20th September 2024
Nearly 3 years ago, we became aware of the nefarious impact of retained EU law on the UK’s listed closed-ended investment companies (LCIC) sector (aka investment trusts). In truth, had we been more watchful the writing was on the wall in 2018 at the onset of MiFID, and potentially even before that when AIFMD came in.
The purpose of this week’s blog is not to take you through (again) the labyrinthine laws and regulations that led to the extraordinary situation of operating expenses of LCICs being forced to be disclosed as ongoing costs.
Instead, it is to celebrate a victory for common sense and the efforts of a small band of determined campaigners. On Thursday September 19th 2024 the government and FCA released statements (see: here) announcing reforms to UK retail disclosure rules that will temporarily exempt investment trusts from assimilated EU law requirements.
The substance is that the FCA will apply new regulatory forbearance ahead of the forthcoming statutory instrument on the new framework for Consumer Composite Investments. From 19th September, LCICs may choose not to follow the requirements of PRIIPs Regulation nor those found in Article 50(2)(b) and Article 51 of the MiFID Org Regulations. This means there will be no FCA action should a LCIC choose not to issue a KID, nor state that there is in ongoing cost in holding a share of a LCIC via the European MiFID Template (EMT).
In other words, the campaign group’s arguments concerning what constitutes an “ongoing cost” – per the MiFID regs – have been heard. Specifically, we have recognition that while there are recurring operating expenses that are deducted from the Net Asset Value (NAV) of LCICs, these are not analogous to ongoing costs of other retail investments, which are deducted from the value of the investment. In the case of LCICs, the value of the investment is not the NAV, but the share price.
Our campaign group is highly supportive of additional disclosure and that is why we are keen to work with both the Treasury and the FCA, as well as distributors, to offer point-of-sale disclosure of LCIC operating expenses in a useful format that compliments existing disclosures in reports and accounts (required in the Listing Rules).
Consumer Duty enshrines some valuable principles, and we must ensure that all four outcomes of these regulations are strived for – in particular consumer understanding and consumer support. Our Statement of Operating Expenses (SOE) will take all the information found in the reports and accounts (sometimes buried in footnotes!) and disclose it clearly. It will list all operating expenses, segmented into templated sections, that are deducted from the NAV – a list of expenses not dissimilar to those recommended by the AIC in calculating what is currently known as “ongoing costs”. A small group of us have been diligently working in the background to bring this document to fruition. It should be made clear that these expenses, which can be disclosed in both pounds & pence and as a percentage of NAV, are deducted from the NAV not the share price. They are operating expenses, not ongoing costs. Specificity of language is utterly vital here. The SOE will aid comparison within LCIC sectors, and with open-ended funds where appropriate, in addition to relevant information, such as the share price and NAV per share.
Thursday’s news is a wonderful fillip to this enormously important sector. The investment trust is a tried and tested wrapper for illiquid assets with a 156-year history. It is the great investment democratiser: allowing investors access to assets that otherwise would only be available to fabulously wealthy people via private funds and limited partnerships. Even more than that, the investment trust channels investor capital into productive assets vital to the health of the UK economy, society and climate. It has been responsible for the build out of huge parts of the UK’s infrastructure. This is truly win-win. The FCA’s generous forbearance removes a key source of market failure, and we now have the breathing room to create the bespoke legislative and regulatory framework the sector deserves.
Finally, we can say with a high degree of certainty that the future is bright for this amazing sector, full of brilliant people. We look forward to participating in the FCA’s consultation on the rules for the new CCI regime and are grateful to both HMT and the FCA for their intervention today.
Ben Conway – Head of Fund Management
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