While EU regulator, the European Securities and Markets Authority (ESMA), and the wider funds industry continue to debate investment fund fee levels and transparency issues, a post-Brexit UK is forging its own, distinct way forward.
The UK funds market has witnessed some of the steepest cost decreases in Europe following its departure from the EU in 2020.
Since Brexit, UK regulator the Financial Conduct Authority (FCA), has also been developing a new regulatory and product information framework for Consumer Composite Investments (CCIs), launching a two-part consultation on this in December 2024.
CCIs are investments whose returns are dependent on the performance of or changes in the value of indirect investments. They include UCITS funds, NURS (Non-UCITS Retail Schemes) and packaged retail products such as investment trusts and other closed-ended funds.
The CCI regime will apply to any firm that manufactures or distributes a qualifying fund to retail investors in the UK. This includes firms not authorized by the FCA1 such as EU firms that distribute products such as EU domiciled UCITs in the UK under the Overseas Fund Regime (OFR).
Under the new framework:
- There will no longer be any requirement to disclose implicit fund transaction costs
- Explicit fund transaction costs can be disclosed separately to other ongoing costs
- Fund manufacturers /Authorized Corporate Directors can, in theory, instantly switch to the new rules whenever they are ready
This ‘made in Britain’ approach is designed to revisit rules around fund cost disclosure. Its principal aim is to create a simpler, less burdensome, and more flexible approach to disclosures for fund structures than existing EU market templates.
New approach
Crucially, under the new regime, the FCA wants to move away from what it sees as the rigid format of packaged retail investment and insurance-based products (PRIIPs) regulations and the UCITS key investor information document (KIID).
Instead, it wants to allow greater flexibility to promoters to improve and demystify investment documentation. This, it hopes, will provide information which genuinely helps retail consumers gain a better understanding of the financial products they are buying.
The new regime will place more emphasis on distributors embedding product information in documentation to support consumer understanding. It remains a work in progress.
The FCA launched part II of its CCI consultation in April which included some more detailed recommendations on transaction cost calculations and cost disclosure. It is working to a publicly stated (and tight) deadline of the end of this year to have a new rule set in place.
While the new regime will be UK-centric, its genesis is helping to inform debate in Europe, where ESMA is similarly revisiting fund costs disclosure regulations.
Regulation, regulation, regulation
Beyond regulation focused purely on cost and value, asset managers have also had to dedicate resources to regulations related to Environmental, Social and Governance (ESG), oversight of cybersecurity, and disclosures, to name but a few.
Compliance costs have increased significantly for asset managers while at the same time the costs they charge investors have fallen. The impact of these two competing forces on revenue and margins is of obvious concern to asset managers.
As new frameworks emerge, such as the OFR in the UK and Retail Investment Strategy (RIS) in Europe, cost pressures on managers seem unlikely to ease. Regulators and managers will need to continue to seek a balance that provides effective investor protection and disclosure while allowing sufficient flexibility and cost-efficiency in developing and offering investment products.
Against this backdrop, the CCI regime implementation will be the first real investment fund sector divergence for the UK from the EU since Brexit. As such, it is likely to be watched keenly not just by fund managers with UK domiciled products and peers directly impacted due to their distribution of foreign products into the UK, but also fund managers distributing products across Europe and indeed the globe.
1 Deloitte. The FCA’s Consumer Composite Investments Regime – a new approach to retail investment disclosures will challenge the industry. 20 January 2025.
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