The ‘gruffalo’ in the room?: FCA releases interim measures to protect trusts from cost disclosure regulation

Regulators acknowledges that requirements ‘may not result in representative cost information being published’ for investment companies

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The Financial Conduct Authority (FCA) will allow investment companies to provide additional information, including cost breakdowns, on their key investor documents (KIDs) as an interim solution to ongoing cost disclosure concerns.  

For several years, key members of the investment company industry, alongside wealth managers and discretionary fund managers, have raised concerns that cost disclosure regulation requires trusts to list costs associated with their net underlying assets, despite the fact investors buy shares at ‘price’. This therefore results in investment companies appearing more expensive on their KIDs than they actually are.

In a document published today (30 November) a spokesperson from the FCA acknowledged that “for a minority of investment products, the required costs and charges disclosure may not result in representative cost information being published” and that this concern “has been raised in the context of closed-ended funds”.

“These are pooled investments but are also corporate bodies and so have some features of companies as well as of funds,” they said. “This can affect their cost base, as some costs incurred by listed closed-ended funds can in some cases be equivalent to costs incurred by commercial companies.

“Commercial companies are not subject to these costs and charges disclosure requirements.”

It added that “further concerns have been expressed” about listed costs then become aggregated into other products, such as multi-asset funds, discretionary-managed funds, or fund of funds.   

KID requirements come from PRIIPs regulation, which is in place as a result of retained European legislation (known as REUL).

Article 8.3 of PRIIPs requires “all direct and indirect costs borne by a retail investor, including one-off, recurring and incidental costs, to be disclosed in an aggregated figure to show the compound effect of the total costs on the investment”, according to the FCA.

HM Treasury acknowledged the investment company industry’s indignation at being unfairly penalised in the accompanying documentation for this year’s Autumn Statement, explaining that as part of its Smarter Regulatory Framework (SRF), REUL will be replaced by a new set of rules which will; be spearheaded by the FCA.

In its statement today, the regulatory body said: “Consumer disclosure for investment products is a priority area, and the repeal of PRIIPs has been prioritised by government in the SRF process.

“The Treasury issued draft legislation on the repeal and replacement of the PRIIPs regulation in November 2023.”

As part of this reform, the FCA will “consider the purpose and usefulness of aggregating a range of costs and charges into a single figure”.

However, because current cost disclosure requirements are set out in REUL, the FCA is unable to make changes to the current regulation until they are transferred “the relevant requirements” through legislation.

As an interim measure, however, the FCA has stated: “Where listed closed-ended funds and funds that invest in them (or manufacturers of such funds) are concerned that the costs required to be disclosed in key information documents do not appropriately reflect the ongoing costs, they can provide additional factual information (as well as the aggregated figure) such as the breakdown of costs to put the aggregate number in context.

“For example, a listed closed-ended fund may give a better explanation of costs that are clearly corporate costs. As a result, a fund of fund might seek to explain how its own aggregate figure is affected by the investment company’s cost.”

The FCA confirmed that, if companies provide further cost breakdowns on the KIDs, it “will not take enforcement action to the extent that the firm contravenes the restriction on adding further information to the UCITS KIID or the prescriptive requirements of the PRIIPs KID”.

Sarah Pritchard, executive director of markets and international at the FCA, said: “We’ve listened carefully to feedback and, while we don’t have all the tools to fix the issue, we have put in place an interim change to support better transparency. 

“Investment companies can now act to make changes to how they disclose costs and charges, and we look forward to implementing wider reform of the future disclosure framework as soon as legislation allows.” 


William MacLeod, managing director at Gravis, told Portfolio Adviser the interim measures are “reminiscent of the Gruffalo”.

“This statement deals with the mouse but ignores the Yeti looming in the background,” he said.

“We were very pleased to see the issue of cost disclosure raised in the Chancellor of the Exchequer’s Autumn Statement and to learn that HM Treasury are in consultation until 10 January 2024, before issuing two Statutory Instruments early in the New Year.

“It was encouraging that at yesterday’s Treasury Select Committee Questions the Chancellor reiterated the urgency with which HM Treasury and the FCA are considering the issues faced by the sector.

“It was somewhat disappointing, therefore, to see the FCA’s statement this morning, in which they appear to have endorsed the granular detail of disclosures permitted in KIDs but have avoided the far more significant issue of the disclosure of costs through the EMT.”

He added: “The FCA have been given emergency powers to intervene until this issue is resolved and we look forward them being exercised.’”

Richard Stone, chief executive of the Association of Investment Companies (AIC), said the interim step is “far from a full answer to the problems of cost disclosure”.

“Consumers may benefit from a breakdown of costs, but there is much more to do before we can reverse the distortions caused by the current rules and give investors better disclosures,” he warned.

“We will work with the FCA and the industry to use this new flexibility as fully as possible. This will include updating our guidance to members on cost disclosure.

“Meanwhile, we will continue to press for a fuller solution that does not disadvantage investment companies and allows them to compete fairly with other investments. Time is of the essence and the promised consultation on the new rules cannot come soon enough.”