Campaigners say FCA’s cost disclosure rules are unworkable
The Association of Investment Companies (AIC) and key industry figures have slammed the Financial Conduct Authority’s (FCA) cost disclosure proposals, arguing they are unworkable and at risk of inflicting further damage to the investment companies industry.
A joint industry response to the financial regulator’s consumer composite investments (CCI) consultation argues that investment companies should be excluded from the CCI framework. This should happen, they argue, because investment companies are different to open-ended funds in the way they operate, and in the way they are governed and regulated.
A campaign group headed by Baronesses Ros Altmann and Sharon Bowles is responsible for writing the response. So far, the response has received more than 270 signatories, including more than 30 companies and four legal academics. The deadline to sign is 3pm today.
The CCI framework is due to replace various other pieces of EU regulation and the final rules will be announced later this year. Responses to the consultation are due by the end of today, Thursday 20 March.
‘We do not believe it is feasible to have a coherent and workable framework that operates across such a disparate range of investment vehicles. Seeking to apply the rules as proposed will create a range of unintended consequences,’ the joint response explained.
These include further damage to the investment trust market and ‘poor consumer outcomes’ for investors.
The AIC, a trade body, echoed these sentiments. It agrees that investment companies should be excluded from the CCI regime.
In its own response, chief executive Richard Stone explained: ‘The new rules would be an unjustified burden on our sector, and place investment companies at a competitive disadvantage. It is not too late for the government to legislate to exclude the sector or for the FCA to create a ringfence so that no additional obligations are imposed on investment companies.’
Time to remove regulatory confusion
The industry response also calls for the government to bring forward further legislation to secure the exclusion of investment trusts from the rules.
‘It is time to remove the regulatory confusion between the characteristics of open and closed-ended structures and to end the misleading of investors which has caused needless and costly damage to this important UK financial sector,’ the joint response said.
If investment companies cannot be excluded from CCI rules, the campaign group would like trusts to become a ‘completely ringfenced subset within the CCI regime’, with no additional rules applied. They point out that investment trusts already adhere to a range of rules, including company law and listing rules, which makes CCI regulations redundant.
No ongoing charges
The FCA’s rules aim to achieve comparability between investment companies and open-ended funds but the campaign group argues this is ‘not possible to achieve’. This is because investment companies have a different construction and most importantly no ongoing charges, in their analysis.
According to the FCA’s definition, charges are deducted from the value of the fund and therefore the shareholders’ underlying investment. However, the investment trust industry has long argued 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.
With this in mind, the joint response highlights what is seen as a glaring contradiction in the regulator’s CCI plans: the new rules would allow index funds that own investment trusts to show zero direct costs so they don’t appear ‘unduly expensive’.
However, this would not apply to professional investors who hold the same investment trusts in their portfolios or multi-asset funds.
Baroness Altmann commented: ‘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.’
Industry figures note the proposed rules would place the active management industry at a competitive disadvantage to ‘passive funds’.
There has been controversy previously over index funds run by industry giants like BlackRock and Vanguard choosing not to report the ‘costs’ of holding investment trusts in trackers, when multi-asset funds holding the same trusts have been forced to pull-through the stated fees and report them as part of their own charges to investors.
At odds with government policy
In addition, the joint response said the current proposals contradict government policy, which back in September and November confirmed that Priips and certain aspects of Mifid should not apply to investment trusts because they do not have ongoing charges.
The FCA is proposing that investment trusts, like open-ended funds, should provide a ‘summary cost illustration’, showing costs over a holding period. This would include entry costs, exit costs, ongoing costs and transaction costs, presented as a percentage and in pounds and pence over a 12-month period.
The industry response explained this would ‘result in misleading and completely irrelevant information’ being provided to a shareholder in an investment trust. It also contradicts the government’s previous decision to exempt trusts from having to aggregate their ‘ongoing charges’.
The AIC noted that far from helping consumers, the FCA’s proposals would perpetuate many of the flaws in current disclosures.
‘Keeping the requirement to bundle up costs of different kinds results in a misleading single-figure cost disclosure. This makes it difficult to compare costs, reduces transparency and makes it harder for an investor to understand whether they are getting value for money,’ explained Stone.
The campaign group also highlight the confusion that has reigned since some investment trusts applied 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 those trusts were misleading investors and barred customers from making new investments.
‘It is unlikely that investors will return to the market in a significant way until they have certainty that undue burdens and technical barriers to their investment are removed,’ the response explained.
‘It will be several years before a resolution is reached, if at all, if listed closed-ended investment companies are included in the CCI, unless a subset of the CCI framework ringfencing [trusts] takes immediate effect.’
