Guidance

Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019: explanatory information

Published 22 November 2018

1. Context

The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.

The EUWA also gives Ministers powers to make statutory instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.

HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.

This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.

2. Notice

The accompanying draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.

3. Policy background and purpose of the SI

3.1 What does the underlying EU regulation and UK law do?

The EU Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation introduces a standardised disclosure document (called a Key Information Document or KID) to be provided when packaged investment or insurance-based investment products are sold to retail investors.

PRIIPs are investment products which may be offered to retail customers and may be considered as an alternative to, for example, depositing cash in a savings account. They include, but are not limited to, financial products like investment funds, life insurance policies that have an investment element, derivatives and structured investment products.

The objective of the KID is to make it easier for retail investors to understand and compare similar financial products by requiring risks, performance scenarios, costs and other information about the product to be disclosed in a standardised way.

The PRIIPS Regulation came into application across the EU on 1 January 2018. It creates consistent rules on:

• the requirement for a KID
• the length, format and content of KIDs
• the provision of KIDs to retail investors

3.2 Deficiencies this SI remedies

Consistent with the government’s objective of providing continuity to businesses and consumers as far as possible, the policy approach set out in the PRIIPs legislation will not change after the UK has left the EU. This SI will make amendments to retained EU law related to PRIIPs and fix any deficiencies to the legislation, to ensure that it continues to operate effectively in the UK once the UK has left the EU.

The changes for firms resulting from this SI are expected to be minimal. This SI will effectively create a regime for the preparation and provision of KIDs in relation to PRIIPs which are made available to retail investors in the UK. The UK PRIIPs regime introduced by this SI will be operationally equivalent to the EU PRIIPs regime on exit day, so that firms manufacturing or advising on PRIIPs for sale to UK investors continue to be subject to the same obligations as they are currently.

Changes introduced by the SI include:

Amending the scope of the regulation to relate to PRIIPs sold to investors in the UK only

The PRIIPs Regulation applies to those firms that manufacture, advise on or sell PRIIPs to investors in the EU. As the UK will no longer be a Member State, this SI amends the Regulation to ensure that after Exit, the UK PRIIPs Regulation will only apply to those firms (UK and third country) that manufacture, advise on or sell PRIIPs to investors in the UK. This SI will mean that the UK PRIIPs framework will not apply to any firms, including UK firms, that manufacture, advise on or sell PRIIPs to investors in the EU or in any other third country. Where UK firms are manufacturing PRIIPs for, or selling PRIIPs to, to EU retail investors, they will still be subject to the requirements of the EU’s PRIIPs Regulation.

Amending the scope of the regulation to exclude certain issuers

Any products which are currently outside the scope of the EU PRIIPs Regulation will also be outside the scope of the UK PRIIPs regime. This SI upholds an existing exemption for certain securities which are also outside the scope of the Prospectus Directive, such as non-equity securities issued or guaranteed by sovereigns and certain public-sector entities, and shares issued by central banks.

Currently, such securities issued or guaranteed by EEA sovereigns and public-sector bodies fall under this exemption. This SI extends that exemption so that all such securities issued or guaranteed by any sovereign or public-sector body, in any country, will be exempt from the scope of the UK PRIIPs Regulation.

This approach will avoid market disruption by ensuring that no new products fall within scope of the PRIIPs regime in the UK on exit day, and ensure that after exit the UK treats EEA countries in the same way as other third countries.

Transfer of functions

The EU PRIIPs Regulation assigns functions to a number of EU authorities – primarily the European Commission, the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). These would no longer apply in the UK after EU withdrawal, leaving a deficiency in the UK legislation, as those functions would not be carried out by anyone in relation to the UK. This SI removes this deficiency by generally transferring the functions of ESMA and EIOPA to the UK regulator—the Financial Conduct Authority (FCA)—and the functions of the Commission to HM Treasury.

Binding Technical Standards (BTS)

Under the EU system of financial regulation, the Commission is responsible for developing legislation, with the exception of Binding Technical Standards (BTS) which are developed and drafted by the European Supervisory Authorities. Across financial services regulation, HM Treasury is transferring responsibility for making BTS to the UK financial services regulators. The basis on which this function is to be exercised is set out in the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018.

Consistent with this approach, this SI transfers responsibility for making BTS under PRIIPs to the FCA. The FCA will also have responsibility for correcting deficiencies in PRIIPs BTS so that they operate effectively immediately on exit day and that they remain fit for purpose thereafter.

Information sharing and cooperation requirements between UK and EEA regulators

This SI deletes provisions in retained EU law that will become redundant when the UK leaves the EU, such as requirements regarding powers of European regulators and other references to EU bodies and EU Member States. In the EU PRIIPs Regulation, there are also obligations on UK authorities to cooperate and share information with EEA authorities. This SI removes these obligations from UK legislation. Instead, UK authorities will be able to continue to cooperate and share information with EEA authorities, in the same way as they can with authorities outside the EEA, based on the existing domestic framework provisions for cooperation and information sharing, which allow for this on a discretionary basis. Indeed, it is the UK’s intention to maintain a high level of mutually-beneficial supervisory cooperation with EU and EEA authorities.

Treatment of Undertakings for Collective Investment in Transferable Securities (UCITS)

The EU PRIIPs Regulation contains an exemption from its requirements in respect of UCITS until 31 December 2019. This SI maintains this exemption in the UK PRIIPs Regulation for all UCITS, including EEA UCITS. This is to ensure both UK and EEA funds are able to continue to adhere to the existing disclosure framework for UCITS until this exemption ends, and that UK investors continue to receive the same disclosures for equivalent products. The overall approach to onshoring the UCITS regime is set out in The Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 2018: explanatory information.

3.3 Relevant Rulebook and Binding Technical Standard changes

The FCA will be updating its rulebook and relevant binding technical standards to reflect the changes introduced through this SI, and to address any deficiencies as a result of the UK leaving the EU. The FCA has confirmed its intention to consult on these changes in the autumn.

3.4 Stakeholders

This SI affects firms that manufacture, sell or advise on retail investment products that fall within the scope of the PRIIPs Regulation. This includes, but is not limited to, firms such as asset managers, insurers and investment advisors.

HM Treasury has engaged with industry bodies where possible to ensure awareness of these changes. As already noted, the intention of this SI is not to make policy changes, but rather to reflect the UK’s new position outside the EU, and to smooth the transition to this position.

This SI does not include provisions that will be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK government’s statement in March 2018, and other provisions dealing with Gibraltar more generally. Provisions covering Gibraltar will be included in separate SIs.

4. Next steps

HM Treasury plans to lay this instrument before Parliament before exit.

5. Further information

Read HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act 2018.

6. Enquiries

If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.