Peers warn investment trusts under threat in letter to FCA
A House of Lords committee warned the success of investment trusts is under threat by the Financial Conduct Authority’s approach to legislation.
The House of Lords’ Financial Services Regulation committee said retained EU legislation means investors are given misleading information.
The cost disclosure regime requires investment trusts to report costs in the same way as open-ended funds.
In a letter, dated April 30, committee chair Lord Forsythe of Drumlean said: “This creates a falsely elevated number for aggregated ongoing cost forecasts of funds which are held by investment trusts, giving misleading information to investors and indicating that costs/expenses are to be deducted annually from shareholdings.”
The interpretation of the rules for investment trusts means total costs incurred by the vehicles have to be shared with clients. However it is misleading to do so for investment trusts, as not all costs incurred by these listed companies end up being passed on to the end investor.
For example, under the UK interpretation, investment trusts must include audit fees in their total cost disclosure, but other listed companies do not have to do so.
Under the Priips rules, they are required to include transaction costs, even though the end investor does not bear these costs themselves.
This is artificially inflating the total expenses for investment trusts, making them look more expensive for pension funds, fund-of-funds and model portfolios, campaigners have claimed.
The letter revealed the FCA met with the committee in private to discuss the issue.
It is ludicrous that directors and companies are being forced to make misleading statements to investorsBaroness Bowles of BerkhamstedBaroness Bowles of Berkhamsted, a member of the committee, said “urgent steps” are needed to resolve the issue.
She said: “Since the first one was founded in 1868, investment trusts have become a British success story. They have given institutions and individuals an opportunity to invest in infrastructure, growth companies and renewable energy.
“This success is under threat by the FCA’s interpretation of EU-retained Mifid and Priips, which is not shared by any other country, and has created an unlevel playing field on an international level.
“Urgent steps are necessary to resolve the problems that have been created. The FCA’s forbearance statement, which was issued in November 2023, helped, but does not go far enough.
“It is ludicrous that directors and companies are being forced to make misleading statements to investors.”
The committee said there were a number of negative impacts of the FCA’s interpretation of EU-retained Markets in Financial Instruments Directive (Mifid) and Packaged Retail Investment and Insurance-based Products (Priips).
It said it results in a decrease in money being invested in investment trusts, with claims they are missing out on £7bn.
It also claimed it means foreign investors buy UK real assets at reduced prices.
Baroness Bowles said a solution could be found in requiring authorised corporate directors to enter zero into the appropriate column that is for ongoing fund charges which could align with the practices of EU funds.
Last month (April 19), FT Adviser reported Baroness Ros Altmann, former pensions minister, and Baroness Bowles, former MEP, had been pushing the regulator and parliament for a ‘simple’ fix to the problem caused by the FCA’s interpretation of European Union rules for investment trusts.
Altmann said: “It is deeply concerning that the regulator is not properly informed about how the market works, even though it is responsible for overseeing it.”
The FCA was contacted for comment.
tara.o’connor@ft.com
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