Register Log-in Investor Type


QD view – An update on the charges disclosure problem

a man sitting at a desk with his thumb up

Back in October, we highlighted some issues facing the investment companies industry related to the rules around cost disclosures – basically, investors have been presented with misleading figures for charges that include the running costs of any underlying funds. That is putting off new investors, encouraging selling by others, and has led to platforms restricting new investments in some investment companies.

We updated the story on 15 November – saying that there were Encouraging signs on cost presentation problem, while noting an associated issue – the high amount of capital that brokers backed by banks (as most are) are required to hold if they are trading in investment companies relative to trading in other companies.

Remarkably, just a few weeks later, substantial progress has been made on addressing all of this. The thanks for that goes to a small group of brokers, investment managers, investors, and politicians who have been working tirelessly to raise the issues and educate decision makers.

Brokers’ capital problem fixed

I will tackle the latter point first as it is the easiest to get your head around. On 12 December 2023, the Prudential Regulation Authority (PRA – the part of the Bank of England that sets rules for banks, building societies, insurers and the like) said that closed-ended listed collective investment undertakings (in other words, investment companies) should be treated as stand-alone listed equities for the purpose of calculating market risk capital requirements. That’s it, job done, there no longer is a penalty for brokers dealing in investment companies.

Investment companies are basically equities

There was in interesting extra point in there that may be relevant to the cost disclosure issue. The PRA said “the products have similar characteristics to equities – investors make an initial investment, the entity invests those funds, and investors can buy and sell their position via the exchange rather than redeeming from the fund itself.”

FCA has introduced interim measures

On 30 November 2023, the FCA noted that “some firms are concerned that, for a minority of investment products, the required costs and charges disclosure may not result in representative cost information being published”. It introduced some interim measures, allowing investment companies and the funds that invest in them to split their cost figures into their component parts rather than disclosing one aggregated figure. That is a baby step in the right direction but, for the moment, the FCA is constrained by legislation in what it is allowed to do on this front.

Permanent solution must go further

What we want is to see is an end to the practice of aggregating costs altogether. If you are a client of a wealth manager or an IFA, you want to know what their service costs you. Beyond that, you only care about the investment returns that they generate for you. Their choice of funds should be based solely on what they think will offer the best return, not what will look good on a cost disclosure report.

If investment companies were treated like equities rather than funds for costs disclosure purposes, this would not be a problem. Hopefully, that is where we are travelling to.

Altmann Bill has had its first reading

As one step on that road, Baroness Altmann’s bill to remove investment companies from AIFMD had its first reading on 22 November. You can read some of her thoughts on this topic here.

In the meantime, HM Treasury is consulting on the way forward for legislation (submissions have to be in by 15 January).

Real world impacts

This somewhat dry topic is having real word impacts. I went along to the AVI Global AGM on 20 December.

At the meeting, much opprobrium was directed against the Fidelity platform which, seemingly arbitrarily, is restricting new investment in the trust. It will not tell investors or the trust’s board why. However, we can make a reasonable guess that it relates to an historic and misleading charges figure that aggregates the trust’s own ongoing charges with the look-through costs of the investment companies that it holds. It sounded to me as though there is a good chance that Fidelity will lose business as a result.

Leave a Reply

Your email address will not be published. Required fields are marked *

Please review our cookie, privacy & data protection and terms and conditions policies and, if you accept, please select your place of residence and whether you are a private or professional investor.

You live in…

You are a…