PIA sets rules on disclosure for equity investments: Buyers to see charges document first

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UNIT trusts, personal equity plans and investment trust savings schemes will have to show investors a standardised document setting out the nature of the investment and the charges.

Yesterday the Personal Investment Authority published detailed proposals that would bring these equity investments into line with the disclosure regime due to be imposed on life insurance-based savings products from 1 January.

The key features document would have to be handed over to investors before any transaction is completed. It is designed so that comparisons can be made with life insurance-based investments.

But the Association of Unit Trusts and Investment Companies said it was important that the similar disclosure regulations should not mislead investors into thinking that unit trusts and long-term life products are similar.

Philip Warland, director-general of the association, said unit trusts were most often sold where direct investment in shares, rather than life products, was the direct competitor.

'Assuming an equal holding period and equal performance, the features needing clear disclosure in a long-term life product are likely to be high initial charges and commission: in a unit trust the dominant feature early on will be market volatility. The form of disclosure should reflect these differences,' he said.

The proposal from the PIA insists on sections setting out the investments aims, the investors' commitment such as the minimum investment or monthly sum for regular investment, and risk factors. It then suggests a series of questions and answers explaining how to make an investment, how to track its progress, switching, selling and tax.

The effect of charges is set out at one, three, five and 10 years for lump-sum investments showing the impact in cash terms if the investment does not grow at all and with 7.5 per cent growth.

For regular premium policies, such as a PEP taken out to repay a 25-year mortgage, the effect of charges would be set out for the individual investor and in this case would chart the effect up to 25 years.

Colin Hawtin, head of conduct of business policy, said none of the product providers had said that the new disclosure rules would inhibit sales.

Nick Nichols, of the PEP Managers Association, said the rules were long overdue and although some of the terminology was out- dated and needed tidying up, it was a marvellous opportunity for all companies to revamp their brochures.

Comments are invited by 26 October by the PIA, which hopes to impose the new rules on 1 January but will consider a transition period.