The FCA has launched a consultation on its proposals for a new retail disclosure regime for Consumer Composite Investments (CCIs).
The regulator said it wants to replace prescriptive EU-inherited rules with a more flexible, outcome-focused approach. It has proposed that a CCI must be accompanied by a product summary whenever it is distributed to a retail investor, replacing key investor documents.
Firms will have more freedom to design product information, removing previous format and template requirements under the Priips regime, the regulator said.
Simon Walls, interim executive director of markets at the FCA, said: “The way people invest has changed. We want to ensure that firms can communicate with their customers in a way that gets them the information they need when they need it.
“High quality product information will give consumers the confidence to invest; increased participation in this market will not only benefit consumers but will also provide capital to drive the economy and boost growth.”
Cost disclosures
Under the proposals, CCIs such as investment trusts will explain performance fees and carried interest using narrative and examples in the product summary.
Reduction in yield figures will be replaced by summary costs over a 12-month period, while firms will be allowed the flexibility to describe what costs mean and their impact on returns.
Previously, investment trusts had been subject to a ‘double-counting’ situation where they were forced to disclose their costs as an ongoing charge figure (OCF), and then again through its impact on the NAV.
In November, The FCA allowed ‘forbearance’ for investment trusts in the disclosure of charges under the Priips and MiFID regulations as a temporary solution to the cost disclosure issue.
For investment trusts, the regulator has proposed that ongoing cost calculations would exclude costs incurred in the maintenance and commercial operation of real assets, as well as gearing costs.
“We consider that these costs are more accurately categorised as inherent costs of the underlying assets rather than costs of the investment. We agree that their inclusion can generate distortions that are unhelpful to consumer understanding,” the regulator noted.
The consultation is open to feedback until 20 March 2025.
See also: Are platforms hampering the investment trust cost disclosure victory?
While welcoming aspects of the consultation, Association of Investment Companies CEO Richard Stone said the framework “misses the mark”.
“This long-awaited consultation misses the chance for more radical reform. Whilst there are aspects to be welcomed, the FCA’s insistence that underlying fund costs are bundled into a single figure will not help consumers make better decisions as the regulator believes. Instead it would make it near-impossible for consumers to compare costs meaningfully where funds invest in other funds.
“It would also mean a continuation of the market distortion we saw under the old regime – creating disincentives for fund managers to purchase investment companies that offer exposure to renewable energy, infrastructure and other private assets – even when they think they provide good value.
“It’s not clear from the consultation how costs will be disclosed in the distribution chain – for example, by platforms or wealth managers. It’s essential to get this right as well.”
Stone added that one particular area of concern is the potential for investment companies be drawn into regulation as ‘manufacturers’.
“We are pleased with some aspects of the consultation and the recognition of some of the concerns that we and others have lobbied on. It is good to see the FCA propose that both gearing costs and operating expenses are to be excluded from the new cost disclosure regime, and that past performance is included.
“However, the continued inclusion of a risk indicator based on volatility is a flawed idea that the regulator should have scrapped. Moving from a 1-7 scale to a 1-10 scale doesn’t address the fundamental concerns with this approach.
“We would urge all stakeholders to respond to the consultation. It’s essential that we seize this moment to deliver a radically improved cost disclosure regime that helps investors make better choices.”
Reaction
According to the 2024 FCA Financial Lives survey, over 12.6 million UK investors hold an investment in a CCI.
Reacting to the consultation, Jonathan Lipkin, director of policy, strategy and innovation at the Investment Association, said: “Modernising the UK’s retail disclosure regime is fundamental to achieving a new culture of inclusive investment, where consumers feel empowered to make informed decisions that enable them to achieve their long-term financial objectives and build resilience.
“We welcome the FCA’s consultation as an important opportunity to create a disclosure framework based on simplicity, flexibility, and digital innovation. In a Consumer Duty world, we support a customer-centric regime that provides decision-useful information in an accessible and relevant format, and that helps consumers understand investment products and compare them in a meaningful way.”
Christian Pittard, head of investment trusts and managing director, corporate finance, at abrdn, added that the consultation has “much riding on it and no time to lose”, with twenty-two closed end funds having left the investment trust sector in 2024, according to AIC data.
“The cost disclosure rules can’t be blamed for everything. But they have contributed more than anything to the historically wide discounts we see across the industry today. With the return of the activist investor to the UK, things may get worse before they get better for the industry. That’s less choice for investors, and less investment in UK productive assets.
“That’s why this consultation needs to be short and decisive. While open to new thinking, we continue to champion abrdn’s Statement of Operating Expenses’ template, developed with industry participants as a solution that we believe brings greater transparency.”
