Former Pensions Minister calls for investment trust protection amid ‘flawed regulations’

Former Pensions Minister and member of the House of Lords, Baroness Ros Altmann, has urged the government to intervene to protect UK investment trusts from “flawed regulation” to support pension investment in UK-listed investment companies.

In a blog, Altmann accused the Financial Conduct Authority (FCA) of inaction on remedying the issue of "misapplied" charges disclosure regulations, which she said was forcing investors to sell UK-listed investment trusts and driving pension schemes to buy overseas investment companies instead.

She stated that ministers should no longer leave it to the FCA to “keep dithering and consulting while their misleading rules destroy investor support on a false premise”.

In the Autumn Statement, Chancellor, Jeremy Hunt, asked the FCA to address the regulatory issue.

However, Altmann argued that, since then, “nothing has changed” and the exodus of capital from UK investment companies had accelerated.

“This selling pressure and loss of investor support is based on a false premise, created by regulations that were meant to protect consumers but actually do the opposite,” she said.

“Ministers must no longer leave it to the FCA to keep dithering and consulting. Having recognised that the rules guiding charges disclosures for UK-listed investment companies are misleading investors, the much-needed urgent change has not materialised. Action is needed now.”

The former Pensions Minister argued that UK-listed investment trusts help democratise investing for pension schemes in long-term, less liquid assets, such as infrastructure, growth business and renewable energy.

She warned that UK investment companies were being starved of capital as regulations required them to “misrepresent investor costs”, noting that the sector has been undermined in recent years by charges disclosure rules being misapplied to investment trusts, forcing these companies to exaggerate the costs of holding their shared.

“This has culminated in waves of selling, lack of buyers, unwarranted large discounts to net asset value and share price weakness that has stopped capital raising for vital growth sectors as UK investment companies suffer an exodus of capital from institutions and wealth managers,” Altmann added.

In light of this, Altmann called for emergency intervention to help protect the sector, arguing that the UK is “choosing to shoot itself in the foot” as regulations make UK investment trusts look “uniquely unattractive” with all global competitors.

The government has been pushing for increased pension investment in UK PLC, but Altmann warned that funding had dried up as investors use non-UK listed investment or riskier individual shares instead due to the regulations.

“The market dislocation in investment trusts is being driven in large measure by a unique application of retained EU law which differs from the way the same law is applied in every EU member state,” she stated.

“The perverse British interpretation of EU regulations has made UK-listed investment companies appear misleadingly expensive for investors to hold, driving an exodus of capital from institutions and retail investors.

“Pension investors are being obliged by UK regulators to report operating expenses (that are of course properly reported in financial statements) to investors as though they were part of their own fund management fees.

“They are required to double count the cost of investing. And rather than do that they simply sell the shares. The consequent flight of capital is a disaster for the very assets the government wants the private sector and pension funds to support.

“Funding for UK-listed investment trusts has dried up, depriving the economy of an important source of growth capital for the very areas which government would like pension funds and other investors to support.

“Most investment trusts invest in real assets, including vital infrastructure projects such as schools, motorways, affordable housing, police and fire stations, and NHS hospitals in the UK, which can deliver strong long-term income, offering good dividend yields over time.”

Altmann called on the government to ensure that these charges rules do not “misinform” investors any longer, and argued that UK-listed investment companies should be excluded from PRIIPs and MIFID rules that “mislead” investors, so the FCA can "uphold its consumer duty, undo market dislocations, revive capital markets, and ensure international competitiveness for UK-listed companies".

An FCA spokesperson commented: “We took action in November to allow investment companies greater flexibility to disaggregate and explain their costs and charges. Any further change requires legislation.

“We look forward to the government and parliament providing us with the powers to reform retail disclosure.”

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