Specifically the regulator’s proposals are aimed at fund descriptions that may imply a level of capital protection or guarantee on positive returns when no guarantee exists. For example, absolute return funds.
The FSA has suggested risk-related information should be included in the investment objectives of such a fund’s prospectus, but the IMA believes there are a number of reasons this would not achieve the intended goal.
The trade body has itself been conducting an absolute return sector review, in order to come up with better ways to group the funds for adviser comparison. But this has dragged on since the start of the year with no firm stance announced.
Meanwhile, in its response to Consultation Paper 12/27, the FSA’s communication on the issue, the IMA said it agreed with the importance communications to investors be fair, clear and not misleading.
But it added: “We disagree, however, with the FSA’s approach to addressing its concerns regarding the use of descriptions ‘that can imply a degree of capital protection or a guarantee of positive returns, where no such guarantee exists’.
“If the FSA’s goal is ensuring that investors have a clear understanding of a product being promoted, the proposed approach will not achieve that outcome for two reasons.”
Shortfall
The first is that it will not cover all investment products which use such descriptions and the second is that it will not cover all funds that may be promoted to UK investors.
The reason behind this is that prospectus requirements apply to UK authorised funds only and so the information available would not be consistent across all products available to investors.
Additionally the IMA said it was puzzled the FSA was seeking to address its concerns by proposing the inclusion of additional disclosures in a document investors rarely request, despite it being readily available.
Instead the IMA supports the FSA communicating to firms its clear expectations in relation to financial promotions.
“Such an approach would have the benefit of capturing all investment products and not solely UK-authorised funds. Furthermore it also would have the benefit of ensuring all funds promoted to UK investors are subject to the same disclosure requirements given that offshore Ucits are required to comply with UK marketing requirements.”
European regulation
At the European level Key Investor Information Documents (KIIDs) already should include risk disclosures to make it clear there is a risk to capital.
The European Securities and Markets Authority (ESMA) said in its communication on the topic: “Consider what impression the title of the fund may give to an investor. For example, cautious, balanced and total or absolute return may give the average retail investor an impression of the riskiness of a fund which needs to be balanced by further explanations.
“Therefore, explain the nature of the investments these funds make (or cross-refer to the objectives and investment policy) so that the information in the risk and reward section can be read in context.”
The IMA concluded its response by alluding to the above European regulatory guidance and recommending that if the FSA considers further guidance is required it should be raised within ESMA with a view to delivering guidance that applies to all Ucits products.
