New requirement to publish a "key information document" for individual investors in any type of investment fund

From 31 December 2016 certain fund managers will be required to publish a key information document (KID) to prospective investors in their funds, as a result of the EU’s Packaged Retail Investment and Insurance-based Investment Product Regulation (the Regulation). 

Although the Regulation’s title suggests it will only be relevant to traditional packaged products, the detail reveals that it will also apply to any type of investment fund which accepts an individual investor who cannot be opted-up to professional client status based on the test in the Markets in Financial Instruments Directive (MiFID). This test is significantly harder for an individual to satisfy than the test which generally applies when opting-up individuals investing in funds. 

The MiFID test: hard for individual investors to satisfy? 

It is common practice for UK-based fund managers who wish to target high net worth and sophisticated individuals to do so on the basis that such individuals can be opted-up, i.e. treated as professional clients, for the purposes of the FCA Rules. 

Because fund management is not a type of activity covered by MiFID, those fund managers can do this based on the simplified test in the FCA Rules applying to non-MIFID business, which simply requires the firm to undertake an adequate assessment of the expertise, experience and knowledge of the individual that gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the client is capable of making his own investment decisions and understanding the risks involved, and to follow certain procedures regarding the giving of risk warnings and obtaining a written confirmation from the individual that he or she wishes to being treated as a professional client and understands the consequences of doing so. 

However, the test under MiFID – which will apply for the purposes of the Regulation – requires in addition that at least two of the following criteria are satisfied:

• the individual has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters;
• the size of the individual’s financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds EUR 500,000;
• the individual works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged. 

The requirement for KIDs 

Requirements for the form and content of a KID can be found in Articles 6 to 12 of the Regulation. Some key points to note are:

• a KID must be accurate, fair, clear and not misleading;
• it must be clearly separate from marketing materials and be a stand-alone document (unless the fund falls within an exception);
• it must contain certain prescribed information about the investment fund, including the nature and main features of the fund, a description of its risk profile, the direct and indirect costs to be borne by the retail investor, information on redemption terms, and details on how to complain about the fund or the fund manager;
• the fund manager must review the KID regularly and make revisions promptly available;
• if the KID is misleading, inaccurate or inconsistent with the Regulation’s requirements or the fund’s legally binding documentation, retail investors may claim damages from the fund manager for loss resulting from their reliance on the KID. 

These requirements are similar to those applying to UCITS as introduced by UCITS IV. The Regulation provides that UCITS fund managers will be exempt from the Regulation until 31 December 2019, at which point the UCITS regime may be prolonged or might be replaced by the Regulation.

ESMA and the EBA are due to submit draft technical standards on certain provisions to the Commission by 31 March 2016.