The Financial Conduct Authority (FCA) imposed a financial penalty of over £18.6 million on Invesco Asset Management Limited (IAML) and Invesco Fund Managers Limited (IFML) (together, Invesco) for a number of different breaches of its regulatory obligations toward its investors, as set out in its Final Notice dated 24 April 2014. One of those breaches was a failure by Invesco to comply with its obligation to disclose proper information to investors so that they can understand any risks involved prior to investing.
UCITS IV requires the publication of a key investor information document (KIID) which is a 2-3 page document consisting of pre-contractual information relating to the essential characteristics of a fund. It must be provided to investors to allow them to be able to understand the nature and risks of the investment product that is being offered to them and thus, be able to make investment decisions on an informed basis. The KIID replaced the Simplified Prospectus that was required under UCITS III.
The KIID must be written in a concise manner and in non-technical language. It should also include a short description of the investment objectives and policies, a past-performance presentation, the costs and associated charges and the risk/reward profile including any specific warnings associated with investment in the UCITS.
Failure to adequately disclose risks associated with use of derivatives
According to the FCA, Invesco had introduced leverage through its use of derivatives without adequate disclosure to its investors. Although Invesco’s full prospectuses provided for the use of derivatives, neither version of the simplified prospectus (2008 & early 2011) made any direct reference to the use of derivatives nor the associated risks. The replacement KIIDs, which were published in February 2012, did refer to derivatives but emphasised the potential benefits of the use of derivatives alone and failed to aver to the associated risks.
Disclosure failings increased risk of loss
The FCA considered Invesco’s disclosure failings serious because the introduction of leverage through the use of derivatives increased the risk that the funds would suffer losses. Furthermore, Invesco may have gained an unfair advantage over its competitors as investors may have made investment decisions that they would not have made had the adequate disclosures been made.
Throughout the Final Notice, the FCA reiterated a number of important points. They noted that business practices must reflect investors’ interests at all times, that it is reasonable to expect that retail investors will rely on the product information in a KIID when deciding whether to invest without referring to the detailed prospectus and that fund managers must be satisfied on reasonable grounds that its KIID contains all such information as is necessary to enable an investor to make an informed decision as to whether to acquire units. These are points that fund managers should keep in mind and in light of the Invesco penalty, a review of KIID documentation to ensure compliance with the KIID regulations may well be warranted.