8th December 2023
As regular readers will know, Hawksmoor, along with a few other hardy fund managers and brokers, have been leading the campaign to change the current legislative and regulatory framework for listed closed-ended investment companies (ICs) to ensure fairer treatment and an end to the current market failure.
Last week was highly significant for our campaign. First, the FCA issued some interim measures (see here) that allowed both investment companies themselves, and the funds that hold them, to disaggregate their total cost figures into component parts. This enables fund managers to state what part of their Ongoing Charge Figures (OCFs) are made up of IC costs.
In addition, the Investment Association (IA) amended guidance (document available to members), reverting to the previous position of excluding investment trusts from UCITS KIID disclosures.
In substance, this has not improved the situation at all. The FCA still requires the reporting of the same total cost figure and the IA’s guidance only impacts the KIID document (which very few people read) and not the all-important OCF figure reported to the European MIFID Template (EMT) that is the source document for data providers and platforms. In both cases, neither the FCA nor the IA can do anything about current disclosure requirements under retained EU legislation via PRIIPs and MIFID.
A combination of these regulations still requires investment company costs to be reported in a way that suggests they are ongoing costs that are product costs – i.e. impacting the value of an investment (in the same way open-ended fund equivalent figures are) and aggregated up into the total cost figures of funds or portfolios that hold them. This is misleading and unfair.
Now on to the good news. The FCA acknowledged that PRIIPs is being revoked in the UK as part of a wider set of reforms and legislative changes on cost disclosures. It also stated the following (emphasis added) in relation to listed closed-ended funds:
“These are pooled investments but are also bodies corporate and so have some features of companies as well as of funds. 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.”
This a is huge step forward as we have always argued that the legislative and regulatory framework should be far more bespoke when it comes to ICs – they are neither listed commercial companies nor funds and should not be regulated as either. This is why we have called for DISCLOSURE of IC ongoing costs (calculated per Association of Investment Company (AIC) guidance) but recognition that aggregation of this number into cost disclosures amounts to DOUBLE-COUNTING due to the share price having discounted these costs. These are not product costs in the same way ongoing costs of open-ended funds are. For product cost disclosure purposes, the two instruments should not be treated the same.
In addition, the IA’s latest position effectively means we have two OCFs for UCITS funds: that reported on the KIID which excludes IC costs and that reported in MIFID disclosures (i.e. everywhere else) that includes them. This is clearly untenable and it will be obvious to regulators and lawmakers that this can’t persist.
All of which points to the fact that legislative change is on the way that will enable fairer regulatory treatment of this wonderful sector. The key is what form that legislative change takes. We support Baroness Ros Altmann’s Private Members Bill and we urge our readers to do the same. In fact, we’d like HM Treasury to adopt the measures outlined in the Bill and implement them via a third Statutory Instrument alongside the two already slated. This would be a far quicker way to affect the change outlined in the Bill.
As a reminder, the measures in the Bill seek to address the legislative framework to enable an appropriate regulatory framework for ICs from first principles:
- Remove ICs from AIFMD (Alternative Investment Fund Managers Directive)
- Ensure correct treatment of IC costs under MIFID
It is only via removal of ICs from AIFMD that we can have a framework that recognises that ICs have characteristics of both listed commercial companies and funds. As listed companies they are subject to UK Listing Rules (themselves under the auspices of the FCA) and Company Law and have an independent Board. This renders much of the role of the AIFM (which costs c. £50-100k/year and much more in some cases) redundant. In addition, it ensures market-makers do not have to hold back a penal amount of capital to make markets in ICs given AIFMD results in a classification (as a fund) that forces them to do so – damaging market liquidity. Additionally, removal from AIFMD, in combination with correct treatment under MIFID, ensures that IC ongoing costs are not treated as product costs – these should not be treated in the same way ongoing costs for funds are due to the fact that the share price of an IC already discounts them. Finally, this combination of measures enables the recognition that ICs are neither funds nor listed commercial companies but are in their own unique category. Thus the regulatory framework can be appropriate from first principles rather than applying regulations intended either for funds or listed commercial companies.
The campaign has made huge strides forward to get to this point. We have widespread recognition that the current disclosure regime is wrong and has harmed the listed closed-ended funds sector. HM Treasury is consulting on proposed legislative changes, ending January 10th 2024. This is our chance to let HMT know what a fair legislative and regulatory framework looks like. It is literally a once in a generation opportunity and we urge you all to participate. If you’d like to know how and agree with our position on this, please do get in touch and email [email protected].
Ben Conway – Head of Fund Management
For professional advisers only. This article is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC1354.
