The House of Lords has lambasted the Financial Conduct Authority (FCA) for misinterpreting European Union regulations on cost disclosure requirements for investment trusts.
Misleading costs are discouraging investors from putting as much as £7bn a year into investment trusts – money that some of the more domestically-focussed trusts could channel into the UK economy.
This has resulted in a material loss of permanent investment into the capital markets via equity trusts and the acquisition of UK real assets by foreign investors at significantly reduced prices, the House of Lords financial services regulation committee wrote in a letter to FCA chief executive Nikhil Rathi, published today.
The letter criticised the FCA’s interpretation of MiFID (Markets in Financial Instruments Directive) and PRIIPs (Packaged Retail Investment and Insurance-based Products). These regulations are compelling investment trusts to report their costs in the same format as open-ended funds.
For investors in open-ended funds, managers’ fees eat into the returns they receive. That is not the case for listed investment companies, where costs do not detract from the share price gain or loss that investors experience. Disclosing costs for trusts in the same way as funds risks confusing investors and makes trusts appear more expensive than they actually are.
“This has created a falsely elevated number for aggregated ongoing cost forecasts,” the committee’s letter stated, “giving misleading information to investors and indicating that costs/expenses are to be deducted annually from shareholdings.”
Baroness Bowles of Berkhamsted, a member of the House of Lords financial services regulation committee, said investment trusts “have given institutions and individuals an opportunity to invest in infrastructure, growth companies and renewable energy” an are “a British success story”.
“This success is under threat by the FCA’s interpretation of EU-retained MiFID and PRIIPs, which is not shared by any other country, and has created an unlevel playing field on an international level. Urgent steps are necessary to resolve the problems that have been created.”
The FCA’s forbearance statement, issued on 30 November 2023, granted investment companies some reprieve by enabling them to provide a factual breakdown of the component parts of their costs, with additional context. This “helped, but does not go far enough”, Bowles said.
Part of the problem involves a central EU database in which costs are recorded. “A potential solution could lie in requiring Authorised Corporate Directors to enter zero into the appropriate column that is for ongoing fund charges, aligning with the practices of EU funds, rather than inputting figures that result in misleading disclosures,” she suggested.
“It is ludicrous that directors and companies are being forced to make misleading statements to investors.”