The FCA has published its new consumer composite investment (CCI) rules, which are designed to govern how CCIs interact with investors. Effectively, this is the resolution that we have long been waiting for on cost disclosures.

Many in the investment companies sector had lobbied for closed-end investment funds to be outside the scope of this regulation, arguing that all listed companies are subject to a number of disclosure requirements under the listing rules and companies acts. That argument was turned down. Part of the reasoning for that was that “annual reports and accounts are too complex for retail consumers to navigate and understand to get the basic information required to make an investment decision”. Quite frankly, that is more an acknowledgement that annual reports aren’t fit for purpose than a reason to burden this industry with more regulation, but here we are.

There was a debate about whether the fund manager or the board should be responsible for compliance with the new regulation. Basically, the FCA has said that it should usually be the manager but it is up to the individual investment company to decide.

There was a lot of feedback to the FCA along the lines of ongoing charges having no direct impact on investment companies’ share prices. This seems to have encouraged a stance from the FCA that we need more freedom in the way that we report charges. However, it will still be a requirement to report ongoing costs to investors.

Transaction costs are excluded from ongoing cost figures, which we agree with. However, the FCA is still asking for these to be disclosed as a separate figure. The impact of bid-ask spreads on the cost of dealing can be ignored for this purpose.

Gearing (borrowing) costs do not have to be disclosed in the ongoing cost figure, neither do maintenance costs for real assets. We agree with this but we still feel strongly that investors should be able to find out what these are.

When it comes to funds of funds, the FCA cannot let go of the idea that the ongoing costs of the underlying funds need to be disclosed to investors. If you remember, we argued that this does not make sense given that no attempt is made to disclose the running costs of trading companies to investors. The example that we have often used is why should it look like the running costs of a fund investing in renewable energy are higher if it buys Greencoat UK Wind (UKW) than if it buys SSE. The concession that the FCA has made is that the underlying costs do not need to be bundled into a single figure for ongoing costs. Part of the reason for this concession may have been a reluctance by the FCA to force passive, index-tracking funds to disclose the running costs of their underlying investments.

The changes must be adopted by June 2027 but can be adopted straightaway.

There still appears to be a requirement to aggregate costs together for some purposes under MiFID rules. There is also still a requirement to assign risk ratings to CCIs based on their historic volatility, which we think is misleading. VCTs will automatically get scored 9/10.

The big question

We have been writing about this since October 2023. This is an issue that has done considerable damage to the UK investment companies industry and it is ridiculous that it has taken this long to get to this point. 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?