The FCA’s interpretation of some Mifid rules means it is "failing" to achieve one of its core objectives and "decimating" the investment trust sector according to one of the legislators who helped create the rules.
Baroness Sharon Bowles chaired the European Parliament’s committee on economic and monetary affairs between 2009 and 2014 and now sits in the House of Lords.
Speaking to FTAdviser, Bowles said rules around how investment trust fees are presented mean investors are turning away from sectors such as renewable energy.
One part of the FCA's remit is to facilitate the move of the UK economy towards net zero, she said, "and right now I think they get a zero out of 10 for that".
Furthermore, Bowles said the rules risk "decimating" the investment trust sector.
The rules in question treat investment trusts as collective investment vehicles, rather than as equities. Therefore, the total costs incurred by a trust must be shared with a client, and this means fund of fund investors and model portfolios are less able to invest in the asset class.
In practice this can mean that the audit fee paid by an investment trust must be reported as part of the ongoing charges of owning the trust, while listed companies do not have to report these costs as part of the ownership.
Bowles compared the treatment of property investment trusts with other property companies. She said if conventional property companies had to report certain costs in the way property investment trusts do, then they would look more expensive to own.
Her view is that areas such as renewable energy are better owned by investors via listed investment trusts, as the asset class is inherently illiquid, but ownership through an investment trust provides liquidity.
Bowles said the financial services and markets bill - which was given Royal Assent yesterday to become law - was "meaningless if the FCA continues to sit on obvious and unnecessary regulatory damage to the real economy through decimation of the listed closed end investment funds regime – also known as investment trusts".
Status quo
Under the current guidance, pensions and other fund of fund structures would have to show the enhanced costs relative to owning other investments.
In common with many market participants, Bowles believes clients of these funds may see what appear to be higher costs.
This means they may prefer their investment manager not to use them, while the investment manager may feel that, in an era where cost pressures are intense, they wish to now own investment instruments which are charging a lower fee.
Bowles said: “It matters because those corporate costs, being in effect almost duplicated and put under the headline of 'ongoing charges', suddenly elevated the ongoing charges of the fund investing into the investment trust.
"This is sometimes at levels where they hit cost ceilings put in place by various pension funds and other collective investment funds, or simply made fund managers cringe when the headline of accumulated charges suddenly looked more expensive and people started to think that they were doing something wrong.
"Hence, there became a disincentive to invest in investment trusts to avoid unexpected changes, questions about them or hitting cost ceilings."
FTAdviser has previously reported that under the Priips rules, the requirement for investment trusts to include transaction costs in their disclosure could make them look relatively more expensive than open-ended equivalents.
Bowles told FTAdviser that local authority pension schemes in particular may want to invest in renewable energy or other social impact investments, but that elected councillors, mindful of the political imperative, may raise the issue of fees and ask why lower cost options are not chosen instead.
She said this could lead to "billions" exiting the sector.
Next steps?
William MacLeod, managing director at Gravis Capital, an investment management firm, said: “It is very encouraging to know that the perplexing issue of cost disclosure has been raised in the House of Lords and I’m sure all investors in the sector are exceptionally grateful to Baroness Bowles for bringing repeated attention to this confusing situation.
"The unintended consequence of the guidance, which took effect 12 months ago on June 30, 2022, was to slam the brakes on our national efforts to participate in Britain’s drive to grow our nation’s renewable energy infrastructure sector. It has caused confusion and delay for investors who perceive that charges have risen, where they haven’t and that the investment sector had been hiding something, which it hadn’t. It has been terribly confusing, and nothing has been gained.”
Richard Stone, chief executive of the Association of Investment Companies, said that it is a key issue.
"Investment trusts are a proven way for investors to access productive assets," he explained. "As we have submitted in response to the FCA’s consultation on retail disclosure, cost disclosure needs to be reformed.
"Transparency is important and should enable better investment decisions. Cost disclosures must not be a barrier, create an unlevel playing field or drive market distortions.
"For example, the existence of a disclosed cost should not act as a disincentive to investing in an infrastructure investment trust as opposed to an operating company, such as a utility, with different risks but no associated disclosed cost. Better cost disclosure enabling a vibrant investment trust sector and greater focus on value, not least cost, is to the benefit of investors and the wider economy."
The Financial Conduct Authority has been approached for comment.
david.thorpe@ft.com
