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Advisers warned over ‘misleading’ EU disclosure documents


Advisers will have to decode potentially misleading  fund growth projections being introduced through new packaged product rules.

New three-page key information documents for bonds and investment trusts will be introduced under European packaged retail and insurance-based investment products regulation in January. Other retail investment products are set to come into scope at a later date.

However, experts are concerned the documents have not been tested enough and will contain misleading information about a fund’s growth rate.

Zurich UK life regulatory developments head Matthew Connell is concerned the Priips rules around fund performance projections are determined differently to current UK practice.

In the UK, growth rates for high, medium and low performance projections are mandated through FCA rules and if a provider believes their returns will be lower than what the regulator has assigned they have to disclose a lower rate.

Connell says: “The idea is it stops providers competing on how optimistic they are on growth rates and everyone has to use the same rate.”

But under the European rules, each fund will base its projection on its performance over the previous four years. New funds will make assumptions based on similar funds in the sector.

Connell says: “The concern is funds can have a patch through four years where the returns are very good and when they put that into the Priips modelling you can have an optimistic view of what the growth rate will be.

“But, if you are saying to customers this is what we think the annual growth rate will be over 10 or 20 years that leads to misleading projections, especially on the most optimistic scenario.

“Providers are going to be projecting returns over a medium to long term but they would never project if they were using the FCA method or coming up with numbers of their own to guide customers.

“The concern is once you start projecting these possible returns at the higher end, in 10 or 20 years’ time customers could say, not only did we not hit these optimistic projections, we were never likely to, so why did you give me this information.”

Connell says advisers will have a big part to play in interpreting the documents for their customers.

Regulatory consultant Richard Hobbs agrees the adviser’s role will become more complicated in light of the Priips rules.

He says: “The FCA won’t stop having the mandated rates so this is more information to digest and it makes it harder. On the one hand I have got this historic performance and on the other hand I have got this illustration of what might [happen].”

However, Hobbs says this may lead to advisers have more detailed client discussions.

He says: “This development provokes a different kind of conversation between the adviser and the client.

“What advisers will be able to do is use this development to have a better conversation with their clients where the nature of investing, the risks and the opportunities, and the meaning of the time value of money are gone into rather more thoughtfully than they would otherwise have been.”

Connell is also concerned the documents give a generic illustration of a fund’s performance rather than a personalised projection for each investor.

Connell explains investment return projections under Priips are based on a £10,000 investment rather than the amount the investor is paying in.

He says: “They want this to be a pre-contractual document so they want customers to have a copy of it without having to engage with the providers. If everyone does it on the same £10,000 investment then everyone will be able to see the document in advance on the website.”


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. This is the usual nonsense – nothing has changed. I guess it will be a pain for those just advising on a single fund. But for many (if not most) a portfolio is constructed with up to (and often more) 15 funds. So you send out a 3 page document for each fund – that’s 45 pages. Then you have the report itself – say another 6 pages (being modest). So you send out a bundle (parcel post) of 51 Pages with perhaps some other literature as well.

    Can I ask?:
    1. Will the client read any of this?
    2. Is this good client engagement.
    3. How does the regulator prove whether you have sent it or not?

    Several years ago I put these very points to representatives of the regulator (quite senior people) when at a conference. The reply I got was very instructive – A shrug of the shoulders from both of them.

    Sure the client needs to know what he/she is investing in. Projections are fairy tales and of absolutely no vale. The client needs to know that investments fluctuate and if we really knew what they would produce we would all be millionaires. What they do need to know is what they invest in. Too few of the regulatory bumpf actually tells you the firms contained within the fund, what the firms do (if they are not familiar) where they are based etc. Of course you can’t do this for all the constituents, but a good attempt at say the top 5 or so will give the investor a good flavour. In any case many of the firms may well be familiar. The Bloggs UK growth fund probably means nothing to most people, but mention Diageo – makers of Johnny Walker & Smirnoff, or Unilever – makers of Hellman’s and Marmite and you will have their attention. This means more to them that all the rubbish laid down by all the regulators – UK or EU.

    • But Harry you forget the whole rationale for Regulators is to keep doing stuff/changing stuff in order to demonstrate they are “always on top of things” but more importantly to keep themselves in jobs. They couldn’t give a stuff about whether or not it is better for the client. We know this to be true or else there wouldn’t be the need to have so much mandated documentation when advising clients what to do.
      They are all part of an intellectually defunct, bureaucratic gravy train – every single one of them

  2. Something I have been doing with clients for years is providing illustrations with the expected growth rates and then providing the actual performance over the years as a direct comparison. The client is then aware that the illustration generally has never met the growth rate in any year (it has been both higher or lower, but almost never exactly to the example rate). Due to this they pretty much understand at outset that this is almost pointless as a way of illustrating expected returns.

  3. As for Richard Hobbs saying this is an opportunity to have a more detailed discussion with clients. Only a “Regulatory Consultant” could come up with this statement. Regulatory consultants are almost as much to blame for the crap we have now as the regulator. In fact I seem to remember the FCA (or Possibly the FSA) saying that there is too much stuff in reports because of Regulatory Consultants (and Compliance people) have gone over the top for what they want in, however that is another story. I don’t think I am alone when I say my clients DONT WANT any more detailed discussions than I have been providing for more than a quarter of a century. All they want to know is “Marty, am I likely to beat the deposit rate of interest over the next 7 to 10 years?” The answer to which is yes your are likely to do that (no guarantee though) as long as you understand the importance of holding your nerve and not want to cash it in when the investment goes south some years. We don’t need more detailed conversations, we don’t need more detail to be documented as being discussed in the SR (even if it is only one line to confirm the bumf was given). Its the extra line here, the additional paragraph there to cover off “discussions had” that have landed us with what we now have. Most of that is down to Regulatory or Compliance Consultant’s “ideas” of what should be in there.
    Rant over I am off to have a deep and meaningful conversation with a client

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