Moves by European regulators to provide a standard risk rating for investment funds needs further refining to make them truly effective for consumers, according to the ABI and the IMA. 

CESR, the Committee of European Securities Regulators, put forward its proposals for a standardised risk and reward rating methodology in December 2009.  It is now being considered by the European Commission for use when firms produce Key Information Documents (KIDs) for UCITS funds, starting from the second half of 2011.

Joint ABI IMA research released today¹ shows that 70% of asset classes rated using the proposed method in 2006 would have had their risk categories changed only three years later.  The research found that doubling the period of data used when assessing the relative risk of a fund leads to a significantly more reliable risk indicator.  Changing from five to ten years reduces the proportion of asset classes that would have had their risk indicator changed between 2006 and 2009 from 70% to 30%.

The research also found that under CESR’s proposed scale of seven risk categories, a third of asset classes and half of all funds would fall into one category alone.  The ABI and IMA therefore recommend adjusting the boundaries to give a better spread across the categories and so help consumers to choose between different funds.

Dr Rebecca Driver, Director of Research at the ABI, said:

“Improving the way in which investment risk is explained to consumers has the potential to deliver significant benefits.  The rules as proposed do not yet fully deliver that benefit.  We hope the research work released today will help the Commission as it looks for the best solution.”

Dr Julie Patterson, Director of Authorised Funds & Tax at the IMA, said:

“Reducing investment risk to a single indicator for an individual fund is neither easy or a solution in itself to the complex investment decisions that consumers face. Our joint research shows how the workings of the proposed indicator could be improved to enhance significantly its usefulness to consumers.”

ABI and IMA are today releasing two pieces of research. The first is by Professor Andrew Clare of Fathom Consulting and CASS Business School (commissioned by the ABI and IMA) on the framework needed to use a single measure of risk to categorise a wide range of investment funds and how it might be constructed¹. The second, by Rebecca Driver, ABI, and Julie Patterson, IMA, examines the impact of the specific proposals contained in CESR’s most recent advice².    

Notes

1.        Enquiries to:

ABI:        Erfan Hussain                      020 7216 7411 (Mobile: 07712 841 184)

IMA:       Ginny Broad                         020 7831 0898 (Mobile 07834 089332)

              Noreen Shah                         020 7831 0898

2.        Research papers:
¹  Note on CESR’s recommendations for the calculation of a synthetic risk reward indicator, Joint ABI and IMA research brief, Rebecca Driver and Julie Patterson  (March 2010)
²  Developing a risk rating methodology, Joint ABI and IMA research paper, 2010, Report from CAMR, Cass Business School and Fathom Financial Consulting, by Andrew Clare

The research reports can be found at www.abi.org.uk and www.investmentuk.org.

3.        The ABI is the voice of the insurance and savings industry. Its members constitute over 90 per cent of the insurance market in the UK and 20 per cent across the EU. They control assets equivalent to a quarter of the UK’s capital. They are the risk managers of the UK’s economy and society. Through the ABI their voice is heard in Government and in public debate on insurance, savings and investment matters.

4.        The IMA is the trade body for the UK's £3 trillion asset management industry.  The money its members manage is in a wide variety of investment vehicles including authorised investment funds, pension funds and stocks and shares ISAs.  Its role is to represent the industry and promote high standards.

5.        An ISDN line is available for broadcasts.

6.        More news and information from the ABI is available on our web site, www.abi.org.uk.

7.        The IMA's press releases and other information can all be found at www.investmentuk.org.