The European regulator’s response to the problems created by key investor document rules has been labelled inadequate.
The European Securities and Markets Authority’s consultation on what information is needed in Kids closed on January 13. Kids must be produced by all asset managers in their fund management material under the Packaged Retail Insurance and Investment Product rules.
But in their responses, many fund houses and trade associations said the proposed amendments did not go far enough, and many existing components of Kids could lead to problems.
Kids have proven controversial, mainly due to the requirement they must include a projection of future performance. The formula asset managers must use to calculate this forces fund houses to take recent past performance into account when calculating the future performance.
ESMA launched a consultation on proposed amendments to the Kid rules last November, which closed on January 13. These included adding past performance into Kids and using technology to make the information easier to access.
Despite the fact the UK is due to leave the EU at the end of this month, the Priips rules have already been put into effect and will remain in force at least until the end of 2020 due to the transition agreement reached by the UK government and the EU.
Simon Fraser, chairman of the F&C investment trust, said the future performance requirement could lead to a “mis-selling scandal” as investors may feel the performance projections are a promise, that, when not achieved, would prompt legal action.
He said: “Throughout my career I was told I couldn’t say past performance is a guide to future returns; now, apparently, I have to.”
Mr Fraser had asked for permission to include a cover letter in the Kid, emphasising that future performance projections are just forecasts, not promises. This was granted, and one of the options being explored by ESMA is to allow more words to be included in these cover letters in future.
Concerns were also raised about the Kid’s summary risk indicators, which rank the riskiness of an investment product on a scale of one to six, with six being the most risky.
For example, the method used means venture capital trusts come in with a risk weighting in about the middle of the range. This is because VCTs typically invest in unquoted assets, the prices of which do not move regularly, so VCTs appear to be low-volatility, which, under the prescribed methodology, makes them low risk.
Therefore, risk-weighting methodology has also been raised in the consultation as a point where amendments need to be implemented.
In its response to the consultation, Baillie Gifford said: “The proposals suggested in the consultation do not go sufficiently far in terms of adequately addressing the following concerns: forecast future performance, understated risks and unreliable transaction costs.”
