Alarming deficiencies’ in new European investment rules — German fund group
The association representing German asset managers has called for a two year delay to the introduction of new pan-European rules covering financial products sold to retail investors after identifying “alarming deficiencies” in the new regulations.
The German Investment Funds Association (BVI) said on Wednesday that the new rules, which are due to apply to mutual funds sold to retail investors in Germany by 2020, should be delayed until January 2022.
The new regulations are intended to help retail investors better understand and compare the key features, risks, rewards and costs of investment products sold by asset managers, banks and insurers.
Under the new rules, all providers of so-called Priips — packaged retail investment and insurance-based products — are required to outline a range of returns that an investment might deliver in different market conditions, instead of publishing historic performance data.
Critics, however, argue that this has led to misleadingly optimistic return projections based on the highly positive performance of financial markets in recent years being provided to retail investors.
Providers of structured products in Germany have already started to publish performance projections using the new Priips rules.
Thomas Richter, BVI chief executive, said “alarming deficiencies” has been revealed in the methodology for calculating future returns which had led to “obviously wrong and misleading figures being disclosed to investors”.
The BVI’s statement follows an announcement in January by the UK’s financial regulator that allowed investment managers to provide additional “explanatory materials ”.
The Financial Conduct Authority’s statement followed the publication of wildly misleading performance projections by some product providers that suggested savers could earn massive returns.
Annualised returns of more than 523bn per cent could be delivered for a three-times leveraged note linked to US natural gas prices under a favourable investment scenario, according to the key information document published on the website of ETF Securities, the London asset manager.
The FCA said that where an investment product provider was “concerned that performance scenarios are too optimistic, such that they may mislead investors, we are comfortable with them providing explanatory materials to put the calculation in context and to set out their concerns for investors to consider.”
The BVI also said on Wednesday that it was concerned that “false and misleading” information was also being provided to investors about the charges that fund managers expect to incur for buying and selling securities.
Asset managers have published zero or even negative estimates for expected transaction costs for thousands of funds sold across Europe, an outcome that has been criticised as both unrealistic and misleading.
Negative transaction costs — caused by favourable movements in a security’s price while trading orders are processed — also reduce the total cost of investing that is reported to savers.
Mr Richter said that claims by managers that they would incur negative transaction costs were “highly problematic” and would lead to a “general understatement of costs” paid by retail investors.
Debate over whether the new rules are fit for purpose is widely expected to continue. Regulators have so far shown little appetite for a rethink.
Steven Maijoor, chairman of the European Securities and Markets Authority, the regional regulator, said in March that “concrete evidence” was required to assess whether the methodology for calculating transaction costs was flawed.
“In the absence of such evidence, Esma maintains that the methodology is sound and that negative transaction costs should be extremely rare,” said Mr Maijoor.