FSA clashes with investment firms on performance claims

The investment management industry was gearing up for a showdown with the Financial Services Authority yesterday after the regulator proposed a clampdown on misleading financial advertising, including restrictions on the use of performance data in investment fund advertisements.

Historical investment fund performance is keenly watched by retail investors, and forms the mainstay of retail asset management marketing. That has caused concern within the FSA, which says there is no evidence to suggest an investment fund that has performed well in the past will continue to do so in the future.

New rules proposed yesterday will ban the use of past performance as the predominant message in an advert, while also demanding its inclusion within an advert's main text be accompanied with a warning that there is no link to future performance.

Recently launched funds face extra curbs to restrict the extrapolation of performance data over a short period of time to cover a longer timescale and give the impression of sustained long-term performance.

Fixed income funds will have to give similar prominence to income yield as to often lower redemption yields, to give a more balanced impression to the short and long-term prospects of the fund.

The FSA also proposed that details of the main risks of an investment be moved from the small print to the main text of the advertisement.

Asset managers hit back saying a standardised presentation of past performance was rather the key to raising standards in financial advertising, and the FSA's moves were premature given it had yet to develop a methodology for such a measure.

The Investment Management Association, the industry's umbrella body, said it would be hard to establish what constituted the predominant message of an advertisement, which was a "highly subjective judgement". Richard Saunders, the IMA's chief executive, said: "We have reservations about trying to consider these issues in the absence of any performance standard."

The Consumers' Association echoed those comments. "We are not against advertising past performance per se, but unless consumers have somewhere to go to see the full figures, they don't get the full picture."

Fidelity Investments, one of the asset managers that makes most play of past performance in its adverts, said it would oppose "tooth and nail" any suggestion past performance was not a relevant factor for retail investors to consider. "The FSA has not said they are banning the use of past performance in adverts altogether, and we will take them at their word on that," said a spokesman.

Five Arrows, part of Rothschild Asset Management and a prominent advertiser of high income funds, said it would be looking to comply swiftly with the new rules. "Even our redemption yield represents a reasonable level of yield. This won't remove the reason for our advertising," said a spokesman.

According to one industry insider, by stopping short of an outright ban on past performance data in ads the FSA's proposals were less severe than had been anticipated. "Past performance may not be good for picking future winners from past winners, but it's definitely good for picking future losers from past losers. All that'll happen now is that there will be two messages ­ performance and investment strategy ­ in the ads rather than one."

Christine Farnish, the FSA's consumer director, said work to develop a standardised way of presenting past performance was underway. "The proposals on past performance are designed to ensure that such figures are not viewed in isolation," she said.