UK FSA criticised over absolute return proposals

UK fund industry body the Investment Management Association has criticised local regulator the FSA over its proposals to adjust the definition of absolute return funds, warning it risks putting UK-authorised products at a disadvantage.

In a quarterly consultation paper, the UK Financial Services Authority asked the industry for feedback on funds promising an ‘absolute’ or ‘total return’, saying fund definitions could imply an element of capital protection or a guarantee of positive returns which may not be achievable.

The regulator has warned such definitions have the potential to mislead investors. The watchdog is proposing firms running absolute return funds should be subject to additional disclosures.

These would “inform investors that there may be a risk to their capital, provide information on the anticipated timescale for a positive return, and advise that there is no guarantee that such a return will be achieved over this or any other timescale (where no such guarantee exists),” the FSA said.

It suggested fund providers be given a six-month period in which to change their fund prospectuses to comply with the proposed new disclosures.

In response, the IMA said the FSA’s plans would not achieve the desired outcome because they would not cover all investment products which use such descriptions, nor all funds available to UK investors.

The move could therefore create competitive distortions in the UK marketplace, the IMA added.

Julie Patterson, director of authorised funds and tax at the IMA, (pictured) said: “We think it makes more sense to review the FSA’s financial promotion provisions, as these are what investors see. They also capture all products marketed in the UK to investors.

“Furthermore, European regulation already requires firms to produce a Key Investor Information Document (KIID) for all Ucits funds, which includes a risk and rewards section.”

“If the FSA is of the view that further disclosure for Ucits is required, we recommend close collaboration with ESMA in order to deliver a harmonised approach across all Ucits so investors can compare funds on a like-for-like basis.”

 

This article was first published on Investment Week

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