17th March 2025
Shakespeare fans will know what the title references this week. Perhaps I am guilty of some hyperbole in comparing our Cost Disclosure Campaign Group to the tired and outnumbered English battling the French at Agincourt. Nonetheless, the purpose of this week’s blog is to issue a hopefully similarly rousing cry to arms to that Shakespeare wrote for Henry V…. as well as a similar result!
The campaign for the correct treatment and disclosure of investment company costs is now stretching into its fourth year. The latest chapter in the campaign, and arguably our Agincourt, is the FCA consultation on the new CCI regime (which replaces PRIIPs) that closes on Thursday 20th March (next week as I write this). We must beg your attention in the same way we did just over a year ago with the now infamous HM Treasury consultation, with our joint submission garnering 330 signatories. We have achieved much, but we have yet to enshrine our aims in all parts of law and regulation. Another joint submission is our chance to finally obtain the correct treatment of investment companies in legislation and regulation.
In brief, here is the current state of play, with some history. Prior to the adoption of various strands of EU legislation (AIFMD (2013), PRIIPs and MIFID (2018)), listed closed ended investment companies (LCIC – aka ‘investment trusts’) expenses were treated correctly. LCICs are listed corporate entities that share characteristics with both commercial companies and ‘funds’. Like funds, they have portfolios with NAVs (net asset values). Like listed commercial companies, they have expenses and a share price. All expenses are deducted from the NAV, with no deductions from the share price. These expenses are made up of many things, including a fee (commonly known as the annual management charge (AMC)) paid to the investment adviser – the entity employed by the Board to manage the portfolio. Those fees resemble the ‘ongoing costs’ of open-ended funds – including the largest part – the AMC. With open-ended funds, these ‘ongoing costs’ are deducted from the value of the investment. With LCICs, they are not. As with all listed capital market instruments, the market acts as a discounting mechanism of cash flows. What is known as ‘ongoing costs’ for open-ended funds are really recurring operating expenses for LCICs, and the share price ‘discounts’ these expenses given they are known in advance. They are one factor explaining a deviation between the share price of a LCIC and its NAV.
Prior to 2018, such expenses were not treated as ‘ongoing costs’ and investors did not have to add them to total portfolio ongoing costs (as they rightly would with investee open-ended funds). But the advent of PRIIPs and MIFID forced LCICs to be seen as a “PRIIPs” (a packaged retail investment product). Being classified as a “product” as opposed to a capital market instrument or listed corporate entity erroneously forced LCIC’s expenses to be disclosed as ongoing costs. In doing so, they became almost impossible for wealth managers and multi-asset fund managers to invest in (at least in any great proportions of their portfolios) as it artificially inflated the total published ongoing costs of those portfolios. In a highly competitive landscape, it became commercially unviable to offer portfolios with such high apparent “costs”. It soon started to become a fiduciary duty, as well as a commercial imperative, to disinvest from LCICs, as demand for LCICs continued to wane, pressuring share prices downward and impairing investment returns. Well intended Consumer Duty regulations, incepted in 2023, accelerated this process – with their emphasis on the demonstration of ‘fair value’ and the resulting bias away from investments that inflated overall costs (especially when they aren’t “costs” at all!).
This matters. LCICs not only democratise access to the types of asset classes otherwise only available to the very wealthiest investors via private funds, but they are a conduit of capital from savers / investors to productive areas of the economy. They are a vital part of a healthy free market capitalist democracy and without them society is worse off. No new capital can be raised while discounts prevail.
Ironically, LCICs should be enjoying their moment in the sun. The Mansion House Compact rightfully emphasised the importance of capital flowing to productive areas of the UK economy (social and economic infrastructure, smaller public and private companies). Given the constraints placed on Government in the form of a high debt load and persistent deficits, instruments like LCICs are even more important to achieving higher rates of economic growth.
Aside from these arguments, any regulatory framework should be treating capital market instruments and investable products correctly. Instead, the CCI regulations are trying to falsely conflate LCIC expenses with open-ended fund ongoing costs, which has resulted in market failure and investors being misled.
Last January, the campaign group responded to HMT’s consultation and unsuccessfully failed to persuade HMT to legislate to exclude LCICs from the CCI. Repeated engagement since then has revealed a potential misunderstanding of how LCICs operate and we successfully achieved FCA forbearance and then legislation from HMT via the PRIIPs Statutory Instrument in autumn 2024 exempting LCIC expenses being treated as deductions from value. Nonetheless, HMT has still insisted LCICs be part of the CCI regime under the auspices of the FCA, and the latest consultation risks undoing all the good work.
Note our Campaign is really about correct treatment and the way expenses are disclosed. It is not, as many wrongly perceive, about not disclosing costs, or misleading investors about the true cost of their investment to try to nefariously line the pockets of City fat cats. Quite the opposite. We want to end a market failure, to stop misleading investors and to restore health to a vital part of our capital markets.
The Campaign Group’s response to this latest consultation goes into all the detail required to obtain the correct treatment for LCICs in both law and regulation. It is long and very detailed (70 pages, c. 20,000 words and has taken weeks to write). In the interests of expediency, we have created a shorter form to represent an industry joint submission, and we urge you to consider signing this response to the consultation (as well as potentially submitting a response of your own). In addition, or if you feel unable to sign a joint response to a consultation, given the FCA’s understandable hunger for evidence of the impact of the wrongful treatment of LCICs, we urge you to submit an Impact Statement (which can be anonymous or not) detailing how you or your business has been harmed. We will be collating these statements and adding them to the evidence section of the appendix to the joint submission.
The joint industry submission can be found here.
If you’d like to read the much longer version, please let me (Ben Conway) know.
If you’d like to sign the submission, please let me (Ben Conway) know how you’d like your name to appear, and whether you are signing in your personal capacity or in your professional capacity, or both. Please be conscientious on how you want your firm’s name to appear.
Many thanks in advance.
Ben Conway – Head of Fund Management
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