
According to the Financial Conduct Authority’s (FCA) Financial Lives survey, a quarter of UK adults hold a type of composite investment. Composite investments are investments whose performance is based on the performance of other assets (for example, shares in multiple different companies).
Since Brexit, the EU and the UK have taken different approaches to regulating composite investments. In December 2024, the UK’s FCA opened a consultation on what information should be included to investors looking to purchase these investments
This Insight covers how composite investments are regulated and how their regulation may change.
What are PRIIPS?
PRIIPs stands for packaged retail investment and insurance-based products. Put simply, PRIIPS are investments sold to retail investors (non-professional investors) whose value fluctuates based on the performance of assets which the investor doesn’t directly own. They are also called composite investments.
For example, a share in a FTSE 100 company is not a PRIIP, but a FTSE 100 tracker fund is. This is because the investor’s returns are based on the performance of all the companies in the FTSE 100, but the investor doesn’t own these shares directly.
PRIIPs allow retail investors to invest in assets that might not otherwise be affordable if bought directly. Some customers may value the service of asset managers who manage the assets in a fund, rather than managing their investments themselves.
How are PRIIPs regulated?
PRIIPs providers must publish product information in a “key information document” (KID) for investors, which includes things like the product’s management fees, risk profile and future performance scenarios (calculated under a standard methodology).
This stems from EU regulations in force since 2018, which the UK adopted as an EU member. The European Commission said at the time that PRIIPs are complicated and often lack transparency, making it difficult to compare different investment products.
The EU had already been regulating some types of PRIIPs since 2009 under a directive called the Undertakings for Collective Investment in Transferable Securities (UCITS). Products meeting requirements, such as holding a diverse enough range of specific asset types, can qualify as UCITS.
UCITS products were required to come with a “key investor information document” (KIID). The KIID was similar to the KIDs that comes with PRIIPs, but included information about the product’s past performance, rather than future performance scenarios.
When the PRIIPs regulation was introduced, UCITS sold in the EU were exempt from having a KID. This exemption ended in January 2023.
Most tracker products that track stock market indices are UCITS compliant. According to the European Commission, UCITS account for 75% of collective investments made by small investors in Europe.
Are the KIDs alright?
Since its introduction, the KID has been controversial. Investment firms claimed that the methodology for calculating future scenarios for the KID led to them overstating likely future gains. EU regulators acknowledged that the methodology required certain PRIIPs to report positive returns even in unfavourable future scenarios (PDF), implying to investors that they were not at risk of losing their money.
In a particularly egregious case, the Financial Times reported one PRIIP linked to natural gas prices was reporting returns of more than 523 billion percent under a favourable scenario, opening firms up to accusations of mis-selling.
The industry also raised concerns about the comprehensibility and accuracy of product costs reported in the KID (PDF).
Proposed changes to what’s in the KID
While the EU made changes in 2021 to how performance scenarios and costs were calculated, there was ongoing disagreement between the regulators and the European Commission about how past performance should be communicated or used to model future performance scenarios, with the regulators advocating greater use of past performance.
The changes now allow certain KIDs to say that future performance information may give investors “inappropriate expectations about the possible returns they may receive”.
Other PRIIPs can calculate future scenarios based on past performance information, but not actually provide this information within the KID. Critics claim this divergence undermines the objective of KIDs to provide investors with comparable product information. Cost calculations were also revised, with a mixed reception.
In 2023, the European Commission published proposals to amend the PRIIPs regulation following a wider review. At the time of writing, these are still being considered by the European Parliament and the Council of the EU.
What PRIIPs regulations does the UK have?
The UK kept the EU’s PRIIPs regulations following Brexit and now has powers to amend them without EU involvement. It has made several changes since 2021 and plans to replace PRIIPs regulations entirely.
In July 2020, the Treasury published plans to amend “only the most pressing concerns with the PRIIPs Regulation” (PDF), namely:
- industry uncertainty about the scope of the PRIIPs regulations
- the performance scenario methodology producing misleading information
- the end of the exemption on UCITS funds producing a KID, with the government saying “existing rules for UCITS disclosure are satisfactory”
In the Financial Services Act 2021:
- the Financial Conduct Authority (FCA) received powers to define PRIIPs
- the requirement for KIDs to contain “performance scenarios” was changed to “information on performance”
- the exemption for UCITS was extended to December 2026
The FCA made rule changes in these areas which came fully into effect in December 2022.
Also in December 2022, the Treasury consulted on a wider overhaul of the PRIIPs regulation, which it said:
- placed inflexible requirements on product providers through the KID which itself could provide investors with confusing information
- dissuaded firms from offering some products to retail investors in the UK due to compliance costs
The Treasury also proposed giving the FCA responsibility for designing new disclosure rules.
Replacing PRIIPs regulation
The Financial Services and Markets Act 2023 provided for the repeal of the PRIIPs regulation in the UK.
In November 2024, secondary legislation provided the replacement in the form of the Consumer Composite Investments (Designated Activities) Regulations 2024. The regulations tasked the FCA with designing a new regime which would cover all PRIIPs (now renamed consumer composite investments or CCIs), including UCITS.
The FCA opened its consultation on CCI disclosure requirements in December 2024 and intends to publish final rules in 2025. The existing PRIIPs regulations will continue to apply until the new CCI rules are in place.
In November 2024, the government also passed secondary legislation to exempt investment companies from reporting costs associated with their shares.
Investment companies and trusts issue shares which can be bought and sold on a stock market. The value of the share reflects both the performance of the underlying assets, and the operational costs of the company itself.
However, because the KID requires these operational costs be reported separately, critics of the regulation argued it required investment companies to double count their costs, and could dissuade investors.
What happens next?
Regulatory divergence between the UK and EU will pose a new challenge for investment product providers.
The EU has proposed increasing some requirements such as environmental disclosures, which may help investors make choices at a cost to providers. The European Parliament has advocated certain PRIIPs using past performance in KIDs (PDF), which may help reduce misleading information but hamper comparability between PRIIPs.
Meanwhile the UK’s regulatory regime is expected to become more flexible. However, this brings potential risk and uncertainty for firms used to the prescriptive nature of the KID. A principles-based approach could also risk reducing the comparability between products, and it is unclear whether the UK’s approach will provide more product choice to consumers. Do not type over or delete this non-printing text
About the author: Abbas Panjwani is a Commons Library researcher.
Photo by: Alev Takil via Unsplash
Corrections and clarifications
This Insight was updated on 28 January 2025 to remove inaccurate information about Next plc’s share price.