FSA bans selective use of past performance data

Fund managers were told yesterday they could no longer "cherry-pick" information to show past investment performances in a flattering light, following a lengthy investigation by the Financial Services Authority.

The move is part of a raft of new rules to crack down on the ability of firms to select their best period of past performance to promote funds and to suggest that historic returns are a measure of what investors may get back in the future.

From 1 June next year, all advertisements that refer to the past performance of investments must also include a standardised table showing the annual returns for the same fund for the past five years. These figures must be expressed as a percentage, and should, the FSA hopes, "give consumers a better understanding of the volatility of the investment".

Also part of the changes are requirements for firms to reduce the emphasis on past performance in their advertising, by giving it no more prominence than other factors. They must also carry a risk warning in the main body of the advertisement, rather than burying it in the small print, and must not suggest that the past performance is linked to future returns. At present, firms have to point out only that past performance is "not necessarily" a guide to the future.

But consumer groups yesterday said the new rules did not go far enough to help consumers. The Financial Services Consumer Panel demanded that monetary figures should be banned. "Consumers are more drawn to pounds and pence figures than percentages. Many see it as a direct indicator of what they will get back in the future," Sue Burness of the panel said.

The fund management industry yesterday welcomed the standardised format for past performance data, but maintained that it was useful information for consumers to have. A spokesman for the Investment Managers' Association said: "Although past performance is never a guarantee, profitable investment strategies can be developed using it as an indicator."

Some fund managers also said yesterday the potential for investors to be misled still existed under the new rules.

"The fund manager may have changed in that five-year period. You could be advertising someone else's record," Jason Hollands, of Isis Asset Management, said yesterday. "The more responsible in the industry have recognised that unrealistic expectations have been created."

Funds that are less than a year old will not be allowed to use past performance in advertisements. This aims to end emphasis on short-term performance, demonstrated in the advertising boom during the dot.com bubble in the late 1990s. New technology funds, launched in the midst of a bull market, were able to promote stellar performance over very short periods.

The FSA began investigating the use of past performance in 2000 after becoming concerned that it was not a useful guide to future returns and that advertising was in danger of being unclear and misleading.