.jpg)
The Financial Services Authority (FSA) has published independent and peer reviewed research by PricewaterhouseCoopers (PwC), which supports a reduction in the rates of return firms are required to use when issuing projections of prospective future investment returns.
These projection rates apply to retail investment products such as personal pensions and life products, which do not fall within the scope of the Markets in Financial Instruments Directive (MiFID). The rates are based upon an asset mix of 67% equities and 33% bond investments. Firms are required to revise these rates downwards where the asset mix of a product makes it unlikely to achieve returns in line with these rates.
PwC's research supports a reduction in the current 7% intermediate projection rate and in the adjustment for tax-disadvantaged products.
The FSA will now consult on reducing its projection rates and look at whether the range of rates should be amended.
Peter Smith, head of investments policy at the FSA, said:
"It is crucial that projection rates are set at a realistic level so that investors are not misled. Today's independent research indicates that our maximum projection rates should be reduced. We are seeking views on the range of rates so investors receive a reasonable indication of what they can expect from their investment."
In 2001 the FSA made a public commitment to periodically review the appropriateness of its projection rates. The last review, conducted by PwC in 2007, concluded that the existing rates remained valid.
Background
1. The PwC report.
<http://www.fsa.gov.uk/static/pubs/other/projection-rates12.pdf> PwC was asked to consider:
* whether the current intermediate rate of return continues to
represent the appropriate single rate for illustrating potential returns for those products subject to the projection rules;
* the appropriateness of the 1% adjustment for tax disadvantaged
products; and
* the continuing validity of the long-term inflation assumptions
of 2.5% for prices and 4% for earnings.
PwC's report was subject to peer review by:
Ray Barrell Professor of Economics, Brunel University
Malcolm Brown Professor of Actuarial Science, University of Kent
Mark Freeman Professor of Finance, Loughborough University
2. FSA rules require firms to present projections for non-MiFID products in a standard format and to use prescribed rates of return. These rules are designed to prevent consumers being misled by inappropriately high rates of return. These rules appear in Chapter 13 of the FSA's Conduct of Business Sourcebook (COBS).
<http://fsahandbook.info/FSA/html/handbook/COBS> They are also referenced in COBS 19. Firms must ensure that they always use rates which are consistent with the expected returns of a given product. These rates must not exceed the maximum levels set in the FSA's rules.
3. The FSA's consultation paper on projection rates will also contain its response to the recent European Court of Justice (ECJ) ruling, requiring firms to use the same mortality rates for men and women. This ruling impacts upon the FSA's Conduct of Business Sourcebook so we will be amending the affected rules accordingly.
4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000:
maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
The Financial Conduct Authority and Prudential Regulation Authority are due to be established in 2013. The Financial Services Bill <http://services.parliament.uk/bills/2010-12/financialservices.html>
currently undergoing parliamentary scrutiny is expected to receive Royal Assent by the end of 2012.
