Platforms have raised concerns about proposed changes to cost disclosure requirements that would allow investment funds to record their ongoing costs at zero.

After a long industry campaign, the UK Treasury last week announced plans to replace the EU-adopted Packaged Retail and Insurance Investment Products (Priips) Regulation with a new framework. The new legislation is expected to be introduced in the first half of 2025, with the draft regulation being published on October 10.

A main criticism of the Priips regulation is that it takes into account the costs of investment funds twice. Mutual funds are forced to include both their corporate costs, such as asset management and financing, and their investment manager's fees when calculating a cost figure. Therefore, trusts tend to be disproportionately expensive compared to open-ended funds. Proponents of closed-end funds argue that the knock-on effect has been a decline in the popularity of mutual funds among professional buyers, which has exacerbated discounting in the industry.

In parallel with the UK Treasury's announcement, the Financial Conduct Authority (FCA) published a forbearance statement allowing investment funds to choose not to comply with the Priips Regulation or the related Markets in Financial Instruments Regulation (Mifid) while the sector Violence awaits the relevant legislation coming into force. During this period, the FCA has promised that it “will not take any supervisory or enforcement action if a fund decides not to comply with these requirements”. This means that investment funds can report their ongoing costs as zero and do not have to count their costs twice. Some have already started.

Platform answers

Reactions from investment platforms to the proposed changes have been mixed. Several have expressed concerns about changing their current approach, fearing that recording ongoing fees at zero could cause confusion among customers. However, other major platforms have largely supported the new measures.

According to a spokesperson, Bestinvest has not yet made any changes to its process and will continue to disclose ongoing fee figures for all mutual funds on its platform. Likewise, Hargreaves Lansdown will continue to require the European Mifid template to be “completed as a minimum standard”, meaning investment funds will have to disclose costs and fees information as before.

Other platforms are actively monitoring the situation. AJ Bell said: “We are aware of the FCA’s cease and desist notice and have been closely monitoring all updates and working with industry bodies and product manufacturers to find an appropriate solution that is in the best interests of customers.”

It added: “We are currently reviewing the new rules, although in general it is important that customers have access to accurate cost/fee information.”

Fidelity said it supported the FCA's work to “drive forward new rules” and said it supported “the transitional measures taken to be able to exclude indirect costs from disclosure.”

The platform also said it is actively working with investment funds to find a path forward. “Immediately following the Government's announcement on 19 September and the publication of the FCA's updated forbearance, we contacted all investment funds circulating on our platforms to understand how they might respond to the forbearance and are now drafting changes to the regulations. Not all investment fund providers have confirmed their position to us yet. We stand ready to act quickly when a provider publishes updated public disclosures,” a Fidelity spokesperson said.

Richard Stone, chief executive of the Association of Investment Companies (AIC), sees the FCA and Treasury's actions as a step in the right direction for the sector. “We have been advocating for reform of the disclosure system for a long time, so it is good that some action is being taken,” he said.

Regarding whether the option to not disclose ongoing charges will confuse or mislead retail investors, Stone suggested that investment funds need to consider how to contextualize this information. “I do not believe these revelations are misleading. If anything, they give better and clearer information. As part of the exemption period, investment companies can set this amount to zero. We would argue that this is not misleading, but you need the context,” Stone said.

He expects AIC members to continue to produce a modified key investor information document (Kid) as platforms will need to see these as part of their sales process and that investment funds will make more individualized disclosures in their fact sheets and instead provide more information to investors through this medium. He quoted Murray International (MYI) as a trust that is already promoting this approach. “We're working with platforms to see if we need to include something different, like a modified Kid, so investors can see the full context,” Stone added.

Stone points out that platforms are reluctant to implement solutions ahead of the FCA's consultation on the new system and do not want to make changes until the new legislation comes into force. In the meantime, a solution is needed that provides investors with enough information to make informed decisions within the limitations of the current platform architecture.

Investment funds make up over 30 per cent of the FTSE 250 and are collectively responsible for over £260 billion in investments. The government hopes that exempting mutual funds from adverse regulation will boost growth.

“The Government and the FCA are committed to the ongoing reform program to revitalize the UK’s capital markets. “Ensuring that retail investors can make informed investment decisions is an important part of ensuring healthy capital markets,” the Treasury Department said.