The Financial Conduct Authority (FCA) must offer more guidance on the planned Priips changes that will see performance scenarios swapped for text, so consumers can effectively compare products.
Earlier this month the FCA proposed a raft of changes to Priips regulation that, among other things, would see “misleading” performance scenarios amended to instead show a written explanation of factors that could affect future performance of the product in the key information document (Kid).
The watchdog said changes to the regime would “provide more clarity to consumers” in terms of what Priips products are, the risk they present, and information to help understand their likely future performance.
FCA executive director of consumers and competition Sheldon Mills said at the time that exiting the EU provided the watchdog a chance to amend Kids, “as we know they are not fully achieving the intended aims”.
“We want to ensure that consumers have what they need through transparent information and furthermore through the reduction of potentially misleading information being displayed,” he added.
A step in the right direction
Association of Investment Companies chief executive Ian Sayers believes a review of Kids was a long time in the making.
“We welcome the FCA’s proposals to abolish the current misleading performance scenarios in Kids. This is a step in the right direction for investors,” he says.
“We were raising concerns about Kids even before the rules were finalised and we have been calling for changes since their introduction on 1 January 2018.
“Investment companies are still at a disadvantage in having to produce these toxic disclosures, whilst Ucits funds have repeatedly been let off the hook. It’s high time the Treasury conducted a comprehensive review of Kids rather than relying on a piecemeal approach to their reform.”
More work on product comparison needed
Under existing Priips regulation, the past performance of a fund is not included on a Kid like it is on a Ucits Kid. Instead, the Kid contains a range of future performance scenarios – a quirk that has been widely criticised for being too difficult to accurately calculate and potentially misleading to consumers.
Under the FCA’s new proposals, the future performance scenarios will be replaced with text that describes what factors could affect the future performance of the product, however the FCA is yet to specify exactly what will be expected to appear in the new section.
FE Fundinfo regulations manager Mikkel Bates says the FCA needs to determine what factors should be included in the text in order to offer investors some comparability between the products.
“The consultation paper includes the possibility of rules identifying the factors that need to be included, and this would at least introduce some consistency; but leaving the whole section as narrative opens up all sorts of possibilities for confusion for retail investors,” he says.
“The FCA isn’t looking to leave the narrative entirely up to groups to determine but is considering identifying the factors that should be included. This will ensure some degree of comparability in what is a complex situation, as they are trying to balance between giving retail investors some indication of possible future returns and the impossibility of predicting what underlying market returns will be over any given time period.”
The FCA is not proposing the addition of past performance to the Kid as part of the Priips shake-up, which Bates says is a surprising choice as investors are used to seeing past performance – even with the usual caveats – and without it, different Priips will be difficult to compare, and investors will be totally unable to compare them with Ucits.
The FCA’s consultation will last until the end of September, and then new regulatory technical standards (RTS) will be drafted that will come into force in January 2022, meaning industry players operating cross-border will have to come up with two slightly different Kids – one of the UK and one for the EU – all before next year, giving the industry a “tight deadline”, Bates adds.
By comparison, proposed changes to Priips regulations were produced by the EU regulator in February, and the deadline for the changes to be implemented will likely be July 2022.
Investment Association director of policy, strategy and research Jonathan Lipkin describes the FCA’s proposals as “a welcome step forward”, however he says more could be done to combat separate Priips-related problems.
“It is encouraging to see the removal of the misleading performance scenarios, however we believe more can be done to give retail investors more accurate measures of transaction costs, especially by tackling the root cause of the problem – slippage,” he says.
“We look forward to working further with HM Treasury and the FCA as they build a new UK retail disclosure regime to help all savers make better informed investment decisions.”
