The PRIIP Regulation from 1 January 2018 states that pre-contractual, Key Information Documents (KID) must be produced for packaged and insurance-based investment products (PRIIP) in order to provide consumer-friendly information for non-professional investors. Funds have previously been exempted from this regulation, but from 1 January 2023, funds are also included. The new PRIIP KID replaces the previous Key Investor Information Documentation (KIID). A large part of the purpose of the PRIIP KID is to allow comparisons to be made between different investment products, not just funds, to help non-professional investors make informed investment decisions by understanding the products' most important features and risks.
New way of reporting risks in funds
Funds have previously reported their risk level on a scale from one to seven, where one is the lowest risk and seven is the highest risk. The risk levels in PRIIP KID products are also graded on a scale from one to seven, however, funds will now be compared to other products, for example, high-risk products such as warrants. This means that funds will now be "pushed down" on the risk scale, 1-2 risk classes on average.
It is important to remember that the risk in a fund, the fund's volatility, does not change. What changes is the scale itself, which now also includes products with even greater risks.
New way to report funds' costs
The PRIIP KID also includes a new way of reporting funds' costs, which is also more in line with other regulations that, for example, govern distributors of funds.
What is new, among other things, is the concept of Ongoing costs. This consists of two items: management fees and other administrative or operating costs. This is reminiscent of the previous concept of Annual fee, as well as Transaction costs. Here, the fund manager must account for both a fund's direct transaction costs, such as brokerage, but also for the fund's indirect transaction costs, such as spread costs. Spread costs are the difference between the estimated market value of the financial instrument and the price at which someone is allowed to buy/sell it during a trading day.
It is important to remember that no costs have been added that affect the fund's return negatively compared to before. Part of the purpose of the reporting changes is to create greater transparency and understanding of what investors might gain and the risks and costs involved, and to be able to compare PRIIP products across the EU.