Funds

The Investment Association Guidance on Fund Communication (the “Guidance”) published this week looks set to be a very helpful resource for managers seeking to ensure their fund documentation and investor communications are clear and comprehensible.

Background

As described in our recent blog, the Financial Conduct Authority (“FCA”) has recently introduced a new package of measures to improve the quality, comparability and robustness of information provided to investors in retail funds. The Investment Association (“IA“) was a key member of the Fund Objectives Working Group formed by the FCA to help inform those proposals. As part of that project, the IA agreed to work with consumer representatives and carry out consumer-testing to develop its own guidance.

Purpose of the Guidance

The purpose of the Guidance is to help fund managers to make clearer and more consistent customer communications, focusing on the objectives and investment policy of a fund. It seeks to do this by:

  • giving practical guidance informed by consumer research. For example, the document provides a guide for IA members on how to explain certain concepts without using language that research has shown retail customers find difficult. The aim is to promote the use of more consistent terminology in communications from fund managers about their funds; and
  • providing a reference point with respect to evolving regulatory expectations in this area. The Guidance is not intended to be mandatory, but rather to set out ways in which members can address industry-wide issues on the basis of a common framework.

 “Mindset not compliance”

For us the stand-out recommendation is that managers should focus on mindset, rather than compliance. One of the key recommendations in the Guidance is that:

“Firms should not view the development of fund documentation content as solely an exercise in compliance, but also actively seek to always speak to customers in language they will understand and address the most important issues for them.”

In this respect the Guidance represents a very helpful contribution, flagging those terms which are often misunderstood – sometimes worryingly so.

Lessons from the market testing

The sections of the Guidance explaining the results of their consumer testing lay bare quite how little some familiar industry jargon is understood. For example:

  • there were wide discrepancies between what customers typically regarded as short, medium and long-term time horizons for holding an investment product. It was also noted that the perception of “long-term” decreases with age;
  • less than half of participants who took part in one of the consumer testing exercises could correctly match the following terms to their definitions: growth; yield; income; return. Yield, in particular, was often interpreted to mean ‘total return’;
  • “absolute return” was a very confusing term for participants. Many felt it was linked to the return an individual receives on their investment in any type of fund, not just absolute return funds. Some participants also felt this might refer to a guaranteed minimum return; and
  • most customers were unable to explain what the terms “passive” and “active” meant in a fund context. ‘Passive’ in particular had negative, literal connotations of ‘unmanaged’: “tracking’ was by far the better understood term.

For the future

The IA has indicated that the Guidance will be kept under review and may evolve further following future consumer testing exercises. If kept current with developing trends in this way the Guidance seems set to become a very helpful resource indeed.

Karen Fountain

Partner at Brodies LLP
Karen is a partner at Brodies in the corporate team. She has over 20 years' experience of advising leading financial institutions, funds and intuitional and strategic investors across the globe with a broad range of matters.
Karen Fountain