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Encouraging signs on cost presentation problem

If you read my QD view from 27 October, you’ll be aware of the efforts that are going on to improve the way that costs are disclosed and stem the tide of money leaving the investment companies sector, helping to address its current discount problem.

Encouragingly, politicians seem to be grasping the nettle here. On 22 November, the Lords will debate a private members bill on the topic and yesterday the Chancellor alluded to the problem in the Commons, raising hopes that the government will take action and soon.

What I didn’t include in that QD view was the other reason for urgency on this – the pressure that categorising investment companies as Alternative Investment Funds puts on the capital that brokers can commit to our sector and the effect that this has on bid/ask spreads.

Most of the brokers are owned by banks and these are subject to international rules – Basel rules – that govern the amount of capital that they are required to hold. These brokers are required to hold 8% of the value of their equity positions as capital, but for investment companies the figure is 32%. In other words, if a broker holds 100 individual equities, its capital requirement is four times lower than if it has exposure to the same equities through an investment company structure. From 2025, with Basel 3.1, that capital requirement seems likely to be 70%. The brokers that we have talked to say that the problem arises because investment companies are classified as Alternative Investment Funds under the AIFMD legislation brought in while we were part of the EU back in 2013.

Baroness Altmann has a bill scheduled to be introduced into the House of Lords on 22 November entitled the “Alternative Investment Fund Designation Bill”. It would remove investment companies from the Alternative Investment Fund Managers Directive (AIFMD) regulation.

You can listen to her initial question here.

In The House of Commons yesterday (14 November), MP John Baron asked “I refer Members to my entry in the Register of Member’s Financial Interests. The Chancellor has acknowledged that investment trusts, which make up one third of all FTSE 250 companies, are being plagued by misguided cost disclosure legislation, which is making them appear unduly expensive. That is restricting investment and does not happen in any other country. In addition to the positive dialogue between us and with the Financial Conduct Authority, will he consider supporting the First Reading of Baroness Altman’s private Member’s Bill in the other place next week, which helps to address this issue? Will he also address it in his autumn statement?”

The Chancellor, Jeremy Hunt’s reply: “I welcome my hon. Friend’s expertise in this area, which is of great benefit to the House and to me as I consider fiscal measures. As we are so close to the autumn statement, I would say that the way that we treat costs in our investment and pension funds industries is not optimal, and we need to reform it.”

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