The UK government is contemplating wide ranging changes to the cost disclosure regime for listed investment companies, which will change it from the current rules inherited from EU membership, and which apply to EU funds.
A new framework for what will now be called Consumer Composite Investments, or CCIs, will be introduced next year, the UK Treasury said in a statement last week. This will follow a consultation process to be carried out by the FCA, the UK financial regulator.
The Treasury said the new fees disclosure regime will help investors to better understand the fees they are paying for investment trusts, as well as any additional costs that are being added by distributors – e.g. wealth managers and IFAs. As part of the new legislation, investment trusts will be exempted from current PRIIPs regulations.
The government said a future retail funds disclosure framework is being planned, and investment trusts will be included in this.
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The FCA said the move will address concerns from the investment trusts sector that the regulatory regime was affecting their ability to properly disclose costs to investors.
“The proposed new regime is intended to better cater for a variety of products and investment vehicles, including closed-ended UK-listed investment funds, while still ensuring consumers receive appropriate information to allow them to make informed choices about CCI investment opportunities,” the FCA said in a statement last week.
The leap forward on cost disclosure is being hailed as great news for investment companies and their investors. The temporary suspension of the rules paves the way for a permanent solution to a long-standing and damaging problem.
“It’s good that the Treasury and FCA have recognised that the current cost disclosure regime is not working,” said Richard Stone, Chief Executive of the Association of Investment Companies. “The AIC has lobbied tirelessly on this issue and it’s encouraging that the Labour government has acted so swiftly.”
Stone said that it was 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.
“Investment companies are a great UK success story and have a vital role in bridging the gap between private assets and public markets,” he added. “Ending misleading cost disclosures will enable us to continue delivering for investors and make a critical contribution to the economy as the government drives forward its ambitions for growth, investment and wealth creation.”
Why this is a win for investment trusts
Investment trusts had previously been subject to the Packaged Retail and Insurance-Based Investment Products – aka PRIIPs – regulatory regime, which were drawn up to encourage more efficient EU markets in investment products. The associated disclosure documents associated with PRIIPs investment products inevitably ended up being written in obscure and legalistic language that it was very difficult for retail investors without financial or legal background to understand.
As with any listed company, the share price discounts the costs and investors’ value is represented by the price at which the shares are bought and sold. Full disclosure of all costs is therefore imperative and a high level of transparency through regular reporting is essential and welcomed by industry participants.
However, given that investment companies’ share prices already reflect the value of a company based on this high level of cost disclosure, it made no sense to require institutions and advisors who invest in the shares of investment trusts to report the costs again in their own disclosures to their clients.
Double counting of costs created misunderstandings
This “double counting” requirement reflects a misunderstanding of the nature of a listed investment and impact of fees on the investment (i.e. the share price).
As a result of the requirement to double count, many pension, institutional and retail investors, have sold their holdings in investment trusts, rather than reflect higher costs in their reporting. Those that have not, have suffered huge client withdrawals because they now appear to be artificially expensive thanks to the duplication of reported costs. As a result, in the last two years, investment trust share prices have collapsed and new issuance has all but ceased.
