The Association of Investment Companies (AIC) and cost disclosure campaigners have welcomed the City regulator’s confirmation that UK-listed closed-end funds will have the flexibility to present their expenses clearly and fairly under new “consumer composite investments” (CCI) rules coming in 18 months’ time.
Responding to the huge level of feedback from 115 investment companies and directors as well as the petition of 467 signatories to the cost disclosure campaign group, the Financial Conduct Authority (FCA) said while an annual ongoing costs figure (OCF) would have to be presented as the main “headline”, it would not include transaction costs, performance fees and one-off costs, although these would have to be shown separately.
Unlike previously, there would be no fixed template for the requirement for funds to provide investors with a brief summary and a risk and return score with its own explanation.
Gearing, or borrowing, and the cost of investing in real assets will also be excluded from investment companies’ OCFs to aid the comparison between closed-end funds, open-ended investment companies and exchange-traded funds (ETFs).
Crucially, funds investing in investment companies would not have to aggregate their underlying costs in their funds’ OCF. This removes a deterrent for “funds of funds” to buy closed-ended funds, although these costs will have to be clearly communicated.
In another regulatory twist, investment company broker Winterflood said the costs of holding open-ended “UCITS” funds and closed-end long-term asset funds (LTAFs) would have to be included in a fund of funds’ OCF.
Lastly, the FCA said it would review the requirements under existing “MIFID” regulations for the aggregation of all costs and charges in post-sale disclosures.
AIC chief executive Richard Stone said: “This is a victory for common sense. The FCA has recognised the unique characteristics of investment companies. It’s excellent news for investment companies, their shareholders and consumers.
“We particularly welcome the FCA’s decision not to require other funds to pull through the costs of investment companies when investing in them. This removes a cloud that’s been hanging over the industry and returns the market to a pre-2021 ongoing charge figure that everyone used and understood.”
Stone said it was particularly helpful for fund of funds managers whose products were made to look artificially expensive under the EU’s packed retail “PRIIPs” rules.
Ben Conway of Hawksmoor Investment Management, who helped organise the petition, said it was “great news” but added “there are some points we need to clarify” around the MIFID rules.
James Carthew, head of investment company research at QuotedData, said: “The big question now is how quickly that damage can be repaired and is it too late to encourage many wealth managers and fund of fund investors back to the sector?” You can read all his comment here.
Winterflood’s Emma Bird agreed: “We expect this to remove a barrier to investment for fund-of-funds investors, although we await the review of MIFID cost disclosure which still require wealthmanagers to aggregate investment trust charges.
“This is a positive step, but it remains to be seen whether this will drive a significant increase in demand for investment trusts or have a notable impact on discounts,” currently averaging at around 13% according to the broker’s data.
“We think these long-fought-for changes are helpful in removing an impediment for some investors to participate in the sector,” said Stifel analyst Iain Scouller. “However, it is one factor in a whole range of structural and performance issues that market participants will take into account when deciding whether to choose investment companies.”
The announcement came as the FCA made a string of announcements designed to boost UK investment culture. Among other changes are setting a clearer boundary between retail and professional investors alongside a discussion about how to broaden the range of investments on offer to retail investors.
