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FSA plans cut in projection rates

The FSA is considering cutting the projection rates firms are required to use when marketing retail investment products which do not fall within the scope of the Markets in Financial Instruments Directive.

Under current FSA rules, the intermediate rate of return projection which providers are required to publish in product marketing material is 7 per cent.

However, an independent review carried out by PricewaterhouseCoopers suggests this figure should be reduced to between 5.25 per cent and 6.5 per cent.

The report says: “Following our review of academic research, updated market information and broader economic developments, our best estimate for the single intermediate rate of return is 6 per cent, in nominal terms, with a range around this figure of 5.25 per cent to 6.5 per cent.

“We therefore consider the current 7 per cent intermediate figure to be too high and suggest the FSA brings this figure down to within the range of 5.25 per cent and 6.5 per cent.”

FSA head of investments policy Peter Smith says: “It is crucial that projection rates are set at a realistic level so that investors are not misled. Today’s independent research indicates that our maximum projection rates should be reduced.

“We are seeking views on the range of rates so investors receive a reasonable indication of what they can expect from their investment.”

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. Good work everyone, worth every penny.

    We’ve been using the lower growth rate as standard for years.

  2. Wonderful! this will provide the FSA with another unlimited opportunity for beating up the adviser community with a retrospective review implying that if we didn’t advise our clients to disregard the current projection rates rates as overly optimistic and adopt a suitably pessimistic view towards equity returns they may have a justifiable claim against us. Still, on the plus side it will keep the ambulance chasers in a job when the PPI opportunity expires!

  3. SIB/LAUTRO still misleading consumers with unrealistic projection rates, when will they ever learn?

  4. Paul S, Cardiff 10th April 2012 at 2:54 pm

    After years when these rates have been too high, finally they decide to consult on a lowering. By the time a change is implemented, chances are that returns will have started to rise again.

    There should be an automatic and regular review of the standard rates.

    But only very inexperienced investors pay any attention to the mounds of illustration garbage that accompany most products. They bear no relation to the real world and “events, dear boy, events”.

  5. I wonder how much Price Waterhouse charged for this blindingly obvious comment when you have interest rates as low as 0.5% and Gilt prices also dropping.

    For once I wish the FSA where ahead of the curve instead of always behind it.

    It is also interesting to note that there is no mention of risk and reward in this analysis after all even a 5.25% rate of return is not guaranteed in an equity linked investment as investment can go down as well as up.

    It seems to me that the FSA wants a totally risk-free environment where investors are guaranteed whatever happens to get a rate of return and that all predictions should always come out right when in fact that is not the real world.

  6. Nowadays the only thing that is guaranteed to mislead clients are the projected investment rates. The mid rates should be based on the actual performance of the fund over the past 5 years, or if new, the average performance of the ABI sector it is in. Thus some of the real dog funds provided by banks etc. cannot hide behind assumed performance that is totally unrealistic. Funds that have the potential to provide greater return for increased risk can have wider spreads of projections to show increased volitility. Now, would that be too difficult?

  7. I’m still using the Lautro 9% rate for my low cost endowment clients. What could possibly go wrong.

  8. They are what they are “projections”

    I think the bigger story is Peter Smith stating “independant research indicates” (it should go on to say) has cost a load of money, for little but state the blooming obvious but it keeps all our ex FSA buddies in work !!!

  9. Can you imagine growth rates hitting 7% every single year for 25 or 40 years?

    Bonkers.

    How about 3%? Just as crazy.

    Scrap them altogether and use LAUTRO growth rates and assumed expenses.

  10. ‘Reasonable Expectations’
    I’m astonished by this comment from a senior FSA person: “so investors receive a reasonable indication of what they can expect from their investment”. Suddenly the FSA can forecast returns – wow that is clever! Nobody else can.
    Why are they even trying? the primary purpose of provider illustrations is to show the effect of charges. To do this they all need to show the same growth rate. The current situation with a variety of growth rates makes that near impossible – whose bright idea was that?
    Most financial planners have a variety of stochastic modelling techniques at their disposal for ‘forecasting’ or projections – these are not regulated by the FSA (and shouldn’t be) – provider illustrations are not used for this purpose. After RDR D day, will all providers have illustration systems which can incorporate the separate adviser charges or fees? I doubt it, so advisers will increasingly have to do their own illustrations to show the combined effect of provider and adviser charges – these seem not to be FSA regulated either. Quite a lot wrong with the current system which needs some better thinking than that demonstrated so far.

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