Guy Rainbird explains how the EU’s approach to tackling the problems with KIDs is misplaced
Guy Rainbird, Public Affairs Director
Imagine you phoned the fire brigade when a fire had just broken out in your home. You would not be pleased to be told that no fire-fighters could come to help as they were too busy handing out smoke detectors to your neighbours. An actual fire, surely, should be prioritised over protecting others from possible future ones?
Yet this is how the risks of Key Information Documents (KIDs) are being dealt with by European policymakers, risks which have been so amply demonstrated by the AIC’s submission Burn before reading.
Last week MEPs, with the support of the European Commission, decided to delay giving KIDs to retail investors purchasing UCITS funds. This delay is a racing certainty to be formally adopted by the EU in the new year. So, instead of KIDs being given to all prospective retail investors at the start of 2020, they will not be required across the market until 2022.
The only justification to delay KIDs for UCITS is that they are misleading and potentially harmful to consumers. The AIC has been telling all who will listen that these disclosures are toxic. Too often they understate risks and overstate likely returns. Investment companies can be excellent investments for many retail consumers, but buyers should not be misled into purchasing shares. Our efforts to sound the alarm about KIDs makes it incredibly frustrating that we have not received a swift response to our warnings.
It is not a bad thing that investors in UCITS will be protected from KIDs. What is impossible to understand is how the European authorities could justify protecting consumers of one product (UCITS) but not others (investment companies) facing immediate harm.
A recent consultation paper issued by EU regulators at least shows some willingness to accept there may be a problem. Unfortunately, the options for reform put forward are woefully inadequate. Many could make the situation worse. They will not work because they tinker with the existing rules rather than seeking to change their overall, flawed framework. In the absence of fundamental changes any measures brought forward are doomed to fail.
Presumably the delay in applying KIDs to the UCITS market is to allow time for a full review. This might open the way to identifying better options to fix the rules before UCITS are sold using KIDs. That may provide relief for those investors but, for now, no effective steps are being taken to protect consumers receiving flawed KIDs today.
The possibility of overhauling KIDs in the future must not stop measures being taken now to protect consumers. National regulators should be given new powers to suspend KIDs if they are misleading. Any suspensions would lapse when the KID is imposed on the UCITS market. This will protect consumers while a root and branch reform process is underway.
In the absence of an EU solution, the UK authorities should educate consumers about the problems with KIDs. They should prevent these disclosures contaminating the broader distribution environment. Over optimistic performance scenarios should be banned from financial promotions. Misleading risk indicators should not be used as the basis for automated advice processes or for online product filtering tools. These are the sort of steps that the FCA and others can take immediately irrespective of the EU view. The AIC will be pressing for them to be taken.
But, in the meantime, let’s put out the fire today, then think about how we can stop one breaking out in the future.
Guy Rainbird Public Affairs Director T: 020 7282 5553 E: Guy.Rainbird@theaic.co.uk