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FSA signals reprieve for past performance

The FSA has given its first indication that past performance data will not be banned in investment advertising as the industry had feared.

In an interview with Radio 4&#39s Inside Money programme last week, FSA consumer director Christine Farnish said it is unlikely the regulator will opt for an outright ban but indicated strongly that there will be tighter rules on the use of past performance statistics.

The news may go some way towards consoling the fund management community over the omission of past performance data from the FSA&#39s forthcoming Isa comparison tables.

The indutsry hopes it may be the first step towards a reassessment of past performance in the league tables. Although this may come too late for the publication of the tables in the autumn, it is possible it may be inserted at a later date.

The interview certainly appears to herald the FSA&#39s second U-turn on past performance in less than a year. Regulators had always stood by the view that past performance is not necessarily a guide to the future but, on August 14 last year, the FSA sent out a release declaring that past performance provides no guide to the future.

Now, just under 12 months later, Farnish has stated in her BBC interview that “After all, past performance is a fact.”

If the FSA allows the continued use of past performance figures in investment advertising – as now seems likely – its argument for leaving them out of the comparative tables will be weakened.

The U-turn should come as some comfort for the industry, not just because it is a victory in terms of the regulator&#39s approach to past performance but also because it demonstrates that the FSA is not completely unmoveable.

Since it denounced the use of performance data last August, the FSA has been lobbied constantly to rethink its position, culminating in Skandia&#39s vocal campaign in June.

Skandia systematically dismantled the FSA&#39s arguments, ending one IFA presentation with a slide of chairman Howard Davies in a dunce&#39s hat, accompanied by the statement: “It is not possible to conclude that the FSA do not understand the statistical conclusions of their own research.”

It would seem the industry&#39s persistency is finally paying off.

Skandia investment brand manager Phil Morse says: “I think people are coming round. There is no doubt that some fund managers in the industry are outperforming consistently. How can you say that is luck? I think the FSA had to come round. I think they would have been surprised how many people were not involved with the tables on day one. We could not be involved if they did not include past performance.”

But Morse believes the FSA is right to regulate the use of past performance in advertising and shares concerns with much of the industry that too many fund managers boast performance over obscure time periods in order to boost their figures.

He says: “The problem is that people are giving you five years and three months&#39 performance to make the figures look good. But as long as it is done in a consistent manner, surely past performance has got to be of use.”

As yet, there is no indication as to how the FSA will regulate the use of past performance advertising but it seems likely that it will specify that managers can only advertise over certain time periods. Plan Invest joint managing director Michael Owen believes that the regulator should allow managers to advertise either three, five or 10-year performance.

He says: “I think if they come up with standard time periods for advertising, that would be acceptable. Recently, I have seen companies advertising over ludicrous periods.”

Owen is also keen for the FSA to force companies to make it clear how long a the fund&#39s manager has been running the fund. He says: “You have got to find a way of getting round the problem of fund managers leaving. We saw this whole thing with Albert Morillo last year, where Scottish Widows were advertising his performance when he had left ages ago. I would like to see some kind of a warning if a manager has recently left.”

Media pressure has already led some fund managers to include a note if a fund&#39s management has changed. Earlier this year, Jupiter began to include footnotes telling investors that several of its funds had seen a change in manager.

With more than £100m a year spent on the marketing of unit trust Isa and Pep products, the industry will be eagerly awaiting the conclusions of the review on advertising.

But with the main issue of past performance out of the way, it seems unlikely it will throw up any nasty surprises. Perhaps the more pressing issue for fund firms over the coming months is whether there are still investors confident enough to commit new money.


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