The investment sector has welcomed the news that that cost disclosure requirements for investment trusts will be temporarily banned.
The announcement, by the Treasury and the Financial Conduct Authority yesterday (19 September), comes following years of investment companies calling for change.
These rules were inherited by the European Union (EU) and made it appear that investment trusts were more costly to put money into than they were.
This is because the disclosure rule requires trusts to publish the costs of financing, operating and maintaining real assets.
However, many of these costs are already published in regular company updates and reflected in the value of the share price for all investment companies.
This created a “double counting of costs”, which investment trusts have long been saying has put investors off.
Although £15bn of new money went into investment trusts in 2021 alone, it is estimated the double counting rule was seeing £7bn a year in income being lost.
The Treasury said it will lay out legislation to provide the FCA with the appropriate powers to deliver reform – the new Consumer Composite Investments (CCI) regime.
It said the new CCI regime will deliver more tailored and flexible rules to “address concerns across industry with current disclosure requirements, including for costs”.
The UK’s new retail disclosure regime is expected to be in place in the first half of 2025, subject to Parliamentary approval and following a consultation from the FCA.
The FCA intends to consult on proposed rules for the CCI regime this Autumn.
The Association of Investment Companies (AIC) chief executive Richard Stone described it as “great news”.
He said the AIC has lobbied tirelessly on the issue and praised the Labour government for “acting so swiftly”.
Stone added: “Investment companies are a great UK success story and have a vital role in bridging the gap between private assets and public markets.
“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.”
Abrdn head of closed-end funds Christian Pittard said: “We welcome this move by government and the FCA to address unfair and distortive rules that have crippled investment trusts.
“With the FCA confirming that it will not take supervisory or enforcement action if a fund chooses not to follow the cost-disclosure requirements, all eyes will now be on data publishers at a time when what the industry and investors really need is consistency.”
Pittard also labelled the UK investment trust sector “one of the jewels in the crown of the financial services industry”.
This announcement came following research from Abrdn that revealed London listed closed-end infrastructure investment companies are on track for their first ever three-year gap with no primary capital raised.
Abrdn blamed this on a higher interest rate environment and the cost disclosure rules, with 2023 and 2022 both being fallow years for primary fundraising.
AJ Bell interim investments managing director Ryan Hughes agreed that this news will be “warmly welcomed by both the investment trust industry and broader market participants”.
Hughes added: “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.
“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.”
In the week before the Treasury and the FCA made this announcement, Money Marketing reported on the “double counting of costs” issue for investment trusts.
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