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FCA consults over investment projection rates

ReportingThe Financial Conduct Authority (FCA), the UK’s financial regulator, is consulting on projection rates used by investment firms when showing customers what their money might be worth in the future.

The consultation, which was announced last week, comes partly in light of the Packaged retail insurance-based investment products (Priips) directive in the EU, due to enter force in January 2018.

Companies selling or advising on Priips products would be able to choose whether they include personal performance projections in key information documents, knowns as Kids, under the Priips rules.

The FCA’s continued use of 5% as a long-term best estimate of the growth rate for the nominal single rate of return over the next ten to 15 years has drawn comment from observers.

Tom McPhail, head of policy at Hargreaves Lansdown, said that despite the economic and political fluctuations in recent years, the FCA is still comfortable with the view that an investor holding a typical mixed portfolio predominantly invested in equities, can expect to enjoy a real return of around 3% a year.

He said: “For any investor fearful of committing their savings to the investment markets, this is an important message: if you want to make your money grow over the long term, take advantage of the tax breaks on offer and invest in the stock market; holding your money in cash is fine for the short term but over time it is likely to be eroded by inflation.”

For investment products that do not benefit from a tax exemption the FCA requires firms to use a projection rate 0.5% lower.

Price inflation assumptions had been based on the retail price index (RPI) but will now be based on the consumer price index, resulting in a drop from 2.5% to 2%.  Where contributions, benefits or charges are linked to RPI then this will be 3%.  

Earnings inflation will be dropped from 4% to 3.5%.

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