KIID: Necessity is the mother of all inventions (part I)
Since 1 July 2011 the Key Investor Document (KIID) has become compulsory for all UCITS funds, although a grandfathering clause permits delayed implementation through until July 2012. But as a survey from Deloitte Luxembourg reveals, the industry is not yet ready for this development. Lou Kiesch, Partner and Christopher Stuart-Sinclair, Director at Deloitte, share their thoughts on the KIID: how it all began and where we stand now.
LFF: Who had the idea of developing a KIID in the beginning?
SS: That is probably one of the aspirations of the marketplace since inception. The idea as to how one can render transparent complex and different fund structures in such a way that the man in the street could understand what he was actually investing in. The thought process probably jelled with the introduction in UCITS III of more complex products and certainly crystallised in the banking crisis. But before that obviously UCITS IV had embraced the ideas behind the KIID - to render accessible to the man on the street the complexity of what he is buying.
LK: Necessity is the mother of all inventions. It’s as much the failure of the simplified prospectus as anything else. The simplified prospectus as it was perceived and designed under UCITS III didn’t work. It was originally intended to fill the same role as the KIID now plays. But Be it from its form, or be it from the content, it was a failure. It was time that guidelines came out as to the layout, as well as to the content. Now there is a harmonised approach for both sides, a single document on two sides of A4 paper that will describe each fund in the same terms.
LFF: How were clients informed about a fund before the existence of the KIID?
LK: The KIID is a hybrid document. It is not a marketing document; strictly speaking it is a regulatory document, although it is not Visa stamped. It is nevertheless a key responsibility of promoters, Management Companies, Fund Boards etc and they must deal with the KIID in its regulatory context.
SS: Before the KIID, investors were supposed to read the prospectus: that could be a 40 page document, or longer. They could be invited to read the short form prospectus which in certain cases proved to be even longer than the long form prospectus, or at least so it appeared when you tried to read it. They were assailed with a barrage of different marketing material. It was very much on the basis of caveat emptor that the investor was expected to know what he was buying. Recent experience, and even the interest of the market itself to ensure perennity in investment flows has shifted the focus very sharply to ensuring that an investment is appropriate for an investors needs and means. The thinking from the Commission and the market itself is that in these times of universal markets there is a social responsibility in investing itself, and also in making sure that the product offered to the customer is understood by him.
LK: We will see with the time whether this works or not. A lot of people say that the way the KIID was now conceived, it remains a very complicated document, especially for highly complex UCITS. Although it is an A4 document recto verso, the content can remain extremely complex. Even condensed, the man in the street may not necessarily understand what it is all about. Nevertheless, he needs to acknowledge that he has received, read and understood the KIID and the product that he is investing in at the point of sale. Before subscribing, he needs to confirm that he has received it, that he has read it and that he has understood it.
LFF: What exactly is the challenge of producing a KIID, since the basis is a standard-document?
SS: The document is standard, but the funds that are underlying the document are anything but standard. So one has to get into a very codified format everything from a guaranteed fund to a plain vanilla, simple equity fund, and all that lies in between. When one thinks that in Luxembourg there are 12’000 funds, of which more than half fall under the auspices of the KIID, it means that in Luxembourg alone we are talking about 3’000 different cases to be explained in the same format. Then when one thinks that on top of that, the KIID is actually at share class level, then we are talking about probably 300’000 different KIIDs that have to be produced. (L.K. Some estimates are even higher and speak of 500,000 potential KIIDs) So just the logistics and volume are one of the challenges and clearly codifying all these different structures in the same format is the second huge challenge.
LFF: How many UCITS funds already have a KIID since July 1?
SS: No more than 20%, probably even slightly less. Originally we encountered quite a bit of enthusiasm to be ready for the 1 July, as much as 30% of the market was hoping to be ready by then, but the complexity and the difficulty made people step back from that initial aspiration, as did the lack of preparedness for a task of this dimension. The majority of people are prepared to wait until they are ready, some even for the longest possible date within the grandfathering clause.
LK: The big international players, who have vehicles domiciled in Luxembourg, but also in Dublin, and sometimes additionally in the UK, France and Germany, need to have the sort of project management that aligns a conversion of the KIID simultaneously across all different jurisdictions. From a commercial perspective, it would not be well seen if you upgraded your Luxembourg domiciled vehicle to a KIID, whereas for the foreign platforms, you only implemented the change 12 months later at the end of the period allowed under the grandfathering clause, that is to say the first of July 2012.
LFF: Does the KIID differ from country to country?
SS: We would like to hope the answer is “no”.
LK: I am convinced that after all the hype that is around in the market, one unified approach for all KIIDs across all different jurisdictions will prevail. I do not believe that Luxembourg has to take any lessons from anybody else as to how KIIDs should be designed, because I believe no other jurisdiction has invested as much time, and collective intellectual capital in it than the Luxembourg fund industry, under the lead of the ALFI Working Group on the subject.