Advisers will reap the rewards from EU-wide plans to revamp the Simplified Prospectus document used by providers to supply key fund information to investors.
Under current rules, investors could be supplied with a lengthy document for every fund in which they invest with the information varying from provider to provider.
However, under plans to overhaul the much criticised Simplified Prospectus document, this crucial information could be condensed into two sides of A4.
This would help advisers explain a fund much more clearly to their clients and ensure they are fully aware of the risks involved.
CESR (The Committee of European Securities Regulators), which advises the European Commission, is currently consulting on its proposals to improve disclosure for investors with a paper called ‘Content and form of Key Investor Information (KII) disclosures for UCITs’.
The consultation closes in December and CESR will give its advice to the Commission in February 2008.
The Commission will then carry out market testing throughout 2008 on the basis of this advice and CESR will use the data to finalise its results by March 2009.
As part of the consultation, CESR highlights the need for information to be short, focused, expressed in plain language and presented in a way that enables easy comparisons to be made between products.
It believes KII should be a single document covering a maximum of two sides of A4, unless a product has unusual features which need further explanation, with a standardised list of contents.
On risk-reward, CESR outlines two options; a synthetic risk-reward indicator or improved narrative disclosure.
Its proposals for past performance include using bar charts, percentages instead of cash figures and benchmark performance. CESR says up to 10 years data should be used if available.
Regarding charges, CESR says there is evidence retail investors can misunderstand even relatively simple information. It proposes two options for consumer testing; the first an improved version of the current Simplified Prospectus and the second supplementing this figure with a summary figure.
The consultation has been welcomed by investment groups in the UK but there are concerns about rolling out the new guidelines Europe-wide.
Royal London head of corporate affairs Gareth Evans says: “In a world of fund supermarkets and platforms investors need to have some understanding of the risks they are undertaking. It will help to have a common vocabulary on investment risk.”
However, he says it will be harder to introduce a risk-rating system for the UK than for other countries such as the Netherlands which sell a huge number of structured products where the downside is written into the product.
The IMA also supports the review and is in the process of drafting a response to the consultation paper.
“We are glad the KII will be fund specific and not educational or generic. However, we are currently unsure on a couple of points namely would the new documents be sent to existing investors as well as new investors and would advisers be compelled to pass this information on to their clients,” a spokesman says.IFAonline
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