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FSA backtracks on stats in ads

After almost a year of consultation, the FSA is set to scrap its original plans to ban past performance from being the predominant feature in fund advertising.

According to an unpublished draft paper seen by Money Marketing, the regulator will allow past performance to remain the main feature of an ad so long as it is presented in a standardised format.

Of course, the GSA could change its mind but if the draft is implemented in this form it will be something of a reversal from the regulator which, less than 12 months ago, was determined to clamp down on the over-emphasis on data, which it believes can bamboozle unsophisticated investors.

Its concern is legitimate. Statistical manipulation is rife to the point where past performance has become almost meaningless to the average observer. But the original proposals struck the industry as excessive, leaving them with little room for manoeuvre. The proposals have therefore metamorphosed into something more palatable, where fund firms will be allowed to present the information in a standard format.

Under the new proposals, past performance would have to be illustrated though five-year discrete annual returns expressed as a percentage. The FSA believes this is a better indication of volatility than cumulative figures, which it fears can be used to cloak periods of bad performance.

The figures would have to represent the last five years rather than a five-year period of the firm&#39s choosing, curbing a predilection for presenting only the best spells of performance.

Invesco Perpetual chief executive Mike Webb says: “Thank God the FSA has seen the light. By using discrete performance figures, ads will be able to show the kind of ride investors will be in for, which is the best route for the industry to go down. These are very sensible measures.”

Webb is less happy about the FSA&#39s intention to prevent the use of sums of money to illustrate returns. Having tested consumers&#39 reaction to monetary data, the regulator believes it tends to lure investors into drawing conclusions about future performance while causing them to dismiss risk warnings.

As a result, it will no longer be permitted to use messages such as “£1,000 invested 10 years ago would now be worth £1,500.”

Bates Investment Services head of investments James Dalby believes this measure fails to acknowledge how investors interpret other information they are presented with. He says: “It is not just monetary figures that can be misread. Investors could easily look at the rises or falls in their funds&#39 discrete performance and draw more conclusions from the percentages than they should. But it will probably force fund groups to try and be more consistent.”

Another bone of contention is the FSA&#39s desire to impose tighter controls on the use of deposit-based benchmarks as a comparative tool. The regulator expects firms using such benchmarks to be able to show they have reasonable grounds to suppose investors will understand that comparisons of equity returns against deposit accounts are not on a likefor-like basis.

Artemis product development & communications director Nick Wells says: “It is quite a widely used way of comparing performance and is understood by the man in the street. But as long as we can compare funds against an index, then I am very happy.”

Although there is no real mention of index benchmarking in the proposals, the FSA will allow most forms of past performance data to be presented as long as it does not overshadow the standardised information. The assumption is that this will encompass areas such as discrete quartile performance, which is seen as a fair method of comparing funds, as well as index benchmarking.

The proposals, upon which the FSA will not comment until publication, simply state that past performance should not be presented to consumers as a determining factor in their decision making and must be “clear, fair and not misleading”. Further detail is scarce. This has concerned some fund managers and IFAs, who fear blind spots will remain which could leave investors uninformed about vital fund information.

Chase de Vere savings & investments manager Nikki Foster says: “If the figures are presented in calendar years, there could be lapses when a new manager has taken over but investors are looking at figures for the previous manager. Also, companies will just advertise whichever funds look good over the five-year period.”

Foster does, however, believe the proposals are a big improvement on the previous plans although she points out that they will not help investors understand the reasons behind past performance. She gives the example of Invesco Perpetual star income manager Neil Woodford, whose fund plummeted down the performance charts when he refused to jump on the technology bandwagon at the end of the 1990s. As Foster says, Woodford may have been right but his past performance figures would not reflect that fact.

The FSA may be able to tweak the way in which past performance is presented to ensure fund manager changes are reflected in ads but it cannot – no matter how hard it tries – replace advice. Its latest proposals will undoubtedly lessen the scope for statistics to be manipulated but will never eradicate the main problem, which is that investors remain convinced that past performance is what they can expect in the future.


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