The FCA’s move to adopt a simplified and more flexible retail disclosure regime is generally positive, but there is room for improvement in many areas, according to Confluence’s senior product manager, Lewis Davison.
In December, the regulator published a consultation on the Consumer Composite Investments (CCI) framework, marking a significant departure from the previous EU-based PRIIPs and UCITS regime.
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Flexible product description
In the consultation document, the FCA said it wants to implement a “more flexible and proportionate” product information framework.
As part of this, Key Information Documents (KIDs) will be replaced by a ‘product summary’, which will allow for more flexibility regarding how information is presented.
Davison says the move to greater flexibility is positive, as the previous regime was widely criticised for being too prescriptive.
The FCA is trying to produce a more flexible regime with targeted standardisation, he adds.
“There is a key principle: standardisation only where it is needed.
“There is more freedom on the look and feel of key information presentation in the product summary. Firms can supplement this with additional information and presentations, and they can potentially consider the order of information presentation, albeit the FCA is very cost-focused and wants this information to be presented before other information and past performance.
“This flexibility is generally positive, but there’s a chance it could hamper comparability and investor engagement.”
Davison adds an end investor reviewing multiple funds might encounter different ways of presenting similar information, which could harm comparability.
“While there is some standardisation, this could become confusing and potentially work against the regulation’s intended outcomes.
“This needs careful calibration in the final rules. The industry has a chance to provide feedback and input, hoping for points of clarification.”
Listed closed-ended investment companies
Cost disclosure has been a major issue for listed closed-ended investment companies (LCICs) over the last few years. The previous disclosure regime required investment companies to disclose costs as a charge to the investor, despite investment trusts trading at a share price with no deductions made.
Company expenses are already included in the calculation of the net asset value and disclosed to investors. This led to costs for investment trusts effectively being presented twice.
While the FCA’s forbearance announcement and subsequent UK Statutory Instrument in late 2024 exempted investment companies from PRIIPs disclosure requirements, there has been debate in the industry as to whether investment companies should fall under the new CCI scope at all.
A campaign group made up of industry participants and MPs has called for LCICs to be exempt from the framework.
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Reacting to the launch of the consultation back in December, Association of Investment Companies CEO Richard Stone said the framework “misses the mark” for investment trusts.
“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.”
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Confluence’s Davison also highlights what he calls a “dangerous quirk” in the CCI’s proposal on look-through costs.
“The FCA seems biased towards passive products,” Davison says. “Their outcomes specifically refer to investors choosing lower-cost products, which fails to reflect a rounded assessment of value.
“There’s a dangerous quirk in the CCI proposal’s concept of look-through costs.
“The FCA requires look-through for funds investing in other funds, but introduces an exemption for index funds investing in investment companies. While this makes sense in terms of preventing a misleading presentation of ‘costs’, it is baffling why the exemption is strategy-specific.
“Why should an index fund investing in investment companies be treated differently from other products investing in investment companies? There needs to be a blanket exemption focused on the underlying asset — investment companies — rather than the investment strategy.
“This appears to be another indication of a potential bias towards passive products. The hope is that the final rules will be calibrated to be more asset-focused than strategy-focused, which would lead to a better outcome.”
The FCA has suggested an 18-month implementation period for open-ended funds, and 12 months for closed-ended investment companies. Firms can also move to align with CCI requirements as soon as the Policy Statement is published.
“Most firms will likely use the entire implementation period, some might move strategically sooner,” Davison adds.
“This could create a situation with multiple product disclosures concurrently, which would be highly detrimental to investor comparability. Far better to have a single, 18-month transition period for all products, and avoid an ‘early adopter’ option.”
The consultation period on the CCI framework ends on Thursday 20 March.