FCA publishes new rules on Fund disclosure transparency

The recent announcement from the Financial Conduct Authority (“FCA”) that Fund aims and benchmarks may be incomprehensible to investors comes as no surprise to us, having spent the last 15 years collecting Fund data from over 700 Fund managers.

The follow-up Fund communication guidance from the Investment Association (“IA”) used consumer research to back this up, finding investors had “difficulty understanding a range of commonly-used terms”, with more than half unable to correctly explain income, return, growth and yield.

New FCA regulations will tackle the following:

1. Jargon throughout Fund aims and objectives

A Fund objective should be a simple and clear explanation of the Fund aims and approach. All too often though lengthy paragraphs are padded with technical detail, making them incomprehensible to a typical investor with limited financial knowledge. The text is baffling and makes Fund comparison, a key decider for some investors, very challenging.

The IA research recommends the use of phrases which are familiar and commonly understood by investors:

We have written previously about making content accessible to all users, with one of the core principles making content understandable. We have long encouraged our asset manager clients to make a clear distinction between Fund aims and investment approach, collecting and publishing them as distinct pieces of valuable information.

2. Consistent use of a benchmark in past performance reporting

Some managers were found to use a different benchmark in past performance tables to the benchmark in the Fund literature, which could lead investors to conclude that a Fund has performed better against its Fund objective than it actually has.

Where a Fund’s strategy is limited to an index, managers are already required to disclose this under FCA rules. However, in 2018 alone, 64 Funds were found to not disclose this clearly, resulting in £34m in compensation being paid out.

FundsLibrary’s Fund Research Centre includes a comparison tool borne of a lack of transparency and comparability of Fund data, allowing users a genuine like-for-like comparison of Funds, against more than just performance.

The new FCA regulations come in to effect for new Funds in May 2019 and in August 2019 for existing Funds. The new rules cover all marketing and legal material, including Fund factsheets and Key Investor Information Documents and will require all asset managers to undertake a comprehensive review and reissue of their material.

We believe the new rules are a welcome step to making Fund objectives and investment policies more useful and understandable for investors, marking further progress on the route to improved transparency in the industry.

To find out more about our easy-to-use comparison tool please visit here or contact us on +44 117 980 9994.

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All figures correct as at 30.06.2019.