FSA cleans up use of past performance figures in advertising

The new proposals for a firm using past performance information in its advertisements are:

• Standardised information, set by the FSA, will have to be included alongside a firms own information, and no less prominently. This will counterbalance any attempt by a firm to quote unrepresentative data that shows their products performance in a particularly good light.

• Firms will be cautioned not to show past performance information in pounds because that style of presentation is particularly likely to mislead consumers. FSA research shows that consumers latch on to monetary values and are more likely to regard them as a prediction of future returns.

• The format for the standardised measure will be a table showing returns for up to five rolling twelve-month periods. This will provide consumers with a reasonably up-to-date snapshot of a funds performance over the medium term. It will also give an impression of its riskiness by showing the performance ups and downs. Where a product can show less than 12 months past performance, the firm will not be able to quote performance figures in its advertisements.

In CP183, the FSA also confirms its plans to publish rules and guidance aimed at getting firms to take a more balanced approach to the use of past performance information in advertising. For example, firms will be told that giving too much prominence to past performance information can mean that an advert falls short of the FSAs overarching clear, fair and not misleading standard.

Speaking at the Investment Management Associations Annual Dinner last night (14 May), FSA Chairman Howard Davies said:

"We have had a lengthy debate with the industry about the use of past performance figures. The only agreed conclusion is that if there is any persistence, it applies only to underperforming funds. That clearly limits the usefulness of past data for future investment choices. It doesnt mean that we should prevent consumers from having access to that data. But we do want to ensure that when firms use past performance in their adverts, it is balanced by standardised data that cannot be cherrypicked or manipulated."

The proposals were developed in response to recommendations made by the FSAs independent Task Force in September 2001. The deadline for feedback and comments is 2 September. Feedback will be published in late Autumn and firms will then have a six month transitional period to amend their promotional material to meet the new standards.

Notes for editors

1. Report of the Task Force on Past Performance (September 2001) can be found at http://www.fsa.gov.uk/pubs/other/past_performance_report.pdf

2. The requirement to provide discrete annual returns over five years will only apply to funds and unit-linked policies. The existing requirement of a five-year cumulative figure will remain for products which are not unit-linked (such as with profits policies where returns are smoothed) or which have a fixed term but the information will now have to appear in the main body copy of the ad, rather than in the small print.

3. For more information on how to report an advertisement you think is misleading visit http://www.fsa.gov.uk/consumer/shop_around/advertising/index.html. Consumers can also write to the FSA with a copy of the advert to: Misleading financial promotion, Correspondence Unit, FSA, 25 The North Colonnade, London E14 5HS or they can ring the FSA Helpline on 0845 606 1234.

4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection of consumers; and fighting financial crime.

5. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.