British savers risk losing out in a crisis that threatens the existence of a popular, low-cost way of building savings, campaigners have warned.
Investment trusts have been a key part of the stock market for more than 150 years.
In Victorian times, they were used to raise money to build railways and other projects around the world.
More than 360 trusts, with £267bn of assets, are listed in the city.
True to their roots, today’s trusts raise capital for areas such as renewable energy and infrastructure. They are one of the few ways that allow small savers to get in on the action.
Drawing a line: after Brexit, the UK has no obligation to apply the EU regulations in question
But campaigners, including their peers in the House of Lords, say the trusts are trapped by a strange remnant of EU law that deprives them of cash and exposes them to foreign predators.
After Brexit, the United Kingdom has no obligation to apply the regulations in question.
But their opponents say the City watchdog is imposing them in a “unique” way that is putting British savers, businesses and the stock market at a disadvantage.
They warn that the City’s regulator, the Financial Conduct Authority (FCA), is using a “flawed system” to calculate how fees are charged.
This makes it seem like investing in trusts is more expensive than it really is.
This has led to a sell-off that has driven down the value of the trusts’ shares and made them vulnerable to foreign vultures. Baroness Altmann said the FCA “has taken these EU rules and applied them uniquely, in a way that harms UK businesses”. “It is the opposite of what Brexit was intended to achieve.”
He added that “the regulator has fooled everyone” by forcing trusts to declare costs that do not actually exist. Because they are listed on a stock exchange, a unit trust’s share price includes its operating costs, including management fees and general trading expenses.
But under current rules, these must be presented to potential investors as if they were paid directly by shareholders. This, activists say, amounts to double counting.
For example, the FTSE 250 Abrdn Private Equity Opportunities Trust, which invests in private companies and has a market value of almost £800m, is listed on investment platform Hargreaves Lansdown with an “ongoing charge” of 6.25 per cent.
This implies that an investor purchasing your shares would expect to pay additional fees on top of their initial investment, when in reality they will not.
And according to data from the Association of Investment Companies (AIC), the 6.25 percent figure is itself inflated and is actually only 2.84 percent.
Altmann has introduced a bill in the House of Lords calling for trusts to no longer have to comply with the rule. Baroness Bowles, a Liberal Democrat peer, said it is “an FCA-sponsored breach of consumer duty that has killed investment”.
William MacLeod, chief executive of investment firm Gravis Capital, warned the sector was facing “a crisis” and trust share prices had “collapsed”.
AIC data showed the average discount in the investment trust industry is 10.8 per cent compared to an average since 2008 of around 6.5 per cent.
Q: What is an investment trust?
TO: Investment trusts invest in assets such as stocks, infrastructure and small growing companies that most investors would not be able to buy directly. Trusts are listed on the stock exchange, so investors can buy and sell their shares.
Q: What is the problem?
TO: An investment trust’s market share price takes into account its operating costs, such as management and administration fees.
However, the UK’s city watchdog, the FCA, forces these trusts to present the costs as if they were paid directly by investors.
The use of leftover EU rules – not followed by any EU or any other country – makes British investment trusts appear exceptionally expensive and uncompetitive.
This double counting of expenses has led to UK investment trusts being excluded from investment platforms and pension investors switching to overseas companies, leading to huge falls in share prices, all of which based on erroneous figures.