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Following the Treasury’s consultation on replacing the EU-inherited Packaged Retail and Insurance-based Investment Products (PRIIPs) regime with a new framework for Consumer Composite Investments (CCIs), new legislation is soon expected to be introduced that will deliver more flexible rules regarding disclosure requirements that are tailored to UK markets and firms. The FCA will be consulting with firms on the newly proposed rules for the CCI regime this autumn, with the rules set to come into place in the first half of 2025.

The main aim of the new framework is to reinvigorate the UK’s capital markets, with a vital component of this being retail investors’ ability to make informed investment decisions. From a high level, the new CCI framework is seeking to provide information to investors in a manner allowing them to better understand what they are paying for and the value they are receiving through the distribution chain.

One key update and focus of the reforms, is the Government’s announcement that in late 2024, legislation will be laid that will exempt closed-ended UK-listed investment funds from the requirements of the current PRIIPs regulation. This exemption will remain in place until the implementation of the new UK retail disclosure framework.

The FCA Position

Further to the Government’s above exemption to PRIIPs regulation for some investment trusts, the FCA is immediately applying new regulatory forbearance with an aim to provide certainty for firms before the Treasury’s Statutory Instrument takes effect. The FCA has declared that from the 19 September 2024, closed-ended investment funds whose ordinary shares are admitted to trading on a UK regulated market or a UK MTF, do not have to follow the PRIIPs requirements and associated technical standards. This forbearance will remain in place until the new framework is in place, and the FCA has confirmed that it will not take supervisory or enforcement action on funds choosing not to follow the PRIIPs requirements.

The FCA has stressed however that while it will not be taking action against firms that fall within this forbearance not conforming to the PRIIPs regulations for disclosures, it still expects these firms to comply with other relevant rules and regulations such as Consumer Duty, Principle 7 (ensuring communications are fair, clear and not misleading) and COBS 2.1.1R, which requires them to act honestly, fairly and professionally in accordance with the best interests of clients. The FCA will still act if firms are seen to be in breach of these expectations.

The Impact

Whilst providing this temporary regulatory forbearance to certain investment trusts may be useful for managers of the trusts, as they no longer need to follow the requirements of the PRIIPs regulations, it can have a much larger impact on firms further down the distribution chain that utilise these products and the provided costs associated with them. For example, many Independent Financial Advisory firms that use Investment Trusts to assist their clients in achieving their investment objectives. Similar issues apply to platforms, whether acting as intermediate distributors or on a D2C basis.

From our experience of working with these firms, many use the European MiFID Template (EMT) issued by the Investment Trust to ascertain the costs they should be showing clients as part of their disclosures. Following the FCA’s forbearance, meaning Investment Trusts no longer need to calculate and provide such information, some firms are now planning to amend their EMTs, meaning that firms further down the distribution chain will not have access to the information that is required to successfully provide their clients with a aggregated costs and charges disclosure that includes the manufacturer’s costs.

The Outcome

The FCA has since released an update to the statement, detailing that the forbearance applies to all firms in the distribution chain that carry on business related to these products. Firms that choose not to provide a key information document (KID) or costs and charges information must now decide on whether any additional information is required to ensure that investors have all that they need in order to make informed decisions and that their systems and processes support the supply of any such information.

Thistle has extensive experience in this space and can assist firms throughout the distribution chain, whether they are manufacturers or distributors. For investment trusts to which this exemption and FCA forbearance apply, Thistle can assist your firm in its updated process for calculating costs and charges, ensuring that you still comply with FCA expectations under Consumer Duty, Principle 7 and COBS 2.1.1R. For firms further down the distribution chain, we can also assist with how you can compliantly present these disclosures to your clients.