The FCA levied a GBP18 million fine on Invesco Perpetual in April 2014 after a series of infringements of their rules that included violation of the UCITS Key Investor Information Document (KIID) disclosure requirements, non-compliance with UCITS portfolio diversification limits, late recording of trades in the funds and poor controls over Invesco’s order allocation policy.
The fine covers the years from 2008-2012 when Invesco would have initially issued a Simplified Prospectus (SP) for each UCITS, which was then replaced by the KIID. While the SP failed to mention the use of derivatives altogether, the KIID disclosed the use of derivatives but was judged to be misleading as only the potential benefits of the use of derivatives were emphasized and not the downside risks.
The fine for poor and misleading communication to retail investors sends a strong signal to the UCITS industry that investor disclosures will be subject to increased regulatory scrutiny. The KIID is the main document to explain the UCITS risk profile to retail investors and highlights the significant difficulty of condensing all the relevant information required into the concise 2 page document, they need to guarantee that the KIID is comprehensive and sufficiently clear on the inherent product risks. Managers will need to ensure that those preparing the KIID have the proper training, and that there are adequate processes and controls in place to produce KIIDs that meet the regulatory standards.
Also important to note from this fine are the failings in the Managers operational processes and controls that risked having a negative impact on fund performance. This is a wake-up call to UCITS Managers to ensure that they have the controls and safeguards in place across all the middle office and back-office functions to guarantee the fair treatment of all their UCITS and their investors.
The wider implication of the recent enforcement action is that the quality of disclosure, by BOTH the manufacturer and distributor, could read across the wider FS industry.
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