The UK regulator, the Financial Services Authority, yesterday unveiled a package of measures aimed at cleaning up the way mutual fund managers make use of past performance information in advertising. Sales of mutual funds in the UK, long driven by selective use of performance data from the best-performing funds, has come under FSA scrutiny since last year – when the regulator ostentatiously refused to include performance data in its own web site rankings of mutual fund managers. Outgoing FSA chairman Howard Davies told the Investment Management Association’s Annual Dinner on Wednesday that “we have had a lengthy debate with the industry about the use of past performance figures. The only agreed conclusion is that if there is any persistence, it applies only to underperforming funds. That clearly limits the usefulness of past data for future investment choices. It doesn’t mean that we should prevent consumers from having access to that data. But we do want to ensure that when firms use past performance in their adverts, it is balanced by standardised data that cannot be cherrypicked or manipulated.” The FSA says it will adopt a dual approach, concentrating on the quality of past performance information and also on the overall balance within an advertisement. The new proposals for firms wanting to use past performance information in advertisements are:
Standardised information, set by the FSA, will have to be included alongside a firm’s own information, and no less prominently. The FSA says this will counterbalance any attempt by a firm to quote unrepresentative data that shows a product’s performance in a particularly good light.
Firms will be cautioned not to show past performance information in pounds because that style of presentation is particularly likely to mislead consumers. FSA research apparently shows that consumers latch on to monetary values and are more likely to regard them as a prediction of future returns.
The format for the standardised measure will be a table showing returns for up to five rolling twelve-month periods. The FSA says this will provide consumers with a reasonably up-to-date snapshot of a fund’s performance over the medium term, and give an impression of its riskiness by showing the performance ups and downs. Where a product can show less than 12 months past performance, the firm will not be able to quote performance figures in its advertisements. However, the requirement to provide discrete annual returns over five years will only apply to funds and unit-linked policies. The existing requirement of a five-year cumulative figure will remain for products which are not unit-linked (such as with profits policies where returns are smoothed) or which have a fixed term – but the information will now have to appear in the main body copy of the ad, rather than in the small print. In the consultation paper announcing the changes (CP183), the FSA also confirms its plans to publish rules and guidance aimed at getting firms to take a more balanced approach to the use of past performance information in advertising. For example, firms will be told that giving too much prominence to past performance information can mean that an advert falls short of the FSA’s overarching ‘clear, fair and not misleading’ standard. The proposals were developed in response to recommendations made by the FSA’ s independent Task Force in September 2001. The deadline for feedback and comments is 2 September. Feedback will be published in late Autumn and firms will then have a six month transitional period to amend their promotional material to meet the new standards.