KIID: Necessity is the mother of all inventions (part II)
Part II of the interview with Christopher Stuart–Sinclair and Lou Kiesch from Deloitte Luxembourg: Though so far fund distributors have reacted cautiously to the KIID because of the bad image it might give to some funds, the industry must be aware that in the foreseeable future an investor information document will become compulsory for all types of funds, not only UCITS.
LFF: Do fund distributors react cautiously to the KIID because it could give a negative image to a fund, for instance if the fund has a high risk factor?
SS: In one respect, it is the distributors who have been asking for it. That is the experience in Germany, where the impetus and the incentive to produce a KIID is very much driven by the wish of the distributors to have a single document for domestic funds, and where the KIID is obligatory without grandfathering clauses for the international funds distributed in Germany, when in theory they could continue to use the Short Form Prospectus until next year. Distributors have been demanding a common document.
The second side of it is that the distributors are looking for something that will help them to explain the fund. So far, the distributor has been at the higher value end of the distribution chain, without necessarily having the same compliance obligations. This is changing. To a certain extent, distributors welcome the KIID, because it provides a set of information that can alleviate part of their responsibility for ensuring that the investment is appropriate.
The third point is: Will customers be dissuaded by a high risk factor? That will lead us to a much more academic debate as to the validity of the SRRI (Synthetic Risk and Reward Indicator) and how it will react under pressure. Will the picture given by the KIID actually be what the investor experiences when we encounter the next period of market turbulence?
LK: Any serious distributor, be it institutional or wholesale or even in the Private Banking area, must embrace the KIID because it allows the products to be compared going forward. You have a standardised approach for all different asset classes across the different jurisdictions. Within Private Banking, it could make things a bit more difficult, if the SRRI reflects a risk level that is unexpected given the customer’s stated overall risk profile, especially if the indicator on equity investments, for example, starts to show up in the highest risk categories. But overall it should make the task of the distributer easier, for one of the key functions of the KIID is comparability across all products.
LFF: Is the KIID only compulsory for UCITS?
LK: It is compulsory for UCITS, but it is not compulsory only for UCITS, because some jurisdictions ask for KIIDs to be prepared for Non-UCITS as well. And that means not only for non-UCITS domiciled and distributed in their own jurisdiction, but it could be compulsory as well for non-UCITS, such as a Luxembourg domiciled SIF, distributed via a private placement channel in that jurisdictions. A Luxembourg-domiciled SIF could very well end up preparing a KIID as well.
SS: The Swiss market is preparing to introduce a Swiss KIID over time for all of the domestic market (with the exception of Real Estate Funds). But we also have another piece of EU legislation, which is in the consultation phase and included in the reflections on Mifid II. This is the PRIPS, the Packaged Retail Invest Product Directive. This foresees a KIID for everything that is not a UCITS: alternative funds, other funds, basic securities and also a certain number of insurance products. The UCITS has very often been the pathfinder that shows the way the industry should go, and in respect to the KIID, UCITS are considered the benchmark for other products in the future.
LFF: Why do fund distributors tend to outsource the production of the KIID, although they should be the ones who are best informed about the fund?
SS: The KIID is unique in so far as it crosses many business lines within a promoter’s organisation, that don’t usually or necessarily work together in a operational context. The KIID cuts across everything, be it legal departments, risk departments, compliance, general management, product development, marketing, fund accounting and transfer agency, to name but some. There is no transversal link across all those departments below the management committee. So one of the challenges the industry is facing in producing the KIID, is getting all those interlocking pieces to work together when required to a tight deadline. In many cases an Independent Co-ordinator can more adequately fulfill that role than introducing another managerial function within the promoter’s infrastructure.
LK: The industry completely underestimated the upfront exercise, that is to say the project planning, getting the IT infrastructure in place and, above all, having the ongoing monitoring infrastructure in place to vet those parameters that may trigger a new KIID. Now they have been taken by the throat, although they have some breathing space with the grandfathering clause. Sooner or later there will be a trend a little bit like in the fund registration and distribution areas, that will see the widespread outsourcing of the KIID. There is too much effort, too much cost linked to it, combined with an extremely high risk from both a reputational and regulatory perspective. Not everybody wants to do that on their own. For a specialist document, the industry needs specialist providers.