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CESR publishes today its advice to the European Commission on ‘the content and form of Key Information Document disclosures for UCITS’ (Ref. CESR/08-087), known as the KID. The new disclosure document is intended to simplify and highlight the crucial elements that a retail investor should consider when buying a UCITS. The purpose of the Key Information Document is ultimately to replace the Simplified Prospectus for Retail Investors, following further market testing to be undertaken by the European Commission in 2008. This work was launched at the request of the European Commission in April 2007, as part of its wider work to revise the UCITS Directive.
CESR’s proposal was subject to significant consultation with market participants and EU retail consumer associations; the results of this are presented in the Feedback Statement (Ref. CESR/08-035) published today. In addition, a preliminary impact assessment was undertaken and is included in the advice (Ref. CESR/08-087). This marks the first application of the Impact Assessment Guidelines adopted for testing by the 3L3 Committees last year (CESR/07-089). A more detailed impact assessment will be carried out when the proposals have been market-tested and therefore narrowed down further.
Eddy Wymeersch, Chair of CESR noted:
“Stakeholders agree on the need to replace the Simplified Prospectus with a set of concise, meaningful disclosures for UCITS. As regulators, we are keen to see retail investors grasping the key information which helps them make informed judgements on risk and compare products effectively. A failure to achieve this, will mean the single market in financial services for retail investors cannot advance effectively and this would be to the detriment, both of market participants, and ultimately, retail investors who too will suffer from less choice at a time when saving and investing for your future is not a luxury any of us can afford to ignore.’’
Lamberto Cardia, Chair of the Investment Management Expert Group commented:
“Increasing investor confidence amongst EU citizens is a high priority for CESR. Enabling retail investors to distinguish the key information that they should consider when buying a UCITS will ensure they are better placed to make informed decisions. The delivery of this advice to the Commission, marks the culmination of the first phase in CESR’s work on key investor disclosures for UCITS and an important step forward in achieving this objective. We were delighted with the willingness of retail investor associations across the EU and market participants to invest time in providing very useful feedback as we developed this first version for testing. The next phase of wider market testing, funded by the European Commission, should produce really worthwhile results and we look forward to working closely with the Commission on the outcomes of that exercise.’
CESR has considered the factors that are likely to make disclosures of product information useful to retail investors and, in particular, the need for such information to be short, focused, expressed in plain language and presented in a way that enables comparisons to be easily made between different offerings. Taking into account stakeholders’ views, CESR makes specific recommendations on a number of points, while in some areas proposes alternative options where testing on retail investors will be particularly important to understand better how consumers react to particular approaches.
A number of key points covered under the different sections of the paper are set out below. A general recommendation that should be noted at the outset is to rename the disclosure the ‘Key Information Document’ or ‘KID’. This is in line with feedback to the consultation and reflects CESR’s preference for a single, standardised disclosure document.
Objectives and scope of KID: CESR recommends that the KID should contain only the essential elements for making and carrying out investment decisions, which excludes information serving only legal or regulatory requirements.
Format and general content: CESR is of the view that the KID should be a single document covering a maximum of two sides of A4. There should be a standardised list of permitted contents in fixed order and hierarchy. Specific recommendations are made for funds of funds, umbrella funds and multiple share classes.
Risk-reward: CESR outlines two broad recommendations for the testing phase: i) the inclusion of a synthetic risk-reward indicator (SRI) alongside an explanatory text or ii) improved narrative disclosure. Consultation responses were mixed in this area; there was support from retail investors’ representatives for the concept of an SRI, while the majority of industry representatives expressed a preference for a narrative approach. CESR notes the need for further technical work on development of a methodology underlying the SRI. With a view to improving the narrative disclosure, CESR recommends a set of general principles designed to increase the focus on material issues.
Past performance: CESR’s recommendations for presentation of past performance information include that the information be presented using bar charts; percentages be used rather than cash figures; and that average yearly performance be shown rather than cumulative. CESR further recommends that the performance of the benchmark should be shown if the fund is managed against one; and that simulated performance be allowed only in specific cases.
Charges: CESR recommends two options for consumer testing – the first an improved version of the existing Simplified Prospectus disclosure, the second supplementing this information with a single ‘summary’ figure.
CESR has identified a number of areas covered by the recommendations on which further technical work will be required; in particular, aspects of risk-reward disclosure, past performance information and charges. A more detailed breakdown of issues to be covered by this technical work is set out at Annex 5 of the advice.
