Investment trust cost disclosure requirements: urgent steps needed to resolve problems caused by FCA’s rule misinterpretation

Concerns about how the Financial Conduct Authority (FCA) has applied the cost disclosure regime to investment trusts have been highlighted by the House of Lords Financial Services Regulation Committee.

In a letter to the FCA’s chief executive, published today, the committee is critical of the UK’s application of retained EU Regulations which requires investment trusts to report costs in the same format as unlisted open-ended funds. This fails to recognise the role of listed company shares as the value of the financial instrument invested in, and indeed the mechanism creating investment permanence.

This has created a falsely elevated number for aggregated ongoing cost forecasts of funds which are held by investment trusts, giving misleading information to investors and indicating that costs/expenses are to be deducted annually from shareholdings.

The negative impact the FCA’s interpretation of EU-retained MiFID (Markets in Financial Instruments Directive) and PRIIPs (Packaged Retail Investment and Insurance-based Products) has had includes:

• a significant decrease in money invested in investment trusts – the industry states that they are missing out on £7 billion a year that could be directly allocated to sectors of the UK’s real economy;
• a material loss of permanent investment into the capital market via equity trusts; and
• the acquisition of UK real assets by foreign investors at significantly reduced prices.

Baroness Bowles of Berkhamsted, member of the House of Lords Financial Services Regulation Committee, said:

“Since the first one was founded in 1868, investment trusts have become a British success story. They have given institutions and individuals an opportunity to invest in infrastructure, growth companies and renewable energy.

“This success is under threat by the FCA’s interpretation of EU-retained MiFID and PRIIPs, which is not shared by any other country, and has created an unlevel playing field on an international level.

“Urgent steps are necessary to resolve the problems that have been created. The FCA’s forbearance statement, which was issued in November 2023, helped, but does not go far enough.

“A potential solution could lie in requiring Authorised Corporate Directors to enter zero into the appropriate column that is for ongoing fund charges, aligning with the practices of EU funds, rather than inputting figures that result in misleading disclosures.

"It is ludicrous that directors and companies are being forced to make misleading statements to investors."