The investment trust sector is in celebratory mood after the Labour government and the FCA (Financial Conduct Authority) announced (19 September) they will exempt London-listed investment trusts from the EU’s PRIIPs (Packaged Retail and Insurance-based Investment Products regulation) and Mifid directives that forced them to double-count their costs.

Onerous and misleading disclosure requirements have had a material impact on the investment trust sector, particularly within alternative asset classes such as private equity where discounts have widened materially, leading some investors to question their involvement in the sector altogether.

However, until the UK’s new framework for CCIs (Consumer Composite Investments) comes into force, the FCA will not action against trusts that don’t comply with PRIIPs (regulation) and there is no requirement for them to publish a KID document.

It is hoped the new measures, which follow consistent lobbying by the Association of Investment Companies (AIC), will put investment trusts back on the radar of disillusioned investors and bring in the wide discounts that have blighted the sector, which will benefit existing investment trust shareholders.

The Treasury said the new fees disclosure regime will help investors to better understand the fees they are paying for investment trusts, as well as any additional costs that are being added by wealth managers and IFAs.

Richard Stone, chief executive of the AIC, said: ‘This leap forward on cost disclosure is great news for investment companies and their investors. The temporary suspension of the rules paves the way for a permanent solution to this long-standing and damaging problem.’

Stone continued: ‘Ending misleading cost disclosures will enable us to continue delivering for investors and make a critical contribution to the economy as the government drives forward its ambitions for growth, investment and wealth creation.’

Ryan Hughes, interim AJ Bell Investments managing director, said news that the government and FCA have moved to allow investment trusts to temporarily ignore the current cost disclosure requirements will be ‘warmly welcomed’ by the investment trust industry and broader market participants alike.

‘Investment trusts play a hugely important role both in the financial services sector and the wider economy as a provider of capital and the unintended consequences of the current legislation created an unequal playing field that put investment trusts at a disadvantage and threatened, in some cases, their very existence,’ explained Hughes.

‘The removal of this unnecessary barrier will help the investment trusts sector regain its footing and allow them to compete equally against other investment structures, which will put them back on the radar for investors who have been reluctant to use them given the cost disclosure requirements.’

THE PROBLEM IN A NUTSHELL

Share prices already reflect the value of an investment trust based on a high level of cost disclosure (including on fees paid to their managers) but institutions and advisors who invested in investment trusts were being forced to report the costs again in their own disclosures to clients. 

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Tom Sieber) own shares in AJ Bell.

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