An outcry from investors has prompted the European Union to propose changes to the rules governing the performance indicators that firms are required to include in Key Investor Documents on retail funds.
In a consultation paper released this morning, EU policy makers expressed concern that the Priips rules were flawed both because of the method used for performance indicators, and because such indicators were less suitable for some investments than others, and thus the Key Information Documents (Kids) were failing to achieve the stated aim.
The regulators now propose to allow firms to include, in a prominent position and in bold lettering, a statement emphasising that the performance projections are simply simulations of what could happen, and a line stating that market movements impact returns.
The EU also proposes a change to the method of calculating future performance. This would be based on the movement of interest rates.
Under the Priip regulations, since 1 January 2018 investment trusts have had to provide investors with a Kid, a two-sided information sheet with all the key facts and figures about a fund.
The document had a standard layout with sections describing what the fund does, the investment risk, charges and performance.
But one part of the rules state the key investor information document for investment trusts must also project forward their anticipated future returns.
The controversy arose because the performance projections must be calculated based on previous years' returns, which prompted Simon Fraser, chairman of the F&C investment trust and the Merchants Investment Trust, to warn of a "potential for a mis-selling scandal".
The board of the £1.6bn City of London investment trust urged its investors to "ignore" the performance projections, while economist John Kay urged them to "burn" the performance projections "before reading".
The Financial Conduct Authority initially said it could do nothing to assuage the industry’s concerns about the issue, which currently affects investment trusts, and open-ended funds from 2020.
But Andrew Bailey, FCA chief executive, later stated the requirements concerned him and the FCA then told firms they could include a qualifying statement alongside the Kid. But this must not downplay the significance of the projections, it warned.
Today's (November 9) consultation stated: "The main issue that has been raised since 1 January 2018 is that the performance scenarios risk providing retail investors with inappropriate expectations about the possible returns they may receive.
"In particular, it has been stated that the scenarios can provide an overly positive outlook of potential returns, where a product has experienced positive returns over the previous five years, that can be seen as above the longer-term norm.
"Given the positive performance of many asset classes over the previous five years, this issue pertains to a wide range of Priips. These concerns have been stated by both representatives of Priip manufacturers and sellers, as well as from associations representing retail investors.
"When assessing this initial feedback, [we] were conscious that the current framework already intended to mitigate this issue, in particular via the inclusion of the unfavourable and stress scenarios and the use of narrative explanations, which means that the Kid must include statements to clarify that the actual return will vary depending on the performance of the market.
