‘Brexit dividend’ needs to focus on investors

The government has today announced the most significant overhaul of financial services regulation for a generation. The Association of Investment Companies (AIC) has long campaigned on many of the issues highlighted and welcomes the bold steps being taken. However, the emphasis on government policy priorities in the regulatory agenda should not override the Financial Conduct Authority’s (FCA’s) key objective to ensure consumer protection.

The principal proposals include the following.

Repealing EU legislation on the European Long-Term Investment Fund (ELTIF), reflecting that the new UK Long Term Asset Fund (LTAF) provides a better structure for the UK market

Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “We have long warned of the dangers of using open-ended vehicles for investing in illiquid assets. History suggests this results in investor harm and that commercial incentives lead to flawed products being launched. This is an area where government priorities, however well-founded, should not be allowed to inappropriately override regulatory concerns.

“Government objectives can be achieved through the existing LTAF structure if there is sufficient institutional investor appetite, although it is debatable the extent to which such vehicles will invest in UK productive assets. Wider distribution of LTAFs to retail investors is an accident waiting to happen and will not help the LTAF achieve the government’s broader economic objectives. High profile examples of fund suspensions in the property sector demonstrate how, even with limits on redemptions, open-ended funds struggle to deal with less liquid assets. These funds are simply not appropriate for a wider retail market. Investment companies are a better vehicle for opening up access to illiquid assets, including productive assets. They are already proven and actively contributing to areas of the economy including infrastructure, venture capital and renewable energy.”

Consulting in Q1 2023 on bringing Environmental, Social and Governance ratings providers into the regulatory perimeter

Richard Stone, Chief Executive of the AIC, said: “There are very high levels of scepticism over ESG claims. Regulating to increase market confidence is essential to protect investors and to develop the ESG investment market for the long term. The AIC will respond to the FCA’s current open consultation on sustainable labelling. We believe the hurdles to obtain such a label should be meaningful and high. Similarly, ratings providers should have convincing methodologies so investors can understand these ESG ratings. Trust in those ratings is critical.”

Laying regulations in early 2023 to remove well-designed performance fees from the pensions regulatory charge cap

Richard Stone, Chief Executive of the AIC, said: “We welcome the planned removal of well-designed performance fees from the pensions charge cap. This should enable pension funds to consider investing in more alternative assets including illiquid and productive assets through investment companies. Those asset classes can be more expensive to invest in due to the additional costs associated with researching, accessing and managing these investments. However, whilst potentially higher risk they also have the potential for higher returns. Investments should be made with a view to delivering the best investor outcomes, not with a sole focus on cost – especially where the cost is a direct result of delivering strong performance.”

Overhauling the UK’s regulation of prospectuses

Richard Stone, Chief Executive of the AIC, said: “Enabling companies to raise capital more easily and at lower cost is to be welcomed. The reform of prospectus requirements, specifically reducing the need for a prospectus when an already listed company issues further shares, is a significant step forward. This would enable listed companies to grow faster and raise additional capital more easily, making the public markets more attractive.”

Repealing the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, and consulting on a new direction for retail disclosure

Richard Stone, Chief Executive of the AIC, said: “This is long overdue. PRIIPs and specifically Key Information Documents currently create an uneven playing field for open-ended and closed-ended funds and provide investors with misleading information. The proposed abolition of PRIIPs and the ability to create a new level playing field is critical in building investor confidence and enabling investors to compare different products. Simple, transparent and fair disclosures enabling investors to gain a clear understanding of the relative risks and potential returns are vital in enabling greater consumer engagement. The new direction for retail disclosure must focus on consumer outcomes, value for money not just cost, with those consumer outcomes at the heart of enabling investors to make better informed investment choices.”

Other elements of today’s announcements which will impact the investment company sector include steps to change the taxation of Real Estate Investment Trusts (REITs), a call for evidence regarding reforming the regulation of short selling, an independent review of investment research, and the ongoing work to review the boundary between financial advice and guidance.

Richard Stone, Chief Executive of the AIC, said: “The FCA set out its ambition in its Consumer Investment Strategy to see more individuals access the markets and invest their savings. This is laudable. Many of today’s announcements are to be welcomed and will help create vibrant capital markets from which investors can benefit. However, central to success is consumer confidence in those markets.

“It is essential that any reforms relating to consumer disclosures, ratings or research ensure that investors have access to simple transparent information which helps them make an informed assessment of the balance of risk and return. All disclosures and investor engagement should focus on enabling better investment decisions based on an understanding of value for money and potential consumer outcomes.

“It is also critical that shifting the boundary between advice and guidance or encouraging the FCA to take into account broader government policy objectives, such as a desire to drive more capital into illiquid or productive assets, does not compromise the integrity of consumer protections. As we have warned before in our papers such as ‘An accident waiting to happen’ the risk is one of investor harm, but should such harms crystallise there is the potential for more fundamental damage to investor confidence in the system as a whole.”

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Notes to editors

1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s vision is for closed-ended investment companies to be considered by every investor. The AIC has 353 members and the industry has total assets of approximately £263 billion.
2. For more information about the AIC and investment companies, visit the AIC’s website.
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