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The simple truth about Ucits 3

The FSA would like to have a disclosure regime which could be applied seamlessly across life and non-life products but a recent EU directive means that a slightly different approach will be required for investment funds.

The directive, known as Ucits 3, has introduced the requirement for a “simplified prospectus” to be given to clients at the point of sale. This document is basically an EU equivalent of the key features&#39 concept to be used pan Europe. The FSA has sensibly decided that the new key facts&#39 documents will be the simplified prospectus by another name.

The contents of the new simplified prospectus are similar but not exactly the same as the current key features&#39 document. Discussions are ongoing between member states on the exact way to deal with a number of areas. Details should be available shortly.

However, it is important to note that the FSA is not at liberty to make material changes to the document, either in the form of additions or by way of leaving things out. Inevitably, therefore, there will be a divergence between the regime that is applied to investment funds and that which applies to life products.

The disclosure regime for investment funds has only been in existence for six years but it was clear from fairly early on that key features&#39 documents were not a hit with clients.

Obviously, the reality is that these documents have remained unread in all but a minority of cases, leaving the hopes for the disclosure regime remaining largely unfulfilled. The FSA has undertaken much research to try to establish why investors were not reading the documents and what can be done to change the situation. The changes it has identified will help improve matters but it is unclear by exactly how much.

Highlights of the new regime include the following:

Prescribed front cover: The front cover of the key facts document will permit only limited branding of the product provider. It will also require the FSA logo and a regulatory message explaining that providers have a duty to offer clients the document. There will be a key facts logo to help make the documents distinct and recognisable. The idea is to make the document more official looking without putting off the target audience.

General presentation: The format will follow a question and answer format “in plain direct language using no jargon”. On the face of it, this is a very sensible aim but implementing it might not be as straightforward.

A good example of this is in respect of risk ratings. There has been talk for some time on the desirability of a simple risk rating for a fund. The problem is that risk is not an absolute – dependent on someone&#39s investment time horizon and personal circumstances, the risk on a fund can be hugely variable for a particular person. Rating a risk with a simple number is attractive conceptually but it can be misinterpreted.

Past performance information: The FSA is a well known sceptic on the usefulness of past performance information but the need for the inclusion of this information by Ucits 3 gives it no option but to comply. The FSA has indicated that information will include discrete annual returns, cumulative returns graphed on the basis of £1,000 investment and a risk warning. Full details will only be available on conclusion of the member state discussions referred to earlier.

Reduction-in-yield illustrations: These illustrations, showing the impact of expenses using a variety of assumed growth rates, have come in for stick in the past, not without justification in most cases. However, the FSA has concluded that, on balance, these illustrations are worthwhile despite their limitations.

To conclude, the new disclosure regime needs to be clarified in a number of areas but from what we can see now, it does look as though it will bring about positive change, albeit imperfections will remain, some of which will be significant. It seems ironic that the FSA&#39s paper on this subject was 273 pages long. For a document whose focus is the simplification and demystification of financial products, it would have been good to have some leadership by example.

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