Statements by the Government and the FCA have introduced regulatory forbearance in respect of cost disclosures under the PRIIPs regime, which will apply until legislation to disapply the PRIIPs Regulation for investment companies comes into force (expected later this year). This is a preparatory measure prior to the introduction of the proposed Consumer Composite Investment (CCI) regime.
The statements come after a long period of intense lobbying of the FCA and HM Treasury by many in the industry. The concern was that the current PRIIPs regime is damaging to the industry as it makes listed investment companies look artificially expensive, including by requiring disclosure in a KID of fees and other costs that are already taken into account in the listed investment company’s share price.
The argument is that the cost disclosure regime otherwise applicable to funds is misleading when applied to listed investment companies; and that listed investment companies should be treated like other listed operating companies where all costs are taken into account in the share price and are not required to be separately disclosed outside their financial statements and annual reports.
Key points of the statement of forbearance are as follows:
- The scope of the forbearance exempts listed investment companies from complying with the UK version of the PRIIPs Regulation and parts of Articles 50 and 51 of the MiFID Org regulation. The PRIIPs Regulation contains the obligation for an investment company (or its investment manager) to produce a KID containing (amongst other things) cost disclosures which reflect the ongoing charges related to the management of an investment company that are “deducted from the value” of the investment company. Articles 50 and 51 of the MiFID Org regulation require regulated investment firms, including intermediaries and distributors to make their own aggregated cost disclosures in respect of investment funds (including listed investment companies) in which their clients invest.
- The forbearance statement appears to provide investment companies with the option of not producing a KID at all, meaning that existing KIDs do not need to be updated or provided to prospective investors and that old versions can be removed from websites. For UK purposes, the statement also means that investment companies (or their managers) are able to make a “blank” cost disclosure in the European MiFID Template (EMT).
- The statement of forbearance is expressed to apply to listed investment companies; but it does not expressly apply to AIFMs/investment managers (who will often be responsible for the KID as a manufacturer), or to regulated intermediaries/platforms. Hopefully the forthcoming disapplication legislation will be clearer, but in view of the context in which the statement of forbearance has been issued, the pragmatic view must be that the statement of forbearance will extend to AIFMs, investment managers, intermediaries and platforms. In particular, the reference in the statement to funds choosing not to follow the requirements of Articles 50 and 51 of the MiFID Org regulation implies that FCA regulated intermediaries/platforms will no longer be required to provide a KID to their clients before they purchase an investment company’s shares and will be able to make a “zero” cost disclosure in respect of listed investment company shares.
- That said, intermediaries and platforms in the UK may still wish to make some form of KID-equivalent costs/risk disclosure to retail clients in relation to investment companies. And it is also worth noting that the contents of the KID are currently used by intermediaries and platforms to support other regulatory obligations in respect of retail clients (for example, suitability requirements). Even if platforms choose to take full advantage of the FCA’s forbearance, in practice, it may take some time for systems which currently require investment companies to have an accessible KID to be updated. Accordingly, investment companies should take care to understand how intermediaries/platforms intend to react to the statement of forbearance before removing or making significant changes to their KIDs, to avoid the risk of their shares being removed.
- Our expectation is that investment companies should, at least initially, plan on continuing to make a KID available (with amended cost disclosures and including an explanatory note that references the statement of forbearance) but that, in light of the joint statement (and as intermediaries/platforms agree on their approach and update their systems), relevant information will in due course come to be provided directly to intermediaries/platforms (for example, via the EMT), rather than through a publicly available KID.
- The forbearance statement recognises that new legislation is required to change the current disclosure rules, but states that the FCA will not take supervisory or enforcement action if a fund chooses not to follow the existing rules. There is some residual risk that, prior to the disapplication legislation being enacted, persons who choose to take advantage of the FCA’s forbearance could be subject to the risk of action from others, for instance private investors seeking to assert private rights of action in respect of non-compliance with the PRIIPs Regulation.
- EU law is not affected meaning that those investment companies that produce a KID for EEA investors will still need to comply with the existing EU rules for that KID as the forbearance does not extend to EEA regulators.
- The Government has set out a legislative path to changing the rules in the UK and adopting a new UK retail disclosure framework for consumer composite investments (CCIs) tailored to UK markets and firms. The new CCI regime is expected to be in place in H1 2025, with legislation to formally exempt UK-listed investment funds from the current PRIIPs rules to be laid before Parliament later this year.
The statements appear to be welcome news for the investment trust industry. It provides a temporary solution to the cost disclosure issues that many believe have contributed to the significant discounts that have emerged in the sector.
The Government and the FCA have clearly taken note of the industry’s concerns although continued engagement on this issue will be required when the FCA are designing the new CCI regime.
The hope is that the disclosure requirements of the new CCI regime will be able to strike the right balance between recognising the unique characteristics of listed investment companies and providing consumers with the data they need to compare investment products.
However, as the statement of forbearance purports entirely to exclude listed investment companies from the scope of cost disclosures (treating them in the same way as listed operating companies in that regard), we anticipate there will be significant industry pressure to maintain this position under the final legislation implementing the CCI.
Authored by Erik Jamieson, Jonathan Baird and James Alder.
