The Financial Conduct Authority has intervened in the row over key information documents (KID) that investment trust groups feared could expose them to claims of mis-selling.
Responding to a barrage of criticism of the new three-page documents, the City watchdog said it was ‘comfortable’ with investment trusts providing additional information to ensure investors are not mis-led by overly-optimistic performance forecasts required by European regulations for packaged retail and insurance-based investment products (Priips).
‘We understand some firms are concerned that, for a minority of Priips, the “performance scenario” information required in the KID may appear too optimistic and so has the potential to mislead consumers,’ the regulator stated.
It said this might be because of the strong past performance of markets, the way the calculations must be carried out or simple calculation errors.
‘Where firms selling or advising on Priips have concerns that the performance scenarios in a particular KID may mislead their clients, they should consider how to address this, for example by providing additional explanation as part of their communications with clients,’ the FCA said.
Ian Sayers, chief executive of the Association of Investment Companies, welcomed the FCA’s response. ‘We are encouraged by the pragmatic approach to the industry’s concerns,' he said.
‘Directors of investment companies have expressed their misgivings about the performance scenarios that KIDs require which, in some cases, are too optimistic.
‘It is one of the pleasing features of the investment company sector that independent boards of directors are more concerned with providing an accurate picture to investors rather than simply complying with rules.’
The failure of 96 investment trusts to have KIDs ready at the start of the year - two years ahead of rival open-ended investment funds - saw them temporarily suspended from Hargreveas Lansdown, the country’s biggest stock broker.
The board of Henderson Smaller Companies (HSL) told investors not to rely on its KID document last week, while James Anderson, co-manager of the £6.6 billion Scottish Mortgage Trust (SMT) said that he was ‘extremely disturbed’ by the changes. John Kay, SMT’s senior independent director, urged investors to ‘burn’ the flawed document.
Scottish Mortgage warned that based entirely on recent equity outperformance investors in its fund were now told they might expect 20% a year over the next five years in a ‘moderate scenario’, or 30% in a ‘favourable’ one.