Regulators and fund providers at odds over reforms

LUXEMBOURG Wed Mar 24, 2010 1:32pm EDT

LUXEMBOURG (Reuters) - Regulators and fund providers agree on the need to restore investor faith in financial markets, but are at odds over how to both ease client fears and guarantee a greater degree of security.

Regulators want more information on funds and investments to ensure investors are fully aware of the risks they are taking on, but the industry faces a tough challenge in informing clients of potential risks without scaring them off.

"It is clearly a pivotal moment in the regulatory business," Sheila Nicoll, director of conduct policy at Britain's Financial Services Authority told delegates at the ALFI fund association's Spring conference.

She wants regulators to be more proactive, and identify problem areas rather than waiting for problems to occur.

"We plan to scan for new risks, and intend to intervene earlier before a problem becomes widespread," she said.

As part of that strategy, EU regulators hope that a new "Key Investor Information Document" (KIID) will help to communicate potential risks to consumers in a straightforward way.

However, while the fund industry welcomed initiatives to provide investors with straightforward information, it warned that the KIID risked being counterproductive.

"If you look at all the components that need to go into the Key Investor Document on two sides of paper, you have to be really quite concise with your risk warnings and the descriptions of your investment process," said Noel Fessey, managing director of Schroders (SDR.L) in Luxembourg.

He thinks regulators made a "grave mistake" in making the document, rather than the prospectus, the primary point of reference.

"I think you have the foundation there of a future mis-selling," he said, adding he was concerned this would be the only document that had to be translated into the host state's language," he told the Reuters European Funds Summit, which has been running alongside the ALFI conference this week.

Fund industry players agreed that stepping up efforts to communicate the fundamental nature and goals of products was crucial.

"Investors need to be educated. As always, there are some investors who haven't read up on how the products work," Manooj Mistry, head of ETF structuring at Deutsche Bank (DBKGn.DE), told the Reuters Summit. "The onus is on both the providers and the financial advisers."

However, the fear remains that fund firms risk alarming investors unnecessarily.

"The more you warn your client of risk... the more you are going to disadvantage yourself with respect to someone who views the world much more optimistically," said Fessey.

"You have to be comfortable as a company that your descriptions are clear and fair and reasonable, and neither too pessimistic nor too optimistic, and it's a really difficult thing to do well," he said.

Andrea Favaloro of BNP Paribas Investment Partners/Fortis Investments said investment managers need to explain risks to investors in terms they can understand.

"We don't aim to explain the mechanics of Sharpe ratios <a measure of risk> to a 70-year-old lady... If we aim to be too technical about what we are doing, then we scare people," he said.

The FSA's Nicoll said more information needed to be available on how investment products could behave in specific market circumstances, as well as on remuneration and incentives paid to investment advisers.

"Information asymmetries and potential conflicts of interest remain and need to be removed or managed," Nicoll said.