fairly and professionally in accordance with the best

interests of its investors.


2. Distributors will not be regarded as acting honestly, fairly and professionally in

accordance with the best interests of their investors if they receive anyinducements other than the following:

y any payments (such as fees, commissions or non-monetary benefits) paidor provided to or by the investor or a person on behal f of the investor;

y any payments (such as fees or commissions, including contingentcommissions) and non-monetary benefits paid or provided to or by the

manufacturer, a third party or a person on behalf of the manufacturer or athird party, where the following conditions are satisfied:

o clear prior disclosure is made to the investor; ando the item is designed to enhance the quality of the relevant service to

the investor and does not impair compliance with the firm's duty to actin the best interests of the investor;

y proper fees which are necessary for the service and cannot, by theirnature, conflict with the distributor¶s duty to act in the best interests of itsinvestor.

3. The receipt by a distributor of an inducement in connection with investmentadvice or general recommendations, in circumstances where the advice orrecommendations are not biased as a result of the receipt of the inducement,

should be considered as designed to enhance the quality of the investmentadvice to the investor.

Documents

3L3 Task Force on Packaged Retail Investment Products Consolidated Report 20100622 v0.2[1] BdP