The Association of Investment Companies (AIC) has claimed that consumers are being misled by Key Information Documents (KIDs) and has urged the UK Financial Services Authority to “act now” to protect consumers.
Research conducted by the AIC looked at 56 investment company KIDs and then compared their Summary Risk Indicators to the Summary Risk and Reward Indicators in the Key Investor Information Documents (KIIDs) produced by their ‘sister’ open-ended funds. A ‘sister’ fund is a fund which shares the same manager, has the same overall investment strategy and a significant overlap in terms of portfolio.
Both KID and KIID indicators grade risk on a scale from 1 (low) to 7 (high), but they are calculated in different ways. The AIC points that given the existence of discounts and the possible use of gearing, the “accepted view” is that the investment company would be more volatile than its sister fund and therefore should, if anything, have a higher risk indicator.
However the research found that the KIDs did not reflect that indicator. Indeed, none of the 56 investment companies has a higher risk indicator than its sister fund; just 3 investment companies have the same risk indicator as the sister fund; 40 investment companies have a risk indicator one lower than the sister fund and 13 investment companies have a risk indicator two lower than the sister fund
Ian Sayers, pictured left, chief executive of the AIC, said: “Prudent investors might then check to see whether these returns are being obtained at the price of much higher risk by comparing the risk indicators of the two funds. Imagine their delight to discover that they can have these fantastic returns with lower risk.
“Of course, this is all nonsense. It reflects the reckless decision to allow competing products to produce seemingly identical information but calculated on a different basis. Any suggestion that consumers will appreciate the subtle difference in methodology between the two risk indicators, when they are called virtually the same thing and presented in exactly the same way, is laughable.
‘United in criticism’
“I cannot remember a time when consumers, directors, managers, analysts, trade associations and media commentators were so united in their criticism of a piece of regulation. Only regulators appear to have failed to spot what is obvious to everyone else, that basing future projections of risk and performance on the recent past was doomed to failure, and so it has turned out.
Sayers added that the AIC has argued against the proposed Summary Risk Indicator as far back as 2010 “for precisely these reasons”, and we were not alone. However, he says, repeated warnings over the next eight years “fell on deaf ears”.
“Though we welcome the FCA’s decision to gather evidence, this should not be an excuse for further delays,” he said. “The evidence is all out there and has been for six months. Though a longer-term solution will need to be carried out at the European level, the FCA should take steps today to protect consumers.
“A good start would be to acknowledge how bad this regulation is and then warn investors not to rely on these disclosures when making investment decisions.”