In an effort to simplify information for investors, the UK’s Financial Conduct Authority (FCA) has announced major changes to the rules governing the disclosure of investment products. The present EU framework has been criticised for confusing or overwhelming consumers, and the proposed proposals aim to replace it.
On Thursday, the FCA delineated its intentions to abandon the current EU regulations and implement a more adaptable, user-centric strategy for investor communications. The objective is to guarantee that investment information is transparent, precise, and more readily comparable across products such as index tracker funds, closed-end investment funds, and contracts for difference (CFDs).
The FCA said that the revised approach would enable firms to use their judgment to deliver better customer outcomes, aligning with its consumer duty rules. The changes are part of the UK’s broader initiative to reevaluate legislation inherited from the EU post-Brexit. The financial industry, especially in the City of London, has responded to this move with optimism since many consider the reforms long overdue.
The Investment Association, representing the asset management sector, endorsed the idea of including simplicity, flexibility, and digital innovation in the disclosure process.
Addressing Challenges in the Investment Trust Sector
The FCA’s proposals might help address the problems facing the £267 billion investment trust industry in the UK. Significant differences between share prices and net asset values are putting pressure on the sector, and this is partly because of current cost transparency laws.
Experts in the field stressed how important it was to act quickly on change, pointing out that several closed-end funds have already exited the market this year. This has made people worry that the sector is getting close to a breaking point. Closed-end funds are different from other types of investments because buyers can’t sell their shares straight at their net asset value. This structure can lead to a disconnect between market prices and the actual value of the underlying assets.
A Renewed Emphasis on Consumer Investments
Under the new framework, the FCA’s regulations will pertain to Consumer Composite Investments, including products whose returns are linked to the performance or value of indirect investments. The FCA reports that roughly 12.6 million individuals in the UK own such goods, roughly a quarter of the population.
The changes would replace EU rules such as the Packaged Retail and Insurance-Based Investment Products (PRIIPs) and the Undertakings for Collective Investment in Transferable Securities (UCITS). These regulations have been persistently criticised for their inability to include consumers or facilitate effective decision-making.
Divergence from EU Regulations
The FCA’s plans represent a substantial divergence from EU retail regulations. While the changes are expected to generate more relevant information for consumers, they will also require UK firms to make substantial adjustments. This transition will result in significant disparities between the UK and the EU regulatory frameworks.
Even though it was well received, the investment trust industry is still worried about a few things. Some people say that the FCA missed a chance for bigger radical reform when it kept the rule that funds show the underlying costs of other funds they invest in. Analysts in the field say that this rule makes the reporting process more difficult than it needs to be.
What’s Next?
The FCA is soliciting comments on its ideas until 20 March 2025, intending to finalise the new regulations next year. For several industry stakeholders, this represents a favourable advancement towards establishing a more efficient and investor-centric disclosure framework that achieves an appropriate equilibrium among clarity, flexibility, and responsibility.
