Tech vendors court law firms for KID market

Financial technology vendors are courting law firms to help develop software that can automatically produce European Union-mandated structured products documentation for the incoming Packaged Retail and Insurance-based Investment Products (Priips) regulation.

A number of law firms – understood to include Norton Rose Fulbright, Ashurst and Allen and Overy – have been approached by fintech providers who want to refine IT tools that speed up the assembly and distribution of key information documents (KIDs). Banks will be required to produce a KID – a three-page document outlining the risks and costs of a structured product – for every product they issue once the regulation enters into force on December 31, 2016.

"There are some well-known names testing the market to see whether they could produce a tool that would enable firms to meet the KID requirements. If they get the design of the KID wrong the consequences can be significant for the product manufacturer, so this is why they are looking to link up with a law firm to provide technical input," says Peter Snowdon, a partner in the financial services group at Norton Rose Fulbright in London.

Eran Elad, Tel-Aviv based vice-president of sales in structured products at technology provider Modelity, says his company is seeking a law firm partner, though "nothing has significantly materialised" as yet. "These implementations require deep financial, technological, legal and compliance expertise and we are interacting with legal entities when providing them on an ad hoc basis per client. It's a natural step forward for Modelity to partner with a law firm and provide a complete offering, so we are looking into such a partnership," he adds.

Financial penalties for non-compliance

The legal sensitivities around KIDs also explain fintech companies' interest in law firm tie-ups. From 2017, banks will face massive fines if they issue KIDs that are "misleading, inaccurate, or inconsistent" with the Priips regulation. National regulators can impose penalties on guilty firms of up to €5 million ($5.4 million) or up to 3% of their total annual turnover. Retail investors that can demonstrate losses resulting from reliance on a faulty KID can also claim damages under EU and national liability laws.

There are some well-known names testing the market to see whether they could produce a tool that would enable firms to meet the KID requirements

"It moves the regulatory climate closer to that of the US, where violations of capital markets laws are subject to severe penalties," says Mathias Strasser, chief executive at WallStreetDocs, a London-based fintech firm. "In this area, law and technology are intertwined in a way that has been the case with few tech regulatory projects in the recent past. Most technology providers have no legal experience and therefore must seek out law firms to plug this gap," he adds.

WallStreetDocs, which has legal experts on its staff, works with London-based law firm CMS Cameron McKenna to offer bank clients legal opinions on KID templates they generate through its cloud-based automated KID solution, Priip Cloud.

However, in the absence of detailed rules, fintech providers are operating in "a vacuum", says Michael Logie, finance partner at Ashurst in London. The industry is awaiting three sets of regulatory technical standards from the European Supervisory Authorities to complete the Priips rules: one on the design of risk indicators, cost indicators and performance scenarios for the KID; another specifying at which point a Priips seller should provide the document to the retail investor; and a third explaining under what conditions the document would have to be reviewed.

These standards are due to be submitted to the European Commission by March 31, 2016. The Priips regulation will then be implemented on December 31, 2016, giving banks nine months to prepare.

"Manufacturers have got it all to do in terms of putting an automated system in place for that hard deadline, especially for mass producers in the German market. Banks will have to produce hundreds of KIDs in a single day, so they need an automated solution that can deal with the workload," says Logie.

Thomas Wulf, secretary general of the European Structured Investment Products Association, emphasises that the KID should not be an overly legalistic document. "Issuers may not be inclined to put the KID process solely in the hands of a law firm to the extent they do with documentation requirements under the Prospectus Directive. The idea behind a KID is different to a prospectus. They have a strong technical and quantitative focus information-wise, which requires the issuer's input," he says.