Investors may be deterred from backing investment trusts that potentially face an additional layer of regulation if European proposals to classify them as complex instruments go ahead.
The news that under MiFID II, the European Securities and Markets Authority (Esma) intends to bring in additional requirements for the distribution of closed-end funds to retail investors, has been met with anger.
If trusts are deemed complex investments, investors would be required to complete an appropriateness test before purchase, with concerns mounting that the bureaucracy could put people off.
The proposals have been blasted by Wealth Management Association deputy chief executive John Barrass who branded them ‘idiotic’ and ‘absurd’. Although his reaction has been among the stronger, he is not alone in being critical.
‘We still don’t know what the implications are going to be,’ said Joe Winkley, head of corporate finance at Winterflood. ‘The focus is on execution-only investors. There has been growth in execution-only investors across the board and the impact will cause concerns for them. I do not think you will find anyone saying that this is a good thing.’
Some argue that depending on the intricacies of the new regulation’s implementation, the popularity of investments trusts could suffer significantly.
Simon Crinage, head of investment trusts at JP Morgan Asset Management, believes the additional paperwork could act more as a deterrent than a means to build in consumer protection.
‘It’s disappointing it got to this stage,’ he said. ‘It is possible the position could be revised before the implementation is put in place. We as an industry have to lobby. If the position does stand, than what we’ve got to do is look at sympathetic implementation by the Financial Conduct Authority to secure the best possible outcome.’
UK and European differences
Crinage said the requirements do take into account the differences between products in the UK and Europe. He said within the UK, the retail distribution review (RDR) put open-ended funds and investment trusts on a similar level. However, the European regulation threatens to undo that.
Barrass said this appears a clear case of ‘regulations being made by people about products they don’t know’, adding: ‘This is where [Ukip leader Nigel] Farage gets votes.’
However, Ian Sayers, director general of the Association of Investment Companies (AIC), is more sanguine. He says the regulation would not result in the ban of execution-only trading. He points out it will also cover other products, such as certain exchange trade funds and UK real estate investment trusts.
Nevertheless, he said: ‘It’s not something we welcome and we will continue lobbying the commission. Esma made recommendations to the [European] Commission.
‘We will be lobbying on how you implement this. It doesn’t affect how advisers have to do their work.’.
Sayers feels much concern is down to the fact it is not yet clear what shape the final implementation will take with the final rules to be imposed in 2017. He recommends it could be done as part of the initial account setting up process.
If it is included at the outset it will be relatively quick and simple, albeit with the caveat of how the rules are finalised.
Simon Moore, head of research at Tilney Bestinvest, believes it should be down to investment companies to say whether they are complex or not.
‘A lot of the European rules do seem to be lacking in the detail. Because they [investment companies] are listed, they get caught up in these rules,’ he said.
He adds that this is not the first time the sector has faced unwanted regulation however, and it will adapt if needed.‘When they tried this 10 years ago, it was if an investment trust is geared by more than 40% that counted to be high risk. They tried the same sort of thing 10 years ago and we coped with that,’ he said.