Baronesses express 'alarm' about FCA's lack of transparency

Baroness Ros Altmann, former pensions minister, and Baroness Bowles, former MEP, said they have been pushing the regulator and parliament for a 'simple' fix to the problem caused by the FCA's interpretation of European Union rules for investment trusts. 

In the UK, rules around cost disclosure treat investment trusts as collective investment vehicles, rather than as listed equities in their own right.

I am more and more alarmed at the lack of urgency in dealing with this.Baroness Altmann

As previously reported by FT Adviser, this is not the case in Europe, but it is how the FCA has interpreted the rules in the UK, the Baronesses told attendees at a recent Gravis Capital webinar. 

Altmann said: "It is deeply concerning that the regulator is not properly informed about how the market works, even though it is responsible for overseeing it."

Double counting

The interpretation of the rules for ITs means total costs incurred by ITs have to be shared with clients. However it is misleading to do so for ITs, as not all costs incurred by these listed companies end up being passed on to the end investor. 

For example, under the UK interpretation, ITs must include audit fees in their total cost disclosure, but other listed companies do not have to do so.

Under the Priips rules, they are required to include transaction costs, even though the end investor does not bear these costs themselves. 

This is artificially inflating the total expenses for investment trusts, making them look more expensive for pension funds, fund-of-funds and model portfolios, campaigners have claimed. 

The FCA seems to be undermining efforts to change this in government.Baroness Bowles

William MacLeod, managing director of Gravis Advisory, said: "In effect, we are double counting."

Altmann added: "This is in direct contradiction to the consumer duty, which is why we are having these apparently clear, fair and not misleading charge disclosures in the first place, to help people make properly informed decisions.

"But the way the FCA is interpreting the rules is making it not clear, not fair and misleading and I am more and more alarmed at the lack of urgency in dealing with this, even as its impact is becoming more serious."

As reported earlier this year by FT Adviser, more than 500 industry experts, lawyers and parliamentarians signed a letter calling on the Treasury to amend the investment trust rules to improve competitiveness. 

However, nothing has happened, even though there are ongoing consultations on what the future of post-Brexit British financial regulation will look like.

Lack of transparency

Bowles said there was also a sense that the regulator was deliberately not allowing full transparency when it comes to addressing the issue. 

She said: "The FCA seems to be undermining efforts to change this in government, despite their duty to consult. 

"We had meetings with regulators and treasury officials. I tried to organise a big, roundtable meeting with all the relevant industry [bodies] and parliamentarians and the FCA and the Treasury.

Damaging UK listed investment companies is bad for Britain.Altmann

"This was all arranged but then the FCA pulled out and said they would only meet industry and parliamentarians separately.

"I am extremely concerned about the lack of transparency in having these fragmented meetings, where nobody will know who said what, and I do not think this is good for transparency of regulation."

These claims were put to the FCA.

A spokesperson responded: “We have regularly met with parliamentarians and industry representatives to discuss issues relating to retail cost disclosure and we continue to engage closely with them on this issue.

“We recognise the challenges posed by existing cost disclosure requirements and we took action last year to give investment trusts greater flexibility to explain their costs and charges, however further change requires legislation."

Backing Britain

According to the Baronesses, this falsely high total cost figure creates a price barrier that dismantles attempts to improve Britain's market competitiveness.

For example, such an artificially high price barrier makes it harder for trustees or DFMs to justify putting client money into those investment trusts that are doing the very thing the chancellor wants Britain to - namely back British business.

Altmann explained: "Pension funds want to invest more into things like British infrastructure or real assets, and the government wants them to invest more.

"Damaging UK listed investment companies is bad for Britain. These are a way for people to invest in a diversified, managed portfolio of real assets."

We need a fix to cover the current situation.Bowles

According to Altmann, this type of investment is important to the economy, and by depriving these companies of new funding, billions was being lost to the country as investors were heading overseas. 

Bowles added: "We need a legally correct interpretation of the wording in the Mifid rules. 

"This could be done by the FCA if they chose to do it by changing their interpretation, or the government could force a change by an amendment or statutory instruments to make that clarification.

"Certainly we need a fix to cover the current situation and to make sure, in the forthcoming regulation, that this error is not replicated."

Debates 

Attendees asked whether government, not the regulator, should be responsible for changing the interpretation of the legislation.

The Baronesses reminded listeners of how, in June 2023, debates were held on how to improve market competitiveness, as part of the financial services and markets bill.

At the time, Bowles put forward an amendment (115) in to fix the issue.

During the debates, she explained to parliament the problems with original guidance provided by the Investment Association (which had been created at the request of the FCA).

She told peers her amendment "concerned an alarming example of harm to the economy and proposed a solution through a specific legislative amendment.

"It aims to fix a competitiveness and investment issue with listed closed-ended investment funds."

She explained how the original IA guidance set out how ongoing charges should be presented in collective investment schemes that invest in other funds.

That guidance equated ITs with open-ended funds, requiring internal running costs incurred at the investee investment trust level to be aggregated as a cost. The IA amended its stance and wrote an open letter to the FCA, but the interpretation remained in place.

Is there a push to consolidation? Do they want just a few big funds?Altmann

As she said in the debate: "This set aside the fact that, unlike with units of open-ended funds, investors have already factored such charges into the price that they are prepared to pay for the shares of the investment."

Despite proposing a fix and explaining why it was needed, the amendment was not passed.

Ulterior motives

Altmann admitted to attendees at the Gravis Capital webinar that legislative changes "take an inordinate amount of time" in any case, and called for more timely fixes to be considered ahead of any new legislation.

The FCA spokesperson added: “We look forward to the government and Parliament providing us with the powers to enact these reforms.”

But Altmann said while government and regulators prevaricate, the problem persists - and this raised other questions about overall motives for regulating the financial services sector. 

She added: "It is easy to have theories of [ulterior motives] but is there a push to consolidation? Do they want just a few big funds?

"If that is the case, we are doing ourselves a big disservice, for it is smaller specialist experts and investment companies who really know their onions, and who can make a huge difference to clients and the economy itself. 

"I hope this is a function of unintended misunderstandings that can be remedied as soon as possible, rather than an attempt to squash the sector."