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EU disclosure rules that often “confuse or overwhelm” investors in many types of investment products will be replaced under proposals by the UK financial watchdog.
The Financial Conduct Authority said on Thursday it would make “significant changes” to the rules on information for investors in various kinds of financial products, such as index tracker funds, closed-end investment funds and contracts for difference.
The changes, which were welcomed by the City of London, are part of the UK watchdog’s review of the many laws it inherited from the EU and can now change because of Brexit.
The FCA said the changes would replace an “overly prescriptive” disclosure regime with “a more flexible, simpler approach”, adding that it wanted investors to be given “information that is accurate, understandable and broadly comparable”.
“We are taking the opportunity to create a more flexible and proportionate product information framework that will address concerns with the current rules,” said Simon Walls, FCA executive director of markets.
He added that the new approach would require firms to use their judgment more on how to achieve better customer outcomes, as is already required under its consumer duty rules.
Jonathan Lipkin, director of policy, strategy and innovation at the Investment Association trade body, said the proposals were “an important opportunity to create a disclosure framework based on simplicity, flexibility and digital innovation”.
Some investors see the rules as an opportunity to tackle a brewing crisis in the UK’s investment trust sector, which is suffering from wide discounts that are partly blamed on the way their costs have to be disclosed.
Christian Pittard, head of investment trusts at City fund manager Abrdn, said the FCA’s consultation “has much riding on it and no time to lose”. He said 22 closed-end funds had left the sector this year and “talk of an existential crisis . . . is not an overstatement”.
Closed-end funds, which include the UK’s £265bn investment trust industry, do not allow investors to redeem their money at their net asset value, which can create divergence between their share price and underlying asset values.
The FCA said its new rules would apply to Consumer Composite Investments, covering any products “where the returns are dependent on the performance of, or changes in, the value of indirect investments”.
It said such investment products were owned by 12.6mn people in the UK, almost a quarter of all British adults.
It is replacing EU rules on packaged retail and insurance-based investment products, or Priips, and on undertakings for collective investment in transferable securities, or Ucits. These require disclosures that “do not effectively help decision-making as they do not consistently engage consumers”, the FCA said.
The new approach “marks the biggest shift from EU retail regulation to date” and would “produce more relevant information” for consumers, said Jake Green, global head of financial regulatory at law firm Ashurst. The shift would “require UK firms to make a lot of changes” and create “material divergence” between the UK and EU rules, Green said.
However, there are still concerns in the investment trust sector that the FCA has not gone far enough. Richard Stone, chief executive of the Association of Investment Companies, said the watchdog had “missed the chance for more radical reform” by continuing to require funds to report the underlying costs of other funds that they invest in.
The watchdog has invited feedback until March and it plans to issue final rules next year.
