Yet another public consultation issued by the Financial Conduct Authority (FCA) in mid-summer is one on KIDs (Key Information Documents). This is relevant to private investors and is designated CP21/23 – see link below.
KIDs are imposed and regulated under the PRIIPs regulation as devised by the EU for packaged investment products such as funds and trusts. KIDs give basic financial information, risk indicators and likely future performance based on past performance. Those who purchase investment trusts for example will be asked to confirm they have read the KID before purchasing a holding.
But in reality KIDs are grossly misleading for many investment trusts. This is because their estimate of future returns are based on short-term historic data. This has caused many fund managers of investment trusts to suggest that they should be ignored and investors should look at the other data that the companies publish to get a better view of likely future returns. The AIC has also criticised them and this writer certainly ignores the KIDs for the investment trusts I hold.
The FCA says “Our proposals should address the existing conflict between PRIIPs requirements which on the one hand require PRIIPs manufacturers to ensure the information in the KID is accurate, clear, fair and not misleading while at the same time prescribing the production and presentation of information on performance and risk which, in some cases, can be seriously misleading”.
The production of KIDs does require substantial effort on the part of fund managers so they add to investors’ costs while not being of substantial benefit to investors in many cases. The intention might have been good but excessive complexity has undermined their usefulness. The FCA admits that the mandated methodologies for calculating performance can produce misleading illustrations across almost all asset classes.
The proposal is to remove performance scenarios from KIDs which seems a very good idea. Alternative performance information is suggested be provided., such as narrative about the factors that might affect performance. But they have avoided providing past performance data which is what is likely to be most important to investors.
The PRIIPs regulations required the publication of a Summary Risk Indicator (SRI). But the methodology to be used seemed to rate some trusts as low risk when they are not – for example Venture Capital Trusts. So it is proposed to introduce new rules requiring an updating of an SRI if it is obviously too low.
The proposals from the FCA seem generally sensible although the AIC is still not happy. They say in a press release that: “….the SRI methodology does not work properly and needs a complete rethink. We were raising concerns about KIDs even before the rules were finalised and we have been calling for changes since their introduction on 1 January 2018. Investment companies are still at a disadvantage in having to produce these toxic disclosures, whilst UCITS funds have repeatedly been let off the hook. It’s high time the Treasury conducted a comprehensive review of KIDs rather than relying on a piecemeal approach to their reform”.
Respondents to the consultation can give their own views of course. There is a simple on-line response form.
Reference: CP21/23 Consultation Paper:
https://www.fca.org.uk/publications/consultation-papers/cp21-23-priips-proposed-scope-rules-amendments-regulatory-technical-standards
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
I agree with most if not all of what Roger is saying and could happily copy and paste most of this into the ShareSoc response. This saves me loads of time in having to prepare our view and response, so many thanks to you Roger.
I like in particular your point; “But they have avoided providing past performance data which is what is likely to be most important to investors”.
With any investment, it is Management that is the key so as far as KIDs are concerned I always want to know how long the current Manager(s) has been in post; their past investment history and whether decisions are made by a team or individual(s). Nothing will protect you from the “Woodford” effect but individual mangers striking off on their own often seem to underperform.
2 NOVEMBER 2021
AIC WELCOMES DELAY TO PROPOSED CHANGES TO
KEY INFORMATION DOCUMENTS (KIDs)
The Association of Investment Companies (AIC) has responded to the FCA’s announcement of a delay to the proposed changes to Key Information Documents (KIDs).
In its Consultation Paper CP21/23, PRIIPs – Proposed scope rules and amendments to Regulatory Technical Standards the FCA anticipated that the proposed new KIDs rules1 would take effect in January 2022. However, the FCA has now announced2 it will confirm in Q1 2022 when the rules will take effect along with any implementation period.
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “We are encouraged that the FCA has listened to industry concerns and is taking its time to get the changes to KIDs right. This will give the regulator breathing space to consider how best to change KIDs to help investors make better decisions. We hope one option being considered is bringing KIDs’ performance disclosures in line with those of UCITS funds.
“Getting more people involved in investing is a goal which policymakers and the industry share. But to make it work, consumers must have confidence in the products they’re offered, and this can only happen if they have reliable and accessible information. That’s something that KIDs do not provide.
“The FCA has recognised the need for reform but it can only do so much. The Treasury should play its part and launch the promised review of consumer disclosures to bring all investment products into an effective disclosure regime. Brexit has given the government the chance to do things better and we urge it not to delay any further.”