EU demands prediction of fund performance in crisis
Asset managers will have to forecast returns under distressed market conditions
Asset managers will be forced to provide investors with predictions of fund performance in the event of another financial crisis under new European rules aimed at strengthening consumer protection.
The European Commission yesterday signed off the controversial new measures that will ensure investor documents include forecasts of fund performance during distressed market conditions.
Sven Giegold, the German MEP who is a member of the influential Economic and Monetary Affairs committee at the European Parliament, said the rules would ensure investors were better informed of risks. “This is good news for investors,” he said.
However, the contentious move has been met with anger by both investor rights groups and asset managers. They fear it will add unnecessary complexity and could discourage consumers from investing for their future.
Guillaume Prache, managing director of Better Finance, a Brussels-based group that lobbies for investor rights, said: “[This] will further confuse and deter retail investors.”
The new rules were finalised following months of negotiations between the European Commission, the EU’s executive arm, and politicians within the European Parliament.
The measures, which fall under a vast set of consumer-focused rules known as Priips, will also force asset managers to predict future performance based on three scenarios, ranging from adverse to good.
Asset managers will not be required to highlight past performance figures in the so-called key information documents.
Martin Bamford, managing director of Informed Choice, an independent financial adviser, said: “Extending the contents of these [key information documents] to include stress-test data and a range of market forecasts simply adds to the information most investors will ignore.”
Justin Bates, an asset management analyst at Liberum, the broker, said the commission was adding “a layer of additional complexity to an already contentious subject and one that will surely be open to significant interpretation and, in reality, impossible to model accurately”.
The asset management industry had undertaken a big lobbying effort to convince European officials to include past performance in the investor document, rather than predictions of future performance.
The commission ruled out this approach, although it is understood the calculations for future performance will take previous returns into account.
A spokesperson for the BVI, the trade body for asset managers in Germany, said: “We think past performance data are the most reliable performance-related information one can obtain on investment funds.”
Tristan Chapple, a director at Phoenix Asset Management Partners, a UK investment boutique, added: “Surely the best guide to future performance is a long-term record of doing the same thing?”
The commission amended the measures to include performance predictions in stressed market conditions after clashing with European politicians about the rules last year.
MEPs rejected the commission’s first set of proposals last autumn — a first in financial services regulation — as they were worried the planned changes would mislead investors.
At the time, Mr Giegold criticised the commission’s proposed formulas for predicting performance, arguing the figures contained a “huge flaw” that would make performance look far better than it is likely to be during another financial crisis.
On Wednesday the German MEP welcomed the introduction of a distressed-performance prediction. He said this should mean investors understand the “real risks” of their investments.