UK's Financial Services Authority Cleans Up Use Of Past Performance Figures In Advertising

The Financial Services Authority today (Thursday) unveiled a package of measures aimed at improving the way past performance information is used in advertising. A two pronged approach focussing on the quality of past performance information and also on the overall balance of an advertisement will be adopted.

The new proposals for a firm using past performance information in its advertisements are:

• Standardised information, set by the FSA, will have to be included alongside a firm's own information, and no less prominently. This will counterbalance any attempt by a firm to quote unrepresentative data that shows their product's performance in a particularly good light.
• Firms will be cautioned not to show past performance information in pounds because that style of presentation is particularly likely to mislead consumers. FSA research shows that consumers latch on to monetary values and are more likely to regard them as a prediction of future returns.
• The format for the standardised measure will be a table showing returns for up to five rolling twelve-month periods. This will provide consumers with a reasonably up-to-date snapshot of a fund's performance over the medium term. It will also give an impression of its riskiness by showing the performance ups and downs. Where a product can show less than 12 months past performance, the firm will not be able to quote performance figures in its advertisements.

In CP183, the FSA also confirms its plans to publish rules and guidance aimed at getting firms to take a more balanced approach to the use of past performance information in advertising. For example, firms will be told that giving too much prominence to past performance information can mean that an advert falls short of the FSA's overarching 'clear, fair and not misleading' standard.

Speaking at the Investment Management Association's Annual Dinner last night (14 May), FSA Chairman Howard Davies said: "We have had a lengthy debate with the industry about the use of past performance figures. The only agreed conclusion is that if there is any persistence, it applies only to underperforming funds. That clearly limits the usefulness of past data for future investment choices. It doesn't mean that we should prevent consumers from having access to that data. But we do want to ensure that when firms use past performance in their adverts, it is balanced by standardised data that cannot be cherrypicked or manipulated."

The proposals were developed in response to recommendations made by the FSA's independent Task Force in September 2001. The deadline for feedback and comments is 2 September. Feedback will be published in late Autumn and firms will then have a six month transitional period to amend their promotional material to meet the new standards.