IA drops guidance on investment company charges after FCA statement
The Investment Association (IA) has removed guidance which forced funds to report the underlying costs of investment companies as part of their own charges, in the wake of Financial Conduct Authority (FCA) action on the issue following the Autumn Statement.
That paves the way for at least a partial resolution of an issue that has pushed some professional investors away from the £256bn closed-end funds sector and played a part in a generational derating of their London-listed shares.
The FCA today released a lengthy ‘statement on communications in relation to Priips and Ucits’, two of the regulatory regimes carried over from the EU which play a role in the investment companies charges issue.
As well as confirming a consultation on new disclosure rules in early 2024, the City regulator also announced short-term measures to start to address the problem and the confusion it causes.
In particular, the FCA gave the green light for closed-end funds and funds that invest in them to start to break down ‘aggregated pricing’ and give a better explanation of costs in their fund documentation. Forcing a single line of pricing has been a major gripe for the sector, making closed-end funds look more expensive compared to rival open-ended funds.
The watchdog also confirmed it would not take enforcement action against firms that start to contravene associated restrictions in the key information documents (KIDs) that are supposed to tell investors the total cost of their holdings.
Following the announcement, the Investment Association has dropped guidance requiring open-ended funds holding closed-end funds to include the costs of doing so in their ongoing charges, which was its previous interpretation of Ucits rules.
A spokesperson for the fund manager trade body said: ‘The current cost disclosure requirements for listed closed-ended funds have had the unintended consequence of creating confusion over fees, leading to adverse impacts on investment decisions.
‘Given current legal constraints, the FCA’s statement is a very focused measure, but one that reflects the wider importance of clearer disclosures in helping investors make informed choices on where to invest their money.’
The IA’s move has a particular bearing on fund of funds, whose managers were alarmed when had the IA’s guidance was reiterated in the summer of 2022, leading to an apparent jump in charges reported by some multi-asset funds which invest significantly in investment companies.
Fund managers at Gravis, Hawksmoor and elsewhere have argued that is artificial and, in the alternatives sector, in particular, was punitive given the difference between cost-free operating companies and investment companies in sectors like property is often minimal.
Richard Stone, chief executive of the Association of Investment Companies (AIC), said: ‘The FCA’s statement acknowledges that a single all-in cost figure may not be the most useful to consumers, and that a breakdown of costs could improve transparency and increase competition.
‘We have long argued that bundling costs such as transaction costs, gearing costs and underlying fund costs together can create perverse incentives and does not help inform consumers’ decisions.’
Analysts at JPMorgan Cazenove said the FCA’s initiative was positive but would not resolve the problems. ‘Closed-end funds will still need to produce KIDs and the current cost disclosures but can put additional text alongside them. That additional text will likely only be seen by those investors who choose to look at the documents rather than just the published aggregated cost ratio,’ they said.
More fundamentally, the analysts said the FCA did not have the power to make any further changes. While legislation is planned for next year, there was a risk Parliament would not have time to pass this into law before a general election.