Baroness campaigners: Time to dump ‘misleading’ rules on trust charges
Baronesses Sharon Bowles and Ros Altmann have reiterated their criticism of investment trust cost disclosure rules which have led to platforms ‘misleading’ investors on charges, ahead of key regulatory decisions on the issue.
The House of Lords duo staunchly oppose the Financial Conduct Authority’s (FCA) proposal to retain the ‘current substance’ of Mifid regulation, specifically the requirement for closed-end funds to continue to disclose ‘ongoing charges’.
According to the FCA’s definition, these charges are deducted from the value of the fund and therefore the shareholders’ underlying investment.
In a response to a regulatory consultation, Altmann and Bowles said this definition applies to open-ended funds but is not relevant to investment trusts. They noted that when an investor owns shares in a trust, charges are not deducted from the value of the investment. This is because a trust’s expenses are already reflected in the shares’ value by the market.
As a result, the existing rules force trusts to effectively double count their costs, in the eyes of some. The baronesses likened it to buying an all-inclusive holiday and then mistakenly being told you have to pay for the flights.
‘Investment platforms have been showing five-year value illustrations which are highly misleading as they suggest shareholders will pay significant costs out of their investment value (the market share price) each year, which they do not actually pay,’ they said.
This has contributed to the ongoing selling of investment trusts and a widening of discounts. The duo said this had effectively blocked the industry from raising capital.
Platform confusion
While the Treasury issued interim directives last year that exempted investment companies from the EU rules which had required them to disclose ongoing charges, investment platforms have been slow to respond.
Altmann and Bowles said the interim measures were not enough to reinvigorate the market because some investment platforms ‘have not allowed necessary presentation changes’.
This refers to some investment trusts applying zero charges to their European Mifid templates (EMTs), which provide the data that platforms and wealth managers use and report when investing in trusts on behalf of clients. When this happened, platforms claimed the trusts were misleading investors and barred them being bought by customers.
Groundhog day
Altmann and Bowles also said the FCA’s consultation on ‘consumer composite investments’ (CCIs) published in December risked a repeat of ‘past errors’.
In their opinion, it includes ‘perverse proposals’ like reinstating an aggregation of costs for investment companies. They point out this makes no sense as they have nothing to aggregate.
‘This is the time to correct the market misperceptions and regulatory confusion between consumer “costs” of open-ended funds and corporate expenses of closed-ended funds,’ they noted.
The CCI framework is set to replace various other pieces of EU regulation which campainers say have also contributed to an inflated and misleading picture of costs being presented to investors in investment trusts
The baronesses propose investment trusts should be exempted from having to aggregate ‘costs’. They noted: ‘The FCA has now publicly confirmed the factual situation that there are no deductions from share prices of listed closed-ended investment companies. That should be acted upon wherever possible.’
Here, they are referring to comments made by FCA chair Ashley Alder at the Lords Financial Services Regulation Committee’s meeting in November where he agreed that ongoing charges are not deducted from the share price.
‘Billions lost’
The duo added that confusing trust expenses with ongoing charges – deducted from the value of the investment – has stalled new investment into the investment trust industry for the past three years.
‘This has harmed investors because it has struck at liquidity, increased discounts and potentially led the UK to miss out on the opportunity of securing tens of billions of new investments into real assets, such as infrastructure,’ Altmann and Bowles said.
Investment firms have been asked to respond to the FCA’s consultation on CCIs by 20 March. Meanwhile, responses to the FCA’s proposal to retain the ‘current substance’ of the MiFID regulation are due by 28 March.
