The product information will be contained in a new document known as the Simplified Prospectus. EU rules require this document to be offered to anyone who wants to invest in a collective investment scheme that holds a UCITS certificate.
The FSA's approach builds on the existing UK regime for investment product information - the Key Features document - by adding new information requirements only where it is necessary to meet the revised EU standards.
The new EU information requirements include:
- a 'Total Expense Ratio' (TER) figure showing the costs and charges of the fund. The figure will not take account of front-end charges, exit costs or certain fund expenses such as dealing costs.
- a 'Portfolio Turnover Rate' (PTR) figure, to reflect the volume of dealing within the fund; and
- the historic performance of each UCITS fund showing up to ten years' annual returns.
"So we propose to retain our existing approach to providing customer-friendly product information – for example, we ask firms to use a 'Question and Answer' format to set out the information required, because we know from research that consumers find this style of presentation helpful.
"And we have decided to retain the 'Reduction in Yield' figure, currently used in Key Features documents, for the Simplified Prospectus for funds marketed to UK customers. Recent market research we conducted shows that consumers find RIY particularly helpful. However the RIY figure will not need to be included in Simplified Prospectuses for funds marketed cross-border to other countries in the European Economic Area. This should allay concerns UK firms may have in terms of European competitiveness."
The FSA will review the effectiveness of the UK UCITS disclosure regime in 2008 after the implementation of the new Key Facts regime for retail products. If, on conclusion of the review, the FSA finds that RIY is failing to act as an effective disclosure mechanism for UCITS, it will be withdrawn on 30 June 2009. This is backed with a 'sunset' provision that would automatically terminate RIY should the requisite Cost Benefit Analysis not support its retention.
The new rules and guidance are effective from 1 May 2005 with a transitional period until the end of September 2005.
Background
- Policy Statement 05/4 'Implementation of the Simplified Prospectus requirements: Feedback on CP 04/18 and made text' is available on the FSA Website.
- Annex 2 to PS 05/4 describes the consumer research conducted in January 2005 into charges disclosure using both the TER and RIY formats. The research found that the inclusion of RIY information did not confuse customers, that the presence of RIY does not make funds appear more expensive and that the inclusion of RIY information was welcomed by respondents. The majority of respondents appreciated the inclusion of RIY information, with 93% claiming it was "useful" and 78% “very useful”. RIY information was felt to make documents easier to understand. Documents lacking this information were assumed to be “hiding something” and were perceived to be less transparent than those with RIY information.
- The original UCITS Directive (passed in 1985) was amended by the EU in 2002. Among other provisions the amendment introduces product disclosure information provisions that require UCITS managers to publish and offer their customers a Simplified Prospectus.
- UCITS are Undertakings for Collective Investments in Transferable Securities and Open Ended Investment Companies.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
- The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve our business capability and effectiveness.
