InvestmentsJun 15 2015

Trusts hit back as EU rules threaten to throttle industry

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Trusts hit back as EU rules threaten to throttle industry

Investment trust managers have joined forces to battle a regulatory attack they fear could damage the perception of trusts and compromise their liquidity levels.

Under plans proposed by European regulators all trusts could fall under a new ‘complex instruments’ regime. This has led 13 houses, including Aberdeen Asset Management, Baillie Gifford, Henderson Global Investors and JPMorgan Asset Management, to club together to raise concerns over the forthcoming legislation.

They are focusing their attentions on the FCA. The UK regulator may not be able to get trusts exempt from the plans but it could provide leniency in the way the new rules are interpreted in the UK.

In a joint response to a consultation by the FCA, the firms said trusts should not be automatically labelled ‘complex’ because this could lead to poor investor outcomes.

Under the new regime set to come into force on January 3, 2017, any instrument labelled ‘complex’ would have to be sold on an advised basis or investors would have to pass an appropriateness test before purchasing.

It forms part of the European Markets in Financial Instruments Directive II (Mifid II) ruling.

A JPMorgan spokesperson said there would be “unintended challenges and consequences” if investment trusts were labelled ‘complex’ across the board.

These would include “a lack of retail investor clarity” and “a potentially adverse impact on investor perception”.

“This could, in turn, potentially limit the liquidity of investment trusts to the detriment of existing retail investors,” the firm said.

Some of the investment trust houses have also submitted individual responses.

James de Sausmarez, head of investment trusts at Henderson, said: “Some investment trusts are complex, but Henderson thinks there should be an appeal system. The likes of the City of London Investment Trust are straightforward instruments.”

Investment trust trade body, the Association of Investment Companies (AIC), also attended the group meeting, but it has submitted its own response to the FCA.

Ian Sayers, the AIC director general, said his body had argued for a simple, one-time-only appropriateness test.

He said: “When an investor opens a trading account or tries to buy an investment trust for the first time they could do it, but then they shouldn’t have to do it again. It’s not like they will lose the knowledge that these are ‘complex instruments’.”

Other instruments that could be labelled ‘complex’ include exchange-traded funds that aren’t Ucits structured, UK real estate investment trusts, and some other open-ended retail schemes.

“The fear is that they are all treated as one. Investment trusts are probably the least complex, so the system should reflect that,” Mr Sayers added.

The FCA will formally consult on the rules within the next few months, with its final policy decision expected at the end of this year.

EXPERTS’ REACTIONS TO A ‘COMPLEX’ ISSUE

Charles Cade

Head of investment company research at Numis Securities

“I think it’s a little bit strange that investment trusts might be considered ‘complex’, but ultimately it will come down to the terms and conditions.

The biggest impact will be if it affects just a few kinds of investment trusts as it’ll be much easier for brokers to just avoid investing in a handful of instruments than the sector as a whole.”

Andrew Alexander

Director at Lakewood Portfolio Management

“It is absolutely ridiculous to label all trusts ‘complex’. Trusts, like open-ended funds, can be complex with regards to the assets invested in, but a UK equity trust is pretty standard and vanilla.

To have such a broad-brush approach smacks of naivety and heavy-handedness.

A lot of it stems from misinformation on trusts.”

Jason Hollands

Managing director at Tilney Bestinvest

“While certain investment companies can have complex investment strategies and the ability to gear in theory is an additional risk over an open-ended investment company, I don’t think it is right to label investment trusts as ‘complex’ in a generalised manner.

This might frustrate the ability to promote investment trusts in the non-advised market where they have been popular in areas such as children’s savings plans.”