KIDs Say the Darndest Things: Or, the Most Plain-Language Things

KIDs Say the Darndest Things: Or, the Most Plain-Language Things

Those of us with some years on us may remember that Art Linklater, an avuncular broadcast personality of the 50s and 60s of the last century, popularized the expression “kids say the darndest things,” as a recurring segment on his television show.

In Europe today the question might be whether KIDs will say the darndest things, and they’d better not try. Regulators may not have the same appetite for “cuteness” that the avuncular Mr. Linklater did.

Fittingly, Linklater’s expression, with some modification (“darndest” sounded too darn American) was eventually exported to Europe. Britain’s ITV ran “Kids Say the Funniest Things” in 1999 and 2000.

I am reminded of this because….

In January 2017 new regulations go into effect in the European Union, affecting Packaged Retail and Insurance-based Investment Products (PRIIPs). The new regs create a unitary disclosure standard for the retail side of the insurance, banking, and asset management industries governing transparency of products as well as the comparability of information from one investment product to another.

The PRIIPs regs, issued on November 11, 2015, require no national transposition for their enforceability.

The centerpiece of the new system is a Key Information Document (KID) which the providers of PRIIPs are required to give to their investors. The asset management industry in Europe has been dealing with KIDs since 2011 as a consequence of an earlier round of rulemaking, over the Undertakings for the Collective Investment in Transferable Securities.  So there will be a lot more groundwork to be done in the banking and insurance industry, where the KIDS are new to the block, so to speak.

A white paper on the subject from RR Donnelley, the investment communications-strategy concern, cautions that the “new regulation … contains certain ambiguities that are yet to be fully worked out and resolved.” Some of the problems arise from the fact that investment products can be complicated things, and displaying the complexity in risk-return terms in an insightful and comparable way in the concise manner required is “no simple matter.” It sounds a bit like explaining Kantian philosophy in a tweet.

The Gist

The gist of it, though, is this. The KID must be a three page, pre-contractual, plain language document that contains specific information about the product to be sold. It must stand alone, that is, it must make its disclosures without cross-referencing with other documents.  It must be available in the official language, or one of the official languages, of the Member State, and the part of the Member State, where it is distributed.  And of course it must be “accurate, fair, clear, and not misleading.”

Some important financial products are explicitly excluded from these regulations. These are:

  • Non-life insurance products
  • Pure protection products
  • Non-structured deposits
  • Vanilla shares
  • Government bonds
  • Pension products recognized by Member States as retirement vehicles.

Donnelley suggests that affected firms work through seven preparatory steps: classification and definition; the in-house versus outsourcing decisions; costings for both (factoring in quality, the ability to deliver over time, responsiveness of service and experience, and the complexity of the financial documentation); content management and version control; distribution (this is, in prep, a definitional problem itself – who will get the KIDS and how will they be sent? Do the available outsourced suppliers have integrated distribution solutions?); consistency review (the KID must be consistent with the prospectus for the same products; and finally review of service level agreements. These SLAs between manufacture and distributors will have to be updated to include their respective responsibilities under the new system.

Content of the KID

What can we say with more particularity about what the KIDs will say? They will be expected to answer the following questions:

What is this product?

What are the risks and what could I get in return?

What are the costs?

What happens if (X) is unable to pay out?

How long should I hold it and can I take money out early?

How can I complain?

And they’ll be expected to be consistent with the Synthetic Risk Indicators calculation. Manufacturers and distributors, as Donnelley cautions, will have to “gather the data points to show full transparency regarding cost disclosure.”

 

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