The new EU rules on a key information document (KID) for retail investors were published in the Official Journal on 9 December 2014. The KID is to be a mandatory, three-page A4 document provided before the retail investor enters into any commitment.
A KID will be required for a wide range of investment products, the so called Packaged Retail and Insurance based Investment products (PRIIPs), including funds, structured products, unit-linked and with-profits life insurance contracts, and structured deposits.
Buying PRIIPs is complex for consumers compared to many other consumer goods. For the latter the assessment of quality and whether the goods perform according to the consumers' expectations can often be made right away. By contrast, the quality of financial products can be very hard to assess. For instance, with long-term PRIIP investments investors might not realise how the investment is performing or whether they have been miss-sold a financial product until a considerable number of years have passed. In addition, consumers typically will not be able to learn from experience given the infrequency with which they often buy PRIIPs.
Coupled to this, the retail investment environment has become increasingly complex. The market is characterised by a wide range of products with uncertain returns and costs. Some products might involve multiple charges at the time of purchase and throughout the product life-cycle. Risk profiles can be extremely difficult to understand, making it difficult to assess whether a product is right for the individual investor.
Given this, a traditional approach to disclosures focused solely on information and with little regard to its presentation, is in being superseded in policy making by an approach that is more informed by insights into consumer behaviours. For instance, the framing of information can be considered, so as to counter cognitive biases which may distort perceptions and provide information in a way that is both simple to understand but also salient for the consumer.
The PRIIPs Regulation reflects these considerations already at 'level one'. It introduces specific measures to simplify and standardise the KID, so as to enable consumers to compare products across various providers, make better choices between different investment options and across product classes, while also increasing the salience and comprehension of the key information provided and its use in making an investment decision.