The European Securities and Markets Authority’s (ESMA) updated Q&As bring in various changes to a UCITS’s Key Investor Information Document (KIID). This Note looks at some of the more important implications of ESMA’s guidance and offers some action points which managers should be taking to ensure compliance.
As flagged in our earlier elexica summary, ESMA has recently updated its Q&As on the UCITS Directive.
In our view, the additional guidance in the Q&As will have a significant impact on the content of both (i) the investment objective and policy section and (ii) the past performance section of the KIID across UCITS product ranges.
ESMA’s changes take inspiration from the FCA’s work on benchmarks, which formed part of its Asset Management Market Study (AMMS) - see Chapter 3 of the FCA’s PS19/4 - although the updates to ESMA’s Q&As arguably go further than the position taken by the FCA in PS19/4.
What has changed?
The key changes introduced by ESMA are as follows:
1. UCITS must clearly state whether a fund is active or passive - this clarifies (but arguably goes further than is required by) the KIID Regulation 583/2010 (article 7(1)(d)).
- If passive, the KIID should now:
- explicitly use the terms "passive" or "passively managed"
- name the index being tracked in the investment objectives and policies
- show past performance against that index.
- If active, the KIID should now:
- explicitly use the terms "active" or "actively managed"
- state whether or not the Fund is being managed in reference to an index (note, that ESMA has proposed a very broad test to assess this requirement, which we expect will capture managers who might otherwise consider themselves benchmark neutral)
- if it is managed in reference to an index, the KIID should:
- provide disclosure on the use of the benchmark index
- show past performance against it and
- indicate the degree of freedom it has from the benchmark which may prove to be a challenging exercise for some managers.
- If not, the KIID should:
- make it clear that the Fund is not managed in reference to any benchmark
- show the past performance of the Fund only.
2. The Q&As aim to clarify when the past performance section of the KIID must show the past performance of the benchmark.
Where a Fund is passively managed, or is actively managed in reference to an index, the past performance section must show the performance of the benchmark.
Where a Fund refers to a benchmark index in its investment objective and policy section and measures performance against that index or benchmark, then the past performance of the index or benchmark should be shown.
3. Outside of the KIID itself - and in a move that to a large extent mirrors the FCA’s work in this area through its AMMS - managers should ensure consistency of benchmark/ performance disclosures across the suite of documents and other communications related to the Fund.
To this end, ESMA seems to go further than the FCA in requiring that, where a benchmark is used to compare the fund’s performance in other investor communications, including marketing documents (a comparator benchmark in PS19/4), it may be misleading not to include a similar disclosure in the KIID.
These changes should be incorporated into KIIDs as soon as practicable or by the next update to the KIID (note that this is not the same thing as the next annual update; in our view, this means the next time a KIID is updated for any reason).
To add to the timing challenges, for UK firms this may be prior to the end of the transition period allowed under PS19/4 - 7 August 2019.
Action points for managers
In light of the new ESMA guidance, we would see the following as steps a manager should be taking to ensure its UCITS KIIDs are in compliance with the updated Q&As:
1. Determine whether a Fund is active or passive
2. For active Funds, determine whether it is managed by reference to a benchmark
3. If managed by reference to a benchmark, determine the degree of freedom the Fund has relative to the benchmark
4. Update the investment objective and policy section of the KIID to reflect these findings
5. Ensure that the past performance section includes the past performance of the benchmark if required
6. Review all marketing materials and distribution channels to determine how past performance is disclosed and establish an update programme to revise and update the output.
We would be delighted to discuss this in more detail. Please do get in touch with any queries you may have.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.