EU divided over reforms to maligned fund performance rules
European Commission and MEPs warn regulator over watering down Priips performance scenarios decried as misleading
EU lawmakers and regulators are at loggerheads over how to reform wildly misleading fund performance disclosures, dealing a blow to fund managers and consumer groups hoping for a reprieve from the much-maligned rules.
The rift between the EU’s executive arm and its main financial supervisor has exploded as policymakers seek to rectify widespread problems with EU rules known as Priips, which were introduced in 2018 with the aim of making investment products easier to understand.
The rules require providers of investment products to publish projections of their future performance in different market conditions. Yet these forecasts have been decried as unreliable, with many funds generating wildly over optimistic figures, such as the 523,000,000,000 per cent annualised return forecast by one provider. Writing in FTfm, the economist John Kay described the regulations as “a triumph of pseudoscience over common sense”.
In a bid to find a workable solution, the European Securities and Markets Authority, the financial watchdog, recently proposed allowing funds to publish historical scenarios based on past performance data instead of forecasting future returns, according to an internal EU document seen by FTfm.
Esma’s proposal was snubbed by the commission on the grounds it went against the objective of the Priips rules to enable investors to directly compare financial products’ performance.
In a letter to Esma, seen by FTfm, the commission said it had “serious concerns” about the legality of the regulator’s proposals. Pointing out that forward-looking performance assessments are enshrined in the original Priips legislation, it warned against replacing them with historical scenarios “even if such scenarios could allegedly better apply to the reality in the market and avoid procyclical effects”.
Esma’s proposal also faces resistance from MEPs on the European Parliament’s economic and monetary affairs committee. Three MEPs, including Green MEP Sven Giegold — a longstanding adversary of fund managers — wrote a letter this month making it clear they would block any attempt to scrap future performance disclosures.
The MEPs poured cold water on the idea of fund managers being able to publish their past performance, arguing that this was more misleading because investors tended to base their future expectations on this information. “The current losses of many financial products in the corona[virus] crisis underlines this serious problem,” they added.
The political opposition to Esma’s efforts is a blow for asset managers and consumer groups, which have long advocated for historical return information to be used in investor documents.
Better Finance, an advocacy group representing European savers, warned last week that lawmakers’ moves to block the proposed reforms would have a “catastrophic impact” on investors.
It said that without changes to Priips, EU savers would be stuck with performance scenarios that were “almost certain to be wrong, highly misleading, not intelligible [and] not comparable”.
Esma has not yet published its final suggestions on reforms to the performance scenarios. According to two people familiar with the situation, the interventions from the commission and MEPs were a pre-emptive warning in response to Esma’s draft proposals.
The regulator, which declined to comment on earlier drafts, said it would submit its proposals to the commission following approval by its board of supervisors.
The commission, which has the power to amend or ultimately reject Esma’s proposals, said it was “working closely” with the regulator by “giving input and ensuring that the [reforms] are fully in line with primary legislation”.