The Association of Investment Companies has called for the suspension of the Key Information Documents (KIDs), while urging the Treasury Select Committee to launch an enquiry amid the failure of policymakers and regulators to protect consumers with regard to the highly-criticised documents.
The trade body has been vocal in the past in its criticism of the Key Information Documents (KIDs), arguing they are "systematically flawed" and could mislead investors due to their reliance on past performance for future projections.
Closed-ended companies were made to provide KID information under the new PRIIPs legislation, which came into force at the start of the year. However, this was followed by high-profile criticism from a number of investment trust providers and boards from Baillie Gifford and Fidelity.
Earlier this year, the AIC refused to host KIDs on its website as it believes it would "not be responsible to do so" , and further research carried out by the trade body, comparing KID Summary Risk Indicators (SRIs) of closed-ended funds to their 'sister' open-ended funds found that closed-ended vehicles were less risky, something which AIC chief executive Ian Sayers said was "nonsense".
In the latest announcement, the AIC said KIDs should be suspended as further research outlined in the report Burn before Reading showed "KIDs mislead consumers about the products they are intended to describe."
"In the worst cases they seriously understate the risks while giving a far too optimistic view of potential future performance. This is a toxic mix which could lead investors to make disastrous decisions which seriously harm their finances," Sayers said in the report.
"The principal reason KIDs are so dangerous is that they include information about the future derived from past performance.
"The KID methodology tramples over a long-standing warning to the ordinary investor that the past is no guide to the future. This warning has been a central part of consumer financial education for as long as I can remember. It is astonishing that the policymakers who set the KID rules have chosen to ignore this basic lesson."
The report's key findings were:
Misleading disclosure of risk
Investment companies have characteristics which make them riskier than equivalent funds. Nonetheless, KID risk indicators for investment companies consistently show investment companies as lower risk than equivalent funds.
KIDs also mislead consumers because of how the risk indicator is described. Investment companies with a risk indicator of 3 (out of 7) are described as "unlikely" to lose money. Investment company shares should not be described in these terms.
Misleading disclosure of performance
KIDs use past performance to provide consumers with scenarios that purport to tell the consumer "what you might get back after costs". This is a dangerous message which does not recognise that recent performance has been very strong since the historic lows experienced during the financial crisis. The actual outcome is likely to be far less positive.
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