FSA writes to compliance officers about compliance with projection rules for non-MiFID products
On 4 November 2009, the FSA published a letter (letter) that it has sent to compliance officers of firms about complying with the projection rules for non-MiFID packaged products (projection rules).
The projection rules are set out in Annex 2 of Chapter 13 of the FSA’s Conduct of Business sourcebook (COBS). Projections are usually included as part of key features illustrations (KFIs) given to customers for packaged products. Projections are required to be made for three different standard rates of return, which should be revised down if a product is not likely to achieve returns in line with these standard rates.
The FSA was prompted to investigate firms’ compliance with the projection rules following its thematic review of pension switching advice in December 2008, which uncovered product providers using inappropriate projection rates. The letter sets out the FSA’s findings of its investigation, and concludes that the majority of reviewed firms have indicated that they have a process for assessing the appropriateness of the FSA’s standard rates for their funds and products, although the way in which that process was applied varied significantly.
The letter outlines follow-up actions for firms:
Firms must revise down the standard projection rates where a product is not likely to achieve returns in line with these rates.
Firms must ensure that they establish a rigorous process for determining appropriate projection rates.
The letter also rescinds any individual FSA guidance to firms permitting them to use standard projection rates with a caveat that they may overstate certain products’ potential return.
The FSA will conduct a further sample review in 2010 to ensure that firms are complying with the projection rules.