Investment trusts under fire from FCA proposals for new consumer regime – why are active managers and investment trusts being disadvantaged?
- Investment trusts in the FCA firing line as consultation proposals want to reimpose damaging cost disclosures which would reverse its recent forbearance and defy Government policy.
- New FCA regulatory regime for ‘Consumer Composite Investments’ favours unit trusts/OEICs over closed-ended investment trusts and benefit index funds relative to active managers.
- The proposed replacement for EU PRIIPs and MiFID rules would worsen consumer confusion about investment trusts, misleading investors and imposing needless extra regulations for no benefit.
- It is time to stop forcing false comparisons between open-ended and closed-ended funds which have damaged consumer interests while claiming to be protecting them.
- Calling all Investment Trust Boards and industry participants- do join the Industry response to the Consultation before 20 March to stand up for your investors and the sector’s survival.
New regime to protect consumers will add further regulatory damage to UK-listed investment trusts: The FCA has issued its new consultation on replacements for the old EU-derived PRIIPs and MiFID financial product regulations designed to protect consumer interests. A new bespoke UK regime for ‘Consumer Composite Investments’ or ‘CCI’s is being proposed, but the FCA proposals are seriously flawed and will disadvantage the investment trust industry, which must urgently wake up and respond to the Consultation to point out the dangers of adding new regulatory investment barriers.
Double regulation damages UK growth: The Government is already concerned about regulatory damage to economic growth. It has rightly repeatedly stated its opposition to double regulation. However, the new FCA consultation’s CCI proposals for investment trusts would mean both duplication and regulatory creep for these already highly-regulated investment companies, adding unnecessary layers of regulation which will continue to mislead investors and threaten the sector’s survival.
EU-derived cost disclosure regulations have been misapplied to UK investment trusts and FCA seeks to compound past errors: In recent years, the UKs application of EU-derived PRIIPs and MiFID cost disclosure regulations to UK-listed investment trusts, have exaggerated their reported consumer costs, undermining this once-thriving, world-leading UK financial sector that has historically delivered capital at scale into productive assets. The FCAs unique interpretation of these EU-derived rules, which no other EU country has applied to its own closed-ended investment companies, has misled investors about the value of these investments, creating ongoing selling pressure, investor losses and wide discounts of share price to net asset value.
It is time to remove such regulatory confusion between the characteristics of open- and closed-ended structures: The terminology in the CCI consultation once again confuses ‘costs’ payable by investors, with the corporate ‘expenses’ payable by the investment trust itself. There are no ongoing direct costs associated with owning investment trust shares unlike those of open-ended funds. Such confusion was supposed to have ended last November, when the FCA issued emergency forbearance and the Government rushed a Statutory Instrument confirming its policy decision to recognise that closed-ended investment companies do not impose direct costs on investors. The aim was to end consumer confusion and regulatory damage, but unfortunately these new CCI proposals would defy that Government policy, undo FCA’s own forbearance and threaten more market turmoil for the investment trust sector.
Nobody is saying investment trusts need not disclose costs, but these are not direct consumer charges and are fully disclosed under listing requirements: Complete and itemised cost information shows all corporate expenses, as required by transparency of Listing rules, Company Law; Financial Reporting Requirements; Prospectus Regulation and so on. The fact is that costs and charges should be disclosed, but closed-ended investment companies should not have to mistakenly show costs being directly and additionally charged to the investor and the new CCI regime should not add another layer of damaging rules.
FCA says index funds owning investment trusts can (correctly) show zero direct costs, but absurdly says active funds holding the same shares, must pretend there are direct costs and report them! The absurdity of the FCA’s position is captured in its proposals that, under this brand new consumer protection regime, investors who hold UK investment trusts in a passive fund or ETF can be correctly told they are not paying any costs to hold those shares. But if they hold the exact same investment trusts directly, or in an active fund, the FCA insists investors must be led to believe they are paying costs to own those investment trust shares. The FCA says passive funds need not show costs for investment trust holdings, to avoid market distortions from making index funds that invest in those shares appear unduly expensive. But the same applies to active funds or direct investors. The same investment trust cannot have costs to active investors, but not to index-funds. The proposed new rules will create consumer confusion, undermine consumer duty and inflict further damage on investment trust investors, for no consumer benefit and indeed to their detriment.
Misleading investors about the costs of owning investment trusts has already had serious negative consequences for the sector: The survival of this once-thriving UK financial sector is under threat. Investor selling, partly based on flawed cost comparison between open and closed-ended funds, have meant UK investment trusts’ contribution to economic growth has collapsed and capital raising has dried up. The UK investment trust sector supports crucial areas of economic activity including infrastructure, alternative energy, tech, life sciences, and smaller and private companies in general. Wealth managers have had to sell investment trusts which look expensive to own, contributing to wide discounts and an unlevel playing field that disadvantages investment trusts relative to open ended funds, international competitors and single company competitors. Removing such excessive layers of regulation that have caused demonstrated market and economic harm, whilst failing to achieve their intended purpose – consumer protection – is vital.
Investment trusts represent one third of the FTSE250 and are ideal vehicles for long-term investors, including small pension funds, to hold less liquid growth assets: An investment trust has a fixed pool of capital, which is invested for the company. This fixed capital pool is not disturbed by the actions of other investors buying or selling their shares. However, an open ended fund such as an OEIC or unit trust, increases and decreases its pool of investible capital all the time, to reflect investor flows, meaning the underlying investments need to be bought or sold to accommodate the flows.
UK listed investment trusts do not belong in the new CCI regulatory regime and FCA should not be favouring one group of companies over another: These are quoted companies which are already regulated by extensive rules to protect investors and are overseen by Independent Boards. They are not the same as open-ended funds. The current proposals are not just damaging to the investment trust sector, they are also prejudicial to self-directed retail investors and the active management industry, which will be placed at yet another competitive disadvantage vis-à-vis passive structures. Instead of ensuring consumer protection, the new CCI regulations would actually damage consumer interests, as well as prolonging the demise of the UK investment trust sector.
Investment trust Boards are being urged to join the Consultation response, put together jointly by Parliamentarians, lawyers and industry participants: The Consultation on these new CCI rules closes this Thursday 20 March. The industry body, AIC, is submitting its proposals, but in addition to this, investment companies themselves need to point out the serious flaws in the CCI proposals with respect to investment trusts.
How Boards and any other interested industry participants can join this collective response: Please visit https://costdisclosure.co.uk/home to find the Consultation Response and click on ‘Contact Us’ if you wish to add your name. This is a link to the FCA Consultation Document itself: https://ir.graviscapital.com/hubfs/Cost%20Disclosure/CCI%20Consultation%20Paper%20December%202024%20cp24%2030.pdf