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The extension of the KID to insurance

Developed to make the process of buying funds simpler for investors, Key Information Documents are to be brought into the insurance arena. David Howell asks whether it can work.

Originally brought in to help consumers cut through pages and pages of complex investment information, the EU Parliament has finalised proposals to extend the use of Key Information Documents (KIDs) and make them mandatory for all packaged retail and insurance-based investment products (PRIIPS) by the end of 2014.

The sentiments behind these new proposals are pretty much the same as what we now have for mutual funds in that they aim to aid comparison and understanding by providing standardised information on cost and risk to investors in a short two to three page document.

But bearing in mind the new regulation covers all packaged investments, including unit-linked and with-profit solutions, investment funds, and structured products, how helpful will it be to have standardised information in order to compare such a wide range of investment products?

There’s already been reservations voiced by UCITS and structured products providers that having a standard risk rating will be too broad a measure. They may have a point. With products constantly evolving, it’s important for investors to know they are comparing like with like.

Take the example of investment funds. The Investment Management Association (IMA) in the UK is currently looking at ways to allow better comparison of increasingly popular risk-targeted funds. Under the association’s current system, risk-targeted funds are spread across a range of investment sectors, making it difficult to compare similar products.

On Friday, the IMA announced it is to merge with the insurance arm of insurance trade body, the Association of British Insurers… click here to read more.

Square pegs in round holes?

So, add insurance benefits and fixed investment terms into the mix of retail investment products KIDs will cover, and coming up with a standard risk rating and cost analysis is going to be a challenge even for the more relaxed compliance department and, let’s face it, there are not many of those about.

Throw in requirements regarding the liability for losses, whereby if a small investor can demonstrate that a loss was caused by the information in the respective KID, or was inconsistent with binding contractual documents, the investment product manufacturer could be liable under national law, as well any applicable information on whether the investment will contribute to environmental or social aims, and the three page limit for new KIDs is going to be a tough ask if it is to provide meaningful comparisons.

There’s no denying that transparency has to be at the heart of any investment decision and simplified KIDs for all products will go a long way to addressing this. But attaching a risk rating to an investment product is only half the story. Investors have to first understand what risk means and, equally important, understand their own attitude to risk.

As advisers we are well aware that there is often a significant gap between perceived and actual risk for the majority of clients. It is this groundwork prior to the investment stage that needs more emphasis if consumers are to make the most of KIDs.

Of course, the devil will be in the detail, but until we see the new rules in action, square pegs in round holes springs to mind.

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