Investment products could in the future be required to carry discrete past performance information which covers a full five-year period, according to the latest round of ideas for a European Directive.
Updated content of discussion for the European Commission’s Markets in Financial Instruments Directive (MiFID), which covers European plans for Conduct of Business Rules, suggests where a financial product contains data about past performance it must “include performance information which covers the previous five years (or the whole period if the financial instrument has been offered for less) based on complete 12-month periods”.
As it stands, this would conflict with existing European directives which require investment products’ have simplified prospectus, for example, to carry 10-year past performance data, albeit the UK financial services industry has special dispensation to use five-year performance data.
Details of Working Document ESC23/2005 – Rev1 Corrected Version 9.9.05 issued by the European Securities Committee – a division of the EC internal market currently chewing over proposals for MiFID – reveal several criteria which investment firms and investment advisers will be required to adhere to, for marketing, data and ‘Know Your Customer’(KYC).
Among those set out, the paper also suggests where gross fund performance is used, documents concerning the product must carry information disclosing the effect of commissions, fees and other charges.
Product information will need to explain a product’s leverage and its effect on the risk potential of losing assets, as well as setting out the volatility of the price of the investment and any other obligations on the product which could affect its performance.
There may be some good news in the latest proposals, however, as advisers may have been given a reprieve against earlier onerous data gathering requirements, whichimplied the intermediary would have been able to deduce an investor’s suitability to, and knowledge of, financial services products from their educational background or profession.
While the KYC requirements regarding a client’s knowledge and expertise are still in place, the directive now suggests information gathered “may” include their “level of education and profession or relevant former profession of the client” rather than insisting this be taken into account when giving investment advice.Similarly, content of the revised working document reveals plans to introduce a voluntary investor aptitude test has been scrubbed at this stage.
But, it appears there is still no sign of the much-needed definition of investment advice, although there are hints towards it, as Article 16 of this paper says:”For the purposes of the definition of ‘investment advice’ in Article 4(1)(4) of the Directive, a recommendation is a personal recommendation if:
There is also no indication at this stage firms will be required to ‘repaper’ or reissue new terms of business to all new and existing clients.
Trade bodies had been concerned the MiFID proposals suggested all firms would have to send new TOB papers to clients and get their signature in return – a costly paper-generating exercise which did not appear to be of any value to either customers or regulation.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Julie Henderson on 020 7968 4571 or email [email protected].IFAonline
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