The Association of Investment Companies (AIC) 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.

Misleading in all market conditions

Had KIDs been prepared in the past, they would have been seriously misleading. Using real data from investment products available at the time shows that KIDs prepared just before the 2008-09 financial crisis would have given a far too optimistic view of likely performance over the next five years. KIDs prepared after the crisis would have been misleadingly pessimistic.

Confusion on costs

The KID methodology includes ‘transaction costs’. 10% of investment companies with equity portfolios have KIDs showing transaction costs of nothing or which are negative (that is ‘less than’ zero costs).

This implies that the process of making investments is either without any cost at all or, in some way, the opposite of a ‘cost’. This is nonsense.

As a result and in addition to calling for KIDs to be suspended, the AIC has called for the Treasury Select Committee to launch an enquiry “given the failure of policymakers and regulators” to take action to protect consumers.

Sayers said: “The evidence is overwhelming. KIDs are not simply unhelpful, they are actively misleading. As more experienced investors will just ignore them, it is the less experienced who will suffer the most. Telling investors that they can have high returns at medium-low risk in unfavourable markets is particularly toxic and entirely divorced from reality.

“Imagine an investor who puts money into the stockmarket today based on the huge potential gains being shown in many KIDs. Then the market suffers a significant correction.

“As our analysis shows, an updated KID for the same investment might then tell the investor that they now stand to lose more money if they continue to hold. So they sell. It is the classic ‘buy high, sell low’ mistake that is doomed to lose unwary investors money and it is hardwired into the KID. It will continue indefinitely through changing stock market cycles.

“The rules should be suspended now so these fundamental flaws can be addressed. Regulators should warn consumers who have already received these documents not to rely on them when making investment decisions.

“If regulators continue to delay taking steps to protect consumers, then they should be held accountable if investors lose money as a result and feel they have been misled.

“It is nearly nine months since these documents were first produced and the reality of them was there for all to see, yet there has been no meaningful response from policymakers or regulators.

“The Treasury Select Committee should investigate this issue to hold policymakers and regulators to account so that action is taken sooner rather than later and consumers can get the protection they deserve.”

Following the outcry over the since the launch of PRIIPS earlier this year, FCA Andrew Bailey said the regulator will take action to address the unintended negative implications of European regulatory standards PRIIPs and MiFID II.

This is reproduced from Investment Week; all views are from the publication. This originally appeared online on 11 September 2018.

To read more articles like this, sign up here

Further reading on this topic:

‘Critical risks’ face Financial Ombudsman, says report