The Treasury and FCA will temporarily exclude investment trusts from PRIIPs regulation as it attempts to create a new regulatory framework for Consumer Composite Investments (CCIs), including a policy for fair representation of cost disclosure.
The new framework will aim to deliver “more tailored and flexible rules which will address concerns across industry with current disclosure requirements”, according to the FCA release. Under the PRIIPs framework, investment trusts must disclose costs in the same way as open-ended funds. However, because investment trusts have both a NAV and a share price as a listed company, this causes a misrepresentation of the price as fees are applied to the share price instead of the NAV.
The FCA will hold a consultation on its proposed CCI regulation this autumn, with a goal of allowing for more “bespoke arrangements” to address sector concerns.
The proposal follows outcry across the investment trust industry for a change in regulation including the introduction of a bill in the House of Lords. Baroness Sharon Bowles, who has led a campaign against the current system for cost disclosure, read The Listed Investment Companies Bill in the House of Lords on 5 September. The bill was designed to deduct charges from the trust’s net asset value instead of it’s share price.
Richard Stone, chief executive of the Association of Investment Companies (AIC), said: “It’s good that the Treasury and FCA have recognised that the current cost disclosure regime is not working. The AIC has lobbied tirelessly on this issue and it’s encouraging that the Labour government has acted so swiftly.
“We look forward to working with the FCA as it consults on the new Consumer Composite Investments (CCI) regime. It’s vital that these new rules recognise the unique characteristics of investment companies, permanently end misleading cost disclosures which distort the market, and enable investors to make better informed decisions.”
See also: Investment trust industry calls on Labour to resolve cost disclosure issue
For the first time on record, investment trusts are on track for a three-year span of no primary capital raise, according to research by abrdn. The lack of fundraising reflects the interest rate environment as well as the effect of the current cost disclosure arrangement on the industry, abrdn concluded.
Christian Pittard, head of closed-end funds at abrdn, said: “The new Government has made boosting economic growth – by channelling capital into areas like renewable energy and infrastructure– its raison d’etre.
“These funds already invest billions into these areas – delivering crucial economic growth projects. However, cost disclosure rules, which have amounted to a distortive “double counting” of costs, have negatively impacted investor sentiment, therefore choking flows into investment trusts. They have been a key cause of these three lost years of infrastructure investment.”
The announcement from the FCA recognised the role of investment trusts in the UK, representing over 30% of the FTSE 250 and investing in £260bn in assets, and called the sector a “valuable source of investment funding to both conventional and emerging asset classes”.
Ryan Hughes, interim AJ Bell Investments managing director, said the FCA’s move today will be “warmly welcomed” by the investment trust industry as well as the broader market.
“Investment trusts play a hugely important role both in the financial services sector and the wider economy as a provider of capital and the unintended consequences of the current legislation created an unequal playing field that put investment trusts at a disadvantage and threatened, in some cases, their very existence,” Hughes said.
“The removal of this unnecessary barrier will help the investment trusts sector regain its footing and allow them to compete equally against other investment structures, which will put them back on the radar for investors who have been reluctant to use them given the cost disclosure requirements.
“At a time when the government is looking to encourage investment in the UK and to encourage private capital to drive economic growth, the removal of any barriers that could hold this back should be viewed positively.”
