The Investment Association has launched a review of equity income sector definitions and questioned whether the current yield requirement is “fit for purpose”.

The organisation has put a variety of questions to member firms, as it considers if reforms are needed, following longstanding concerns.

In a consultation, it said the IA Sectors Committee “believes it is time for fresh discussions” on the matter.

The document stated: “Consideration needs to be given to whether the current yield requirement is fit for purpose. It is the committee’s longstanding view that the sector should have a clearly measurable target to make sure that only true equity income funds are able to be presented within it.

“It must be credible, and it must be a useful resource for investors considering which fund to buy. We believe that transparency could be part of the solution.

“The clear and consistent presentation of funds’ income delivery to investors is important and improvement of that disclosure could be an option.”

Regarding its rolling three year test on the need for funds to yield 10 per cent above the market, it said: “The requirement has attracted controversy over the years, especially in the UK Equity Income sector when high profile funds have left the sector after failure to meet the test.

“Previous consensus has suggested that it is valid to establish a clear income test for the man on the street, and enforce against this ‘hard’ hurdle. We are interested to test the current consensus.”

The IA laid out three possible options to members and encouraged them to respond with their views.

Option 1 – No change

Option 2 - replace the current 110% hurdle with a requirement to generate a yield higher than the FTSE All Share over 3 year rolling periods. Retain the 90% yield requirement over 1 year. Demonstrate that an above market average income is an objective of the fund in product or client documents. Other sector criteria unchanged.

Option 3 – require specific disclosure in relation to income (e.g. net yield, absolute net income generated over 5 years for £100 investment, income growth, total returns, volatility etc). Accordingly, the yield hurdles in the current definition would be removed.

The body said firms should keep in mind that any sector inclusion criteria needs to:

• seek to achieve a population of funds which provides best utility to sector users
• remain valid over the long term and across market cycles.