Fresh anger over ‘future performance’ proposals

Earlier this month European regulators published final proposals for the introduction of key information documents (Kids), set to replace key investor information documents (Kiids), stating that fund firms must replace past performance details with projected future performance.

Estimated returns must be displayed in three hypothetical scenarios: when market conditions are ‘unfavourable’, ‘moderate’ and ‘favourable’.

Draft rules were criticised for this requirement, as Investment Adviser reported earlier this year, and the finalised packaged retail and insurance-based investment products (Priips) proposals have led to further objections.

Regulators have now stated that returns in the moderate scenario must be based on average market conditions from the past five years.

The favourable and unfavourable projections should be based on highs and lows, respectively, achieved over this time period.

One regulatory specialist warned the equity bull market seen since 2009 meant these calculations – which replace the original option of using product manufacturers’ scenario definitions – could be “misleading” for investors.

The individual, who wished to remain anonymous, said: “In the consultation there were the different performance scenarios, but it was open for providers to decide what was going to be reasonable. Now, ‘moderate’ is based on past performance and will be the average of the past five years. I think this is misleading for investors.

“The S&P 500 [index] has had a bull run for the past five years. If you have had a bullish market, then the moderate scenario will be a bullish one.”

The specialist noted that other changes revealed by the proposals would transform how funds were classified according to certain metrics.

The range of annualised volatility – used to assign products to a particular risk bucket – will now differ from current Ucits standards, meaning a product ranked as ‘4’, for example, may fall into a different category under Priips.

“The same products will have a risk factor that differs [between the Kid and Kiid],” the specialist explained.

“We might be missing the objective of being transparent for investors.”

Meanwhile, a spokesperson for the Investment Association reiterated the organisation’s call for the use of past performance figures.

“We fear that the proposed methodologies for calculating the forward-looking performance scenarios risk encouraging a range of suboptimal decisions by end investors,” the spokesperson said.

Others see some positive changes in the proposals.

Nicola Higgs, a partner and member of the regulatory team at legal firm Ashurst, noted manufacturers could now link to other documents in the Kid, in a move that could encourage firms to make further literature more user-friendly.

“The ability to link to other documents within the Kid is a change. At first [the Kid] was meant to be standalone because most investors don’t read lots of different things,” she said.

“The Kid can’t be retail-friendly and then link to a website that is just algorithms, so it may make companies think about the website and other documents.”

Kids and priips

3

Number of pages in the Kid

December 31 2016

Date the rules come into force, though Ucits funds will enjoy a three-year exemption