KII pressure starts to show

Asset managers have started to grapple with Key Investor Information (KII) – a key component of the UCITS IV reform which European Union Member States are implementing this year.

The promoters of UCITS funds must produce, distribute and maintain KII following strict content rules. Existing UCITS funds are caught by the regime at the latest from July 2012, but new UCITS funds and German-based asset managers have had to use KII since July 2011.

The early indications are that KII, which replaced the Simplified Prospectus of UCITS III, is enduring a difficult transition.

Financial industry observers say that many asset managers are falling short of fulfilling the requirements outlined in the UCITS IV legislation. They claim some are not using plain language – a critical plank of the reform – while others are only copying and pasting information from their fund prospectus.

Others say that asset management firms are falling behind schedule in to preparing KII documents and were struggling with the concept of including important investor data on a small document.

If these criticisms are accurate, it is already becoming clear that KII will create significant challenges for asset managers who must reassess the way they handle product information.

Under UCITS IV, KII must be written in a “brief manner” and in “non-technical language”. It should be drawn up in a common format which allows for comparison, and presented so that it is likely to be understood by retail investors.

Asset managers confronted with KII face an editorial challenge. The way their KII is written is important in meeting the UCITS IV requirements. It is clear from the legislation that jargon, technical financial industry language or verbose prose, will not suffice.

The language used to summarise the proposed investment strategy of the UCITS fund must be clear, understandable and easy-to-follow. Asset managers who simply revert to their fund prospectus in the hope of transferring that language to their KII may discover it is incompatible.

Aside from the risk of not meeting legal obligations, asset managers run the risk of damaging their reputation among potential investors. Many distributors will be weighing up multiple investment choices, and those promoters who clearly describe their investment goals and strategies may well win an advantage over those who bury their investment intentions in complex and incomprehensible language.

In addition to the plain language requirement, the KII must include appropriate product information about the essential characteristics of the UCITS fund so that investors can make decisions on an informed basis.

These elements should be understandable by the investor “without any reference to other documents”. The KII also needs to indicate where the full information and documents may be obtained free of charge.

Time and pressure is now a serious factor for asset managers. Every KII must be updated as of 31 December, which makes this date a natural choice to produce first KIIs. While most market participants took comfort in the fact this deadline was still some way off, we note that this is in less than 4 months.

This does not leave fund promoters much time to ensure that not only KIIs are produced, but they meet content and plain language requirements. This should not be taken lightly because any discrepancies between KII and the full prospectus can mislead investors. Further, the rigid contents requirements applicable to KII require in most cases a much more structured approach to describing investment policies and risk disclosures than asset managers are familiar with from their prospectuses.

Crucially, both supervisory authorities and investors increasingly demand clarity in documents.

The question investment professionals must now ask themselves is can they afford to neglect KIIs until the last moment? Definitely not. In our view this area will become one of the distinguishing factors in the industry for investors when deciding where to invest capital. Saving time and effort on work done today can backfire soon for asset managers in the future.

Martin Bock is Senior Manager, Fund Markets, Products & Client Segments

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