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Trusts ignored again as funds gain further let-out from ‘KIDS’ rules

3 August 2020

Government proposal lets open-ended funds dodge for further five years flawed European rules on performance disclosure that closed-end investment companies have laboured under for over two years.

A government proposal will let open-ended funds dodge for a further five years flawed European rules on performance disclosure that closed-end investment companies have laboured under for over two years.

The regulatory amendment released by the government on Thursday would permit European-wide ‘Ucits’ funds to diverge from the EU Packaged Retail Investment and Insurance-based Products (Priips) directive on controversial key information disclosures which require fund groups to model future returns on recent performance.

The UK ‘onshored’ Priips legislation and brought it within UK law last year as part of its preparation for Brexit. The latest amendment proposes enabling the Financial Conduct Authority to replace the ‘performance scenarios’ in key information documents (KIDs) with ‘appropriate information on performance’.

UK regulators took the unusual step of publicly criticising the KIDS proposals after they came into force for investment companies in 2018, warning they risked serious ‘consumer harm’.

A follow-up response was expected but Thursday’s amendment does not refer to investment companies, an omission that threatens to prolong their ‘unfair’ regulatory treatment compared to open-ended funds which have to comply with less detailed and onerous disclosure on costs and performance.

‘It is disappointing, in our view, that the policy document does not acknowledge this and proposes a change which will greatly extend the duration of this disparity in regulation,’ said Christopher Brown, investment companies analyst at JPMorgan Cazenove.

Ian Sayers, chief executive of the Association of Investment Companies (AIC), said: ‘The government will allow the FCA to change how performance is presented but will not let it address other fundamental failures, including the disclosure of risk. It also intends to let the regulator postpone KIDs for Ucits funds for up to five years. 

‘This is good news for investors buying those products but means consumers who want to purchase other investments will remain at risk of being misled.’

He urged UK authorities to think again and show genuine independence and make comprehensive reform of KIDs an early priority.

The requirement for investment trusts to project the sort of returns they might provide investors in different scenarios based on recent performance provoked an outcry from fund managers, directors and their trade body two years ago. The AIC demanded but failed to secure an extension of their delayed introduction to Ucits applied to its members.

Baillie Gifford’s James Anderson, co-manager of Scottish Mortgage Trust (SMT ), warned the projections would mislead investors about ‘intrinsically unpredictable and unmeasurable’ risk factors, while economist Professor John Kay, then a non-executive director of the global trust, urged investors to ‘burn’ rather than read their disastrous contents.

Two years ago, the concern was that investors would be encouraged to expect the good returns of the post-financial crisis bull market to continue. Now, the fear may be the opposite. Brown said the next round of forecasts would be skewed by the negative impact of this year’s coronavirus crash. 

European efforts to reform the rule recently appeared to hit a legislative log-jam with the latest attempt at an overhaul ending in acrimony as the insurance regulator broke with its banking and securities counterparts to scupper an attempt to formulate compromise proposals.

An earlier attempt at reform by the European Securities and Markets Authority was rejected by the European Parliament in April.

In a letter obtained by the Financial Times, the three regulators admitted they were ‘not in a position to formally submit’, a compromise proposal after some members of the insurance body’s board objected.


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