Consumer Composite Investments: Past Performance Disclosures – FCA’s New Approach
In the third article of our blog series on the new CCI regime, Seamus O’Cuill, Head of Investor & Digital Services at Funds-Axis, delves into the FCA’s proposals regarding past performance disclosures for Consumer Composite Investments (CCI).
Core Proposal: A Shift to a Growth of £10k Line Graph
Under the current UCITS KIID, a bar chart displays past performance, and the EU PRIIPs KID uses simulated performance scenarios. The PRIIPs KID must be accompanied by either a past performance document containing a past performance graph, as per the UCITS KIID, or an online past performance bar chart.
However, the FCA has opted for a different approach: a growth of £10k line graph. This new graph will reflect 10 full years of performance data (if available) and will give investors a clearer picture of the product’s historical returns. A key recommendation is to display quarterly data points at a minimum, with the possibility of using daily, weekly, or monthly data points for a more granular view of volatility.
What Happens When a Fund is Less Than 10 Years Old?
Funds that are not in existence for 10 full calendar years are still required to present a line graph, but subject to two key exceptions as outlined below:
- If the graph is based on less than 12 months of data, a disclosure will be needed to indicate that the graph may not represent long-term performance.
- If less than 3 months of data is available, the product summary must state that there’s insufficient data to create the graph.
Benchmarks
For products that make reference to benchmarks in the prospectus, benchmark performance should be disclosed for the equivalent period.
Where benchmarks are otherwise used by the fund but are not disclosed in the prospectus, these benchmarks should also be disclosed.
For each benchmark disclosed, the manufacturer must explain why each was chosen. Where no benchmarks are referenced or used, the manufacturer must explain how an investor can evaluate historic performance.
Graph Particulars: Ensuring Clarity for Investors
The new £10k line graph must comply with the following:
- The graph should reflect performance net of product costs and charges
- If the fund is denominated in a foreign currency, the amount equivalent to £10k should be used, and the FX rate must be disclosed.
- The graph must feature a clear disclaimer stating: Past performance is not a guide to future performance.
Exceptions to the New Rules
- Material Changes: If a material change occurs within the 10-year period, the full 10-year performance must still be shown with a disclaimer explaining that the pre-change performance was achieved under conditions that no longer exist.
- Mergers: If a merger occurs, the graph must include performance for all pre-merger products.
- Closed-Ended Companies: For closed-ended companies, the graph must show two performance lines, one based on NAV per share and another based on the share/unit price.
- Feeder Funds: Feeder fund performance must be based on the feeder fund’s performance, not the master fund’s performance.
Seamus O’Cuill’s Insights
Seamus O’Cuill notes:
“There is much to be welcomed in the new legislation, especially for UK-only products. The removal of performance scenarios for UK-distributed products is a welcomed relief. However, manufacturers distributing in both the UK and EU will need to provide two different disclosures: one for UK distribution (with the £10k line graph) and another for the EU (with performance scenarios and associated past performance information), as well as publish historical performance scenarios.
This line graph provides a clear picture of previous returns for a product, based on actual compounded performance over 10 years. For the first time, investors will have a clear indication of previous physical cash returns, making the information much more tangible and practical.
The clarity around exceptions, such as for material changes, mergers, and feeder funds, provides much-needed guidance for both manufacturers and investors. The FCA’s practical approach to this regulation is a refreshing change from previous UK and EU legislation.”
What’s Next?
At Funds-Axis, we continue to work through the consultation papers to support our clients in their transition to the new regime. Manufacturers should begin preparing now to meet these new requirements, especially regarding past performance disclosures.
Should you wish to explore how this affects your organisation, please don’t hesitate to contact us for expert advice and guidance.
