UK's House of Lords questions FCA's ability to 'protect market stability'

Members of the House of Lords have questioned the Financial Conduct Authority's ability to "protect the market's stability" and called for emergency action from the Treasury.

On Monday (13 November), the House debated a private members' bill brought forward by former pensions minister Ros Altmann, which aims to overhaul cost disclosure rules for UK investment companies by removing them from the Alternative Investment Fund Managers Directive (AIFMD) regulation.

Altman said the current EU cost disclosure rules, known as PRIIPS, have caused investment trust charges to appear artificially expensive, which had been deterring investment in various areas, particularly battery storage, wind and solar farms.

Joanna Penn, parliamentary secretary for the Treasury, affirmed that both the government and the FCA "understand industry concerns" regarding investment company cost disclosure requirements.

She said that both institutions are "working at pace to repeal retained EU law under the smarter regulatory framework enabling the FCA to deliver UK take tailored rules on the alternative investment fund managers directive specifically".

In response, Altmann asked if the Treasury truly recognised the UK financial sector was "being undermined by selling pressure based on exaggerated reported charges figures".

She further pressed if Penn's department had "urged emergency action following FCA failure to protect the market stability, international competitiveness, fair competition and Consumer Duty?".

In response to the question, Penn agreed that investment trusts "play a vital role in raising capital" and reminded her colleague the FCA was "independent, but I understand that it is taking forward work to look at what can be done in this area".

"While we take forward the wider programme of measures to repeal the EU law and replace it with UK rules that will help to address the issue that she has raised," Penn said.

MiFID II forces firms to disclose total investment cost to clients

Other members also questioned the FCA's ability to navigate markets through this issue.

Labour lord Spencer Livermore said: "The primary duty of the FCA is to deliver stability, but the issue raised today by the Altman is not the first time concerns have been raised about apparent instability in certain markets.

"Does the minister [Penn] remain satisfied the FCA has the tools and expertise it needs to uphold its duties. Will she confidently has the capacity to meet its growing workload?"

Penn responded that she was satisfied with the FCA's abilities, adding that the Financial Services and Markets Act, which passed earlier this year, had updated the tools and the framework "for the FCA to be able to do its job now that we have left the EU."

An FCA spokesperson told Investment Week: "Transparent costs and charges are an important part of the regulatory framework, so consumers know what they are paying for.

"We know that some disclosure requirements can be improved. We have committed to designing a new disclosure regime which will consider what the right way to disclose costs should be. Many of the disclosure requirements are legislative and will require the government to make changes to enable our new disclosure regime."

Updating laws and regulations for trusts

Regarding the debate on amending the cost disclosures for investment trusts, Penn was asked if members suggested that "emergency action or forbearance be safely be introduced to avoid being in a tighter, static regulatory bind than when [the UK] was in the EU".

She explained there was no scope for any emergency action from the FCA to grant an exemption to the regulation because the issues were part of law and the regulator can only grant emergency forbearance on regulatory rules, and "must operate within the legal framework".

"Forbearance can only be a temporary short-term fix, which is why the government is committed to repealing and replacing retained EU law, including legislation related to cost disclosure under our smarter regulatory framework," Penn said.

She added they "expect[ed] further updates at the Autumn Statement" next week.

Shareholder activism and M&A surge is a mixed blessing for investment trust sector

Ewan Lovett-Turner, head of the investment companies research team at Numis, said it was positive to see the issue of investment companies costs disclosure recognised at the highest level and the sector "being seen as a vital path to open-up investment in the UK economy, particularly in areas such as renewable energy and infrastructure".

He said that any regulatory changes for the closed-ended space would have to come as part of wider reforms, noting that any changes will take some time to come into effect.

"However, the mood music was positive and the potential impact of being outside the cost disclosure regulation would be significant", he added, giving a "much greater scope" for a range of investors to increase exposure to trusts sector or return after exiting their positions.

"Unfortunately, changing behaviour and investment processes would not happen overnight, but it would certainly stop one of the biggest headwinds to demand for the sector. We will watch developments with interest," he said.

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