The new FSA disclosure regime, which will introduce substantial reform on how product details are presented to consumers, will cost the insurance industry £130m and fund firms £10m, according to estimates from the regulator.
The changes, outlined in a document seen by Money Marketing, will see key features replaced by key facts, in an attempt to promote greater consumer understanding of the importance of the information.
The new documents will be much shorter, with the first page only allowed to include the provider and product name, the Key Facts logo and the fact the firm is regulated by the FSA. More involved details will be available upon request.
Post-sale confirmation letters will be scrapped as the FSA says consumers do not read them but suitability letters, which the regulator believes to be held in high regard, will be strengthened.
The product information will be displayed in a question and answer format as the FSA says its research shows this appeals to consumers. “What you may get back” information will be restricted to pension products only and there will be changes to the way charges are displayed, with more focus on comparability between products.
Undoubtedly, the most embarrassing thing about the FSA's forthcoming consultation paper is the fact that the regulator has been forced into reversing its long-held position on the importance of past performance.
The FSA has previously argued that information on past performance should not be considered reliable when investors are making decisions. But new draft rules on the use of past performance in advertising by fund managers will fall short of banning its use although there will be severe restrictions.
Past performance information will no longer be allowed to form the biggest part of an ad and warnings about its inconsistency will have to be included in the main text rather than buried at the bottom.
Amendments to the European Ucits directive mean that fund managers will be required to include an indication of the “historical performance” on disclosure literature. Fund firms will have to include a bar chart showing 10 years' discrete annual returns, a line graph showing hypothetical returns on a sum of £1,000 invested 10 years ago and prominent risk warnings in the main text prefixed with the word “Warning”.
For products which have been running less than 10 years, this information must be included for the lifetime of the fund, while those less than a year old will not include these details.
IMA head of communications Clare Arber says: “We did recommend in our response to an earlier FSA consultation that past performance should be included in this manner so in that sense we welcome this move.”
The latest amendments to the Ucits directive mean the FSA has had to create two sets of proposals for disclosure documents, one for life and pension business and one for investment products.
The differences between the two stem from the fact that the Ucits directive now requires that fund managers must design a “simplified prospectus”' of which a key component is an indication of past performance. Most fund managers say this approach is sensible and welcome the fact that Europe is forcing the FSA's hand on the matter.
Threadneedle communications director Richard Eats says: “I do think it is important to display risk warnings in a proportionate manner but I do think it is important to include them. We think Europe is moving the FSA in the right direction.”
In its disclosure consultation paper, the FSA says: “We explained that we do not consider past performance to be a useful indicator of future performance for consumers. But the Ucits II directive requires this information to be included. We have therefore sought to develop proposals to fulfil that requirement while minimising the potential consumer detriment associated with the use of past performance information generally.”
This indicates the extent to which the FSA is reluctantly implementing the changes regarding past performance. Despite the majority of fund managers arguing the importance of the information, as long as it is taken into consideration alongside other factors, the FSA has remained steadfast in its opposition.
There are few in the investment industry who would agree with the FSA's position on the matter although IFAs continue to emphasise that past performance is only one of many factors to be considered.
Bates Investment Services senior investment adviser Kerry Nelson says: “It is important for past performance to be included in the overall decision-making process but there are other factors that need to be taken into consideration.”
Hargreaves Lansdown head of research Mark Dampier says: “I think it is quite important to have past performance. My only objection is when it is used even though the fund manager has moved on.”
Despite the FSA having to backtrack on past performance, it is for the most part implementing a new regime which it hopes will increase consumer understanding. Whether consumers find the documentation easier to understand will only be determined later.