The FCA’s interpretation of some Mifid rules means it is "failing" to achieve one of its core objectives and "decimating" the investment trust sector according to one of the legislators who helped create the rules.
Baroness Sharon Bowles chaired the European Parliament’s committee on economic and monetary affairs between 2009 and 2014 and now sits in the House of Lords.
Speaking to FTAdviser, Bowles said rules around how investment trust fees are presented mean investors are turning away from sectors such as renewable energy.
One part of the FCA's remit is to facilitate the move of the UK economy towards net zero, she said, "and right now I think they get a zero out of 10 for that".
Furthermore, Bowles said the rules risk "decimating" the investment trust sector.
The rules in question treat investment trusts as collective investment vehicles, rather than as equities. Therefore, the total costs incurred by a trust must be shared with a client, and this means fund of fund investors and model portfolios are less able to invest in the asset class.
In practice this can mean that the audit fee paid by an investment trust must be reported as part of the ongoing charges of owning the trust, while listed companies do not have to report these costs as part of the ownership.
Bowles compared the treatment of property investment trusts with other property companies. She said if conventional property companies had to report certain costs in the way property investment trusts do, then they would look more expensive to own.
Her view is that areas such as renewable energy are better owned by investors via listed investment trusts, as the asset class is inherently illiquid, but ownership through an investment trust provides liquidity.
Bowles said the financial services and markets bill - which was given Royal Assent yesterday to become law - was "meaningless if the FCA continues to sit on obvious and unnecessary regulatory damage to the real economy through decimation of the listed closed end investment funds regime – also known as investment trusts".
Status quo
Under the current guidance, pensions and other fund of fund structures would have to show the enhanced costs relative to owning other investments.
In common with many market participants, Bowles believes clients of these funds may see what appear to be higher costs.
This means they may prefer their investment manager not to use them, while the investment manager may feel that, in an era where cost pressures are intense, they wish to now own investment instruments which are charging a lower fee.
Bowles said: “It matters because those corporate costs, being in effect almost duplicated and put under the headline of 'ongoing charges', suddenly elevated the ongoing charges of the fund investing into the investment trust.
"This is sometimes at levels where they hit cost ceilings put in place by various pension funds and other collective investment funds, or simply made fund managers cringe when the headline of accumulated charges suddenly looked more expensive and people started to think that they were doing something wrong.
