KII - industrializing fund information
By Laurent Denayer, Ernst & Young Luxembourg, and Yves Tambour, Consultment
Agefi
October 2010
Key investor information (KII) is a central plank of UCITS IV. Implementing the KII requires robust automated processes. Today, KII is becoming an issue of major concern for the fund industry. In this article, we explore some of the key questions relating to KII, and the related challenges.
Introduction
We are entering a phase where the attention in the fund industry is turning from the UCITS IV opportunities — such as master-feeder structures and the management company passport — to the obligations — enhancement to existing regulatory requirements (including MiFID alignment) for management companies, the notification procedure, and, above all key investor information (KII).
Our experience tells us that the challenges around KII, and, more generally fund information, have been far underestimated by the industry. Further, few players are ready to tackle the challenges. Many management companies are hoping that their administrators will be able to cope with the challenges; often, the administrators feel that producing documents is not their job.
“Information to be provided to the investors”, as the UCITS Directive calls it, is proving to be a major concern to the asset management industry.
Industrial means needed
The introduction of the KII multiplies the volume and variety of information to produce. One KII must be produced per share class (except in the case of representative share classes, which may in practice turn out to be more expensive than one KII per share class); KII must be translated into the language of the Member States in which it is distributed. Furthermore, additional documents may need to be produced to meet distribution requirements in countries outside the European Economic Area.
Management companies are responsible for the KII, which implies its content, production, distribution, publication and archiving, but above all, the management of the whole process. Managing the process includes, inter alia, ensuring that the KII is always kept up to date, and that it is consistent with other fund documents — the required fund documents (prospectuses and periodical reports), marketing communication but also KIIs of other funds from the same management company.
Responsibility for KII
The KII must be presented and laid out in a way that is easy to read. It must be written in language that is clear, succinct and comprehensible to investors. Management companies are liable if KII is misleading, inaccurate or inconsistent with the relevant parts of the prospectus.
Production deadlines
KII must be reviewed at least once a year and produced within 35 days of the beginning of the calendar year (elements such as the past performance are calculated on the basis of complete calendar years).
However, some sections of the KII may change within a year; as a consequence, KII content must be monitored on a regular basis to track material changes such as those to the synthetic risk and reward indicator (SRRI) which is calculated on the basis of the volatility of weekly NAVs. Where material changes are identified, the KII must be updated.
From a practical point of view, it is expected that many management companies will issue KIIs from January 2012 (i.e., including data covering calendar year 2011); thus, there will be a peak in KII production efforts during January and the beginning of February 2012, and a second peak in June 2012 for the latecomers.
Transition from simplified prospectus to KII
New umbrella funds or single funds launched after July 2011 must produce KIIs. Simplified prospectuses must be replaced by KIIs by July 2012 at the latest. The Committee of European Securities Regulators’ (CESRs’) consultation paper entitled Guidelines for the transition from the Simplified Prospectus to the Key Investor Information document sets out the regulators’ proposed approach that management companies should take during the transitional period. It suggests, inter alia, that:
- For a new UCITS authorized during the transitional period, KII shall be provided from the outset (there is an exception for feeder UCITS).
- When a new compartment is added to an umbrella UCITS during the transitional period, either a simplified prospectus or a KII can be produced for that compartment; when a new share class is approved, it must be treated in the same way as existing share classes.
- A simplified prospectus may be revised during the transitional period
- The same document (i.e., the simplified prospectus or KII) must be provided to investors in the UCITS’ home Member State and every host Member State in which it is notified — KII must be adopted on the same date in the home and host Member States.
It remains to be seen whether the approach suggested by CESR will be followed in each Member State.
Luxembourg’s draft law transposing UCITS IV offers UCITS the opportunity to transition to KII even before the July 2011 deadline.
Distribution challenges
The Directive requires the UCITS and/or its management company to make sure that the investors have received the last version of the KII in good time before taking their investment decision. As a consequence, distributors need to be educated about their new responsibilities, distribution agreements need be reviewed and processes implemented to ensure confirmations of receipt of documents.
When a change is to be implemented by the UCITS or its management company, the package of updated documents, such as KIIs and the prospectus, should be communicated to the home Member State regulator, and each host Member State regulator where the fund is distributed (a “written notice”), before the change is implemented. Thereafter, the updated KIIs must be published and communicated.
Publication challenges
UCITS and/or their management companies are required to publish the latest versions of the KII and other required fund documents on their website. Given the multiplication of the volume of information, number of documents and users, this implies transforming creaking existing websites into dynamic multilingual multiuser-type interfaces. In short, the website becomes a strategic communication tool of a group, management company or UCITS.
The cost of KII
Considering its length and format, KII production was originally considered by some to be much cheaper than the simplified prospectus. However, due to the multiple challenges of end-to-end management of KII, it will turn to be much more expensive than expected.
Further, the relative cost of implementing the KII may be larger for small groups, implying the need to find partners which can bring together critical mass to offer optimal solutions.
KII vs the factsheet
Will KII replace the factsheet? KII offers comparability of funds — inter alia of performance measurement, fees and a risk indicator.
We expect that the factsheet will continue to exist alongside the KII; over time, it may replace the fact sheet in some cases.
How many KIIs?
We estimate that over 200,000 KIIs will be produced for Luxembourg-domiciled UCITS per year, based on the following assumptions: (a) around 22,000 share classes of Luxembourg domiciled UCITS at the end of 2009; (b) an overwhelming majority of funds are cross-border; (c) on average a fund is distributed in seven countries; (d) the top seven distribution markets host at least six different languages; (e) at least half of these funds will revise their KIIs within a calendar year. At European level, taking into account all the fund documents to be communicated to home and host Member States, over one million documents issued and/or exchanged each year.
A key position for Luxembourg
Luxembourg has a leading position in the EU cross-border market, in terms of assets under management, asset servicing and the high level of expertise. Fund industry information is an opportunity for Luxembourg players to enhance their services and strengthen their positioning.
In Ernst & Young’s survey of asset servicing firms, 75% of respondents indicated that they expect to enhance their fund information services, 54% thought that UCITS IV will bring consolidation of asset servicing firms, and 70% believed that the concentration of services will most likely occur in Luxembourg with fund information being the first service to be concentrated.
Conflicting agendas
Time is short to meet these fund industry information challenges — asset managers will take their final decisions on how they will meet their responsibilities related to KII before the end of 2010, keeping the first months of 2011 for the implementation and the set-up of the operations. Asset servicing, if they are to be able to produce KII, must be positioned ahead of the asset managers with their enhanced offering ready by the beginning of Q2/2011, which implies that their sub-service providers must be ready earlier.
Conclusion
KII will drive an era of harmonization in the area of fund information. Players need to implement industrial means to be able to manage the huge volume of fund documentation and meet the related challenges. We believe that this fund industry information opportunity, driven by the KII, should not be underestimated by asset servicers and sub-servicers.
* By Laurent Denayer, EMEIA UCITS IV strategy and risk management Leader, Ernst & Young, Luxembourg, and Yves Tambour, Managing Director, Consultment
Posted on 7 October 2010
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