The Financial Conduct Authority (FCA) has been given the power to overhaul issues with cost disclosure regulation unfairly penalising investment companies, it has been confirmed in the statement accompanying today’s (22 November) Autumn Statement.
While the move has been applauded, others are disappointed by the pace of change set out, with 10 January being given as the date for submissions to the FCA.
Key figures across the investment company industry have campaigned for several years for an overhaul to Cost Disclosure Regulation and for trusts to no longer be categorised as Alternative Investment Funds (AIFs) because, given regulation under the Alternative Investment Fund Managers Directive (AIFMD), they must disclose ongoing charges in their Key Investor Documents (KIDs) based on their underlying net asset values, despite the fact investors are purchasing their shares at price. This therefore makes their charges appear artificially more expensive than their open-ended counterparts. KID regulation falls under EU law Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation.
Earlier this month, a Private Member’s Bill on overhauling the regulatory burden for trusts by Baroness Altmann was passed in the House of Lords. She also entered the ballot to ask a question in the House last week on cost disclosure regulation, which was successful. Her Bill was due to receive its first reading today.
See also: “‘The end is almost in sight’: Gravis’s William MacLeod and Baroness Altmann on cost disclosure breakthrough“
This year’s Autumn Statement confirmed that the Treasury has drafted a statutory instrument setting out how it will replace PRIPPs regulation with “a new framework tailored to the UK”.
In an accompanying policy note on the UK Retail Cost Disclosure Framework, the Treasury acknowledged that the investment company sector is “highly aligned with the government’s priority to promote long term, productive investment and that it is a key source of capital and liquidity to support economic growth”.
It added that the reforms outlined will “enable the FCA to reform cost disclosure in a holistic way; ensuring it is accurate, does not impact the competitiveness of firms and is not misleading to retail investors”. The note also stated that the FCA is “considering interim solutions to mitigate the impacts on the investment company sector in the short term, as the government acts to implement a long-term legislative solution to the issue”.
James Carthew, head of investment company research at QuotedData, said his reading of the statements made is that “the old inflexible and misleading EU rules will be swept away”.
“What isn’t yet clear is what will replace them. We see that: ‘The FCA will publish a consultation on their draft rules to replace the PRIIPs Regulation, and certain MiFID provisions related to cost disclosure, in due course’. It is also worth highlighting that ‘HM Treasury intends to legislate in 2024, subject to Parliamentary time’.
“Fingers crossed!”
Richard Stone, chief executive of the Association of Investment Companies (AIC), said the trade body “applauds the government’s announcement that powers will be handed to the FCA to deal with the pressing issue of cost disclosures”.
“It is vital that we create a level playing field for cost disclosure between investment companies and open-ended funds, so it is good to see the intention to bring UCITS funds within the same regime,” he said. “The new regime must give investors the information they need to make informed decisions without any bias against investment companies and we look forward to working with the government on this.”
He added that the publication of the draft statutory instrument is “welcome”, as is the Treasury’s intention to take a closer look at MiFID.
See also: “Calls for judicial review into FCA as investment trust sector faces extinction”
“We will be looking at the details of the draft legislation to ensure that the powers handed to the FCA are wide enough. Action needs to be taken swiftly, and given the length of the legislative processes it is also encouraging to hear that the FCA is considering interim action to help mitigate the problems in the short term.”
Reacting to the Autumn Statement, however, Baroness Altmann said the Government’s recognition of the need for reform is “welcome” but that it is “disappointing that there seems little sign of the required sense of urgency”.
“The Statutory Instrument (SI) wants to ensure retail investors are given the right information to enable properly informed investment decisions, but the present situation is so misleading and damaging that it should be addressed immediately,” she urged. “There is also huge emphasis on new funds being set up such as by the PPF and investment banks using the previously proposed LIFTS and LTAF structures, but there are ready made specialist vehicles which could help pension funds back such long term illiquid assets straight away and they currently trade at significant discounts to asset value, offering potentially attractive long-term value to pension holders.
“This SI would remove the huge self-inflicted damage of misleading charges disclosure which has driven so many investors away and the sooner this happens the better. It is not yet clear whether this SI will apply to underlying individual funds or not. I welcome this initiative and look forward to reviewing the proposed wording and scope at the earliest opportunity. This situation really deserves rapid intervention.”
Richard Parfect, portfolio manager at Momentum Global Investment Management, concurred that the acknowledgement from the government is “welcome”. He added that handing the matter over to the FCA “probably makes sense, so long as they engage with the industry participants who have brought this to their attention to ensure any solution is effective on the ground”.
He added that, while he is pleased that the FCA will set out further detail on their proposed rules for a new retail cost disclosure framework in due course, he has concerns that the regulatory body is considering “interim solutions” to mitigate any short-term impacts on investment companies.
“This element is crucial as stakeholders don’t have the luxury of time and the Parliamentary timetable could be unhelpful; so we need a pragmatic interim measure that market participants such as ACDs can get hold of and restore sanity to the “cost reporting” on the funds they administer,” he warned.
William MacLeod, managing director at Gravis, said: “The reference to these Statutory Instruments is both welcome and hugely significant. A number of market participants have received an email from HM Treasury this afternoon thanking us for our input and reiterating the government’s position. It is reassuring that action will be taken; however, the government cannot afford to delay the matter further.
“The Private Members Bill presented by Baroness Altmann which has its first reading in the House of Lords today goes further and covers AIFMD as well as MiFID and PRIIPs and could in theory be adopted to accelerate matters, restoring order to the market and bring the current confusion to an end.
“The addition of repealing AIFMD legislation, inaccurately applied to investment companies, has been very costly and a significant impediment to market efficiency, requiring brokers to hold ever increasing levels of regulatory capital in order to trade in these companies, managers to pay AIF fees amounting to £200m-£400m over the last 10 years and has doubled up the regulatory oversight, but has offered no additional investor protection.
He added: “Gravis, along with a number of market participants, will continue to press the Government to reach a resolution as soon as possible.”
Ben Conway, head of fund management at Hawksmoor, agreed there is “still lots to do”, although he hopes Baroness Altmann’s Private Member’s Bill will “raise the profile” of what the investment company industry is trying to achieve.
“I agree a SI would be far quicker and I’d really like to see The Treasury adopt that approach,” he told Portfolio Adviser. “We need a change to legislation that allows for a regulatory framework that recognises that investment companies have characteristics of both listed operating companies and unlisted funds.
“This should allow for appropriate disclosure of investment company ongoing costs but for these costs not to be presented as, or treated as, product costs in the same way OCFs of funds rightly are. Disclose, don’t double count.
“Today’s news is a step in the right direction, but the urgency of the situation needs to be recognised.”
