The Investment Association (IA) has published its final guidance on the clarity of language in fund documentation for UK authorised funds, with particular focus on fund objectives and policies.
Following the publication of the final report of the asset management market study, the Financial Conduct Authority (FCA) established a working group, namely the fund objectives working group (FOWG), which was tasked with proposing measures on (i) improving the usefulness of fund objectives for customers; and (ii) facilitating the comparability of funds on the basis of their stated objectives. This resulted in the FCA's consultation paper CP18/9 which addressed both guidance around fund objectives and rules for the use and reporting of benchmarks. Following this consultation, the FCA issued non-handbook guidance in policy statement PS19/4 on the description of fund objectives and investment policies.
As part of the FOWG, it was agreed that the IA would work with its members and consumer representatives to promote the use of consistent terminology in communications from fund managers to help customers make comparisons across different funds. The published guidance is the outcome of this.
The guidance is split into two parts:
Part one examines what is considered to be a fund objective, investment policy and investment strategy; how to describe risk in fund documentation; how to describe time horizons; and how to disclose the use of benchmarks and showing performance against those benchmarks.
Part two reflects the findings from customer research and considers the thought process firms should go through when writing for retail investors. The IA has provided two lists within the guidance that may be of use when drafting fund documentation, which set out: (i) terms that retail investors may find confusing but could understand shown alongside a simple explanation such as "bond", "emerging markets" and "rolling three year period", and (ii) terms that retail investors struggle with and so an alternative word or description might work better than the term itself, such as "absolute return", "efficient portfolio management" and "derivatives". The lists are not intended to be comprehensive or to prescribe a specific approach to the use of a term but to highlight the importance of clear communication and to provoke a review process.
The overall aim of the guidance is to assist industry professionals with implementation of improved disclosure in fund documentation and to provide a reference point with respect to evolving regulatory expectations.
The purpose of this document is to help members implement clearer and more consistent customer communications, focusing on the objectives and investment policy of a fund.