The celebrations over cost disclosure for investment trusts may have been premature.
The major investment platforms have thrown a spanner in the works, refusing to change their processes on investment trusts and continuing to require that ongoing charges are declared in full, in line with the Priips and Mifid regulations.
The long-running campaign from, among others, William MacLeod, managing director at Gravis, wealth manager Ben Conway of Hawksmoor and multi-asset manager James de Bunsen of Janus Henderson, plus the AIC and Baronesses Bowles and Altmann, has managed to persuade the FCA, European supervisory authorities, UK lawmakers and lobbying organisations that the rules are flawed. But the platforms are holding out.
Over the past few weeks, the Treasury has laid out plans to replace the EU-inherited Packaged Retail and Insurance-based Investment Products (Priips) regulation with a new framework, the Consumer Composite Investments (CCI) regime due in the first half of 2025.
In the meantime, the UK regulators have allowed ‘forbearance’ for investment trusts in the disclosure of charges under the Priips and MiFID regulations, allowing them to avoid a situation where they were forced to double-count their costs – once as an ongoing charge figure, and another through its impact on the NAV.
The platforms have dug their heels in and many say they will continue to require the ongoing charge figures to be disclosed in the KID document as a minimum requirement.
Bestinvest has said it will continue to disclose an ongoing charge figure for all investment trusts on its platform. It says it is waiting until the UK retail disclosure framework under the Consumer Composite Investment (CCI) regime is published.
Hargreaves Lansdown will continue to require the European Mifid template “to be completed as a minimum standard”. It says: “We are working closely with the trusts on our platform, the regulator and trade bodies to find a solution that fulfils all our regulatory requirements including Consumer Duty in a way that is transparent and fair to clients”
AJ Bell says it is aware of the FCA forbearance statement and has been monitoring any updates closely, “as well as engaging with industry trade bodies and product manufacturers in order to reach an appropriate solution that is in the best interests of customers.”
It adds that it is reviewing the new rules, though says “it is important that customers have access to accurate costs/charges information.” Fidelity International has said it is actively engaging with investment trusts to find a way forward.
The risk is that investment trusts that take advantage of the FCA forbearance rules are ‘deplatformed’. This is not a theoretical risk – in late September, Fidelity International barred four investment trusts from taking new investors on its platform: Shires Income, Majedie Investments (although this has since been ‘unbarred’ as of last week), Downing Strategic Micro-Cap and JPMorgan Emerging Europe, Middle East & Africa Securities. AVI Global, MIGO Opportunities and Patria Private Equity were already barred.
AJ Bell has taken similar action for Bluefield Solar Income and Chrysalis Investments – though has since reinstated Chrysalis – while Hargreaves Lansdown has put restrictions in place for trusts such as Digital 9 Infrastructure and Cordiant Digital, with investors needing to fill in a questionnaire showing they understand complex investments.
Baroness Bowles says: “Some platforms are putting hurdles in before an investor can buy investment trusts, as if you’re a professional investor. We find that even as professionals, we don’t always get the answers ‘right’.
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“There are difficulties around platforms deciding to deplatform certain investment trusts. What shares are they deplatforming? Are they going to deplatform something from the FTSE 100 because they don’t think it deserves to be there? Those are the sorts of the decisions they are now making.
“If an investment is listed on a public market – do they have a right to say they are denying access to something traded on a public market? It’s an odd sort of Consumer Duty. In the case of investment trusts, the message appears to be that if it doesn’t continue to put in false and misleading numbers, they will be deplatformed.”
Bowles’s comments show the frustration surrounding this issue, not least because the campaign group has come up with an alternative ‘Statement of Operating Expenses’, designed to meet the need for adequate disclosure. Abrdn has pioneered this approach and Murray international already has a working document in place.
Conway says that the Statement of Operating Expenses is their idea to help manufacturers and distributors meet their Consumer Duty obligations.
“The SOE also elevates consumer understanding by showing how expenses interact with the NAV, as well as breaking them down into component parts, showing pounds and percentages, and year on year changes.” He believes the new document, “would also elevate disclosure for investment companies to a higher level than any other investment product or security on earth.”
The platforms are reluctant to adopt the new SOE document, criticising it as too complex for retail investors. This is in spite of the widespread criticisms on KID documents as impenetrable and misleading.
Part of the problem is that the underlying issue is complex, so any transparency inevitably reveals complexity, but the alternative is inaccuracy. Conway adds: “Giving a consumer a single number is not transparency. It also does not aid consumer understanding.” MacLeod says that the document is “considerably more informative and relevant for the investor and it is utterly transparent.”
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It is tempting to say that the impact could be minimal. Retail investors that buy investment trusts are usually sophisticated investors who understand these nuances. The biggest impact from cost disclosure has been felt by discretionary fund managers who use investment trusts, who have had to declare higher costs to their clients as a result.
The platform problem should not affect them. Equally, MPS providers rarely use investment trusts – largely because of liquidity considerations – so neither does the platform problem affect them to any great extent.
However, it has been a persistent regulatory anomaly ever since the AIFMD first classified investment trusts as complex investments alongside hedge funds and private equity. Investment trusts have been in a regulatory grey area that sees them needing to conform to reporting rules as if they were open-ended funds, but also treated as complex investments.
Baroness Altmann says the platforms’ current position knocks investment companies out of the opportunity set for some investors. “They are hiding behind established practice. Some people have been led to believe that you can’t trust investment trusts to tell the truth about costs, yet investment trusts have always had to comply with the listing rules.”
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The situation perhaps reveals larger problem, whereby players in the investment management industry are nervous of regulatory intervention, so give retail investors the worst possible scenario, even if it is inaccurate and – as is the case here – even if regulators have agreed an alternative path.
