Advisers will have to decode potentially misleading fund growth projections being introduced through new packaged product rules.
New three-page key information documents for bonds and investment trusts will be introduced under European packaged retail and insurance-based investment products (Priips) regulation in January. Other retail investment products are set to come into scope at a later date.
However, experts are concerned the documents have not been tested enough and will contain misleading information about a fund’s growth rate.
Zurich UK life regulatory developments head Matthew Connell is concerned the Priips rules around fund performance projections are determined differently to current UK practice.
In the UK, growth rates for high, medium and low performance projections are mandated through FCA rules and if a provider believes their returns will be lower than what the regulator has assigned they have to disclose a lower rate.
Connell says: “The idea is it stops providers competing on how optimistic they are on growth rates and everyone has to use the same rate.”
But under the European rules, each fund will base its projection on its performance over the previous four years. New funds will make assumptions based on similar funds in the sector.
Connell says: “The concern is funds can have a patch through four years where the returns are very good and when they put that into the Priips modelling you can have an optimistic view of what the growth rate will be.
“But, if you are saying to customers this is what we think the annual growth rate will be over 10 or 20 years that leads to misleading projections, especially on the most optimistic scenario.
“Providers are going to be projecting returns over a medium to long term but they would never project if they were using the FCA method or coming up with numbers of their own to guide customers.
“The concern is once you start projecting these possible returns at the higher end, in 10 or 20 years’ time customers could say, not only did we not hit these optimistic projections, we were never likely to, so why did you give me this information.”
Connell says advisers will have a big part to play in interpreting the documents for their customers.
Regulatory consultant Richard Hobbs agrees the adviser’s role will become more complicated in light of the Priips rules.
He says: “The FCA won’t stop having the mandated rates so this is more information to digest and it makes it harder. On the one hand I have got this historic performance and on the other hand I have got this illustration of what might [happen].”
However, Hobbs says this may lead to advisers have more detailed client discussions.
He says: “This development provokes a different kind of conversation between the adviser and the client.
“What advisers will be able to do is use this development to have a better conversation with their clients where the nature of investing, the risks and the opportunities, and the meaning of the time value of money are gone into rather more thoughtfully than they would otherwise have been.”
Connell is also concerned the documents give a generic illustration of a fund’s performance rather than a personalised projection for each investor.
Connell explains investment return projections under Priips are based on a £10,000 investment rather than the amount the investor is paying in.
He says: “They want this to be a pre-contractual document so they want customers to have a copy of it without having to engage with the providers. If everyone does it on the same £10,000 investment then everyone will be able to see the document in advance on the website.”