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FSA to strengthen absolute return disclosure rules

FSA Letters 480

The FSA is planning to require fund managers to carry risk warnings on absolute return funds and fund descriptions which imply returns are guaranteed or capital is protected when that is not the case.

The regulator published its quarterly consultation paper today, which includes proposals to ban payments from discretionary fund managers to advisers for referrals after 31 December.

The paper also discusses plans to introduce additional disclosure requirements around fund names, investment objectives or fund literature which imply a degree of capital protection or a guarantee of positive returns when no such guarantee is in place.

The FSA cites “absolute return” and “total return” as fund descriptions that will come under the new rules.

The FSA says: “The additional disclosures will inform investors there may be a risk to their capital, provide information on the anticipated timescale for a positive return and advise that there is no guarantee that such a return will be achieved over this or any other timescale where no such guarantee exists.”

Fund managers would have up to six months to change their funds’ prospectuses, and will have to include the disclosure where fund objectives are mentioned in all disclosure material.

FSA head of investments policy David Geale says: “Previously we have raised absolute return funds as a potential concern, highlighting that customers may interpret terms like ‘absolute return’ and ‘total return’ as a guarantee of a positive return on their investment. We want investors to be crystal clear that their capital is at risk in these funds.

“That is why we are proposing fund managers should clearly state in the fund’s investment objectives that investors’ capital is at risk and that returns are not guaranteed. Fund managers will also have to provide the timescale in which the fund aims to achieve a positive return.

“We want these statements to reach investors directly – so we are proposing that this information appears in the disclosure document available to investors when they decide to invest in a fund.”

In March as part of its retail conduct risk outlook the FSA said absolute return funds pose a misselling risk as the complex strategies and structures used “raise questions about their suitability for all types of retail investors”.

The Investment Management Association consulted in June on proposals to overhaul the absolute return sector. The options put forward included sub-dividing the sector based on which funds are targeting more stable outcomes; sub-dividing by hedge-fund style categories; and renaming and redefining the sector with division by asset and investment strategy. The IMA is expected to make a decision on the absolute return sector by the end of the year.

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