House of Lords quizzes FCA on regulatory regime and enforcement policies

House of Lords quizzes FCA on regulatory regime and enforcement policies
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The House of Lords.has issued a series of questions on finance industry regulations to the CEO of the Financial Conduct Authority (FCA), Nikhil Rathi.

Lord Forsyth of Drumlean, Chair of the Financial Services Regulation Committee, called for clarity on the UK’s cost disclosure regime applied to investment trusts in an open letter to the FCA Chief Executive.

The peer asserted that this regime has been a cause of concern for the industry for some time. In particular, the continued use of some EU regulations requiring investment trusts to report costs in the same format as unlisted open-ended funds has been cited.

Lord Forsyth argues that this fails to recognise the role of listed company shares in the value of financial instruments being invested in. This has in turn led to a reduction in investment of up to £7bn per year.

“This issue is founded on an interpretation of EU-retained MiFID and PRIIPs not shared byany other country. This ultimately creates an unlevel playing field on an international level,” Lord Forsyth explained.

“While the Government has announced that it aims to act on the issue and legislate on these matters in 2024, it has left matters with the FCA to create an interim solution to mitigate the impacts on the investment industry in the short term. In our view, the FCA’s forbearance statement, issued in November 2023, was helpful but does not go far enough.”

The Lords wishes to address four key areas. Firstly, the reduction in SME investment by trusts which is in turn leading to a reduction in investment in the wider economy by these same SMEs.

This falls in line with the economic and financial objectives of the current Conservative government. Under PM Rishi Sunak and Chancellor Jeremy Hunt, the government has made support for SMEs a fiscal priority, at a time when the UK is facing economic uncertainty.

Lord Forsyth added that this limited SME investment environment is affecting jobs and tax revenue and is leading to cheap asset sales to foreign buyers. 

Outside of SMEs, the per outlined the deprivation of consumers and pension funds from investment opportunity, reputational damage to UK markets and regulation and the country’s international competitiveness as other areas of concern.

Lord Forsyth and his Committee have drafted seven questions for the FCA Chief to address. 

  1. Can you explain why the FCA has made and sustained the decision to require investment trusts to be included in the cost-disclosure and aggregation format when no other country in Europe must do likewise?
  2. When was the inclusion of investment trusts in this format consulted upon, as it does not appear a straightforward requirement derived from EU legislation?
  3. How is the FCA working on resolving the market disruption which has come as a result of the cost disclosure requirements?
  4. Given the urgency of the situation, and your understanding that once the legislation is enacted, the issue will transition to the FCA’s rulebook, when do you expect to launch a consultation on the changes to the cost-disclosure regime and can you take immediate emergency action?
  5. Could you confirm that once the statutory instruments are made, this issue will be solved?
  6. Could you provide examples of where the FCA has engaged with industry on this matter?
  7. What is being done by way of communication to regulated entities such as investment platforms and ACDs to alert them and ensure the data trail via the EMT is brought into line with the principles of the forbearance and to prevent further elaboration of wrongful cost explanations and delisting from platforms?

Rathi has been asked to provide responses by 7 May, prior to the FCA and Prudential Regulation Authority (PRA) giving oral evidence on secondary competitiveness and growth objectives to the Committee on 8 May.

In addition, Lord Forsyth also penned a separate letter to Rathi regarding the FCA’s enforcement plans. In particular, the Committee is seeking greater clarification on the regulator’s plans to name companies it is investigating.

The Committee had previously contacted the FCA on this matter on 18 April and had received a response. However, Forsyth has expressed concern that the FCA’s response did not directly refer to the Committee’s specific request.

He concluded the second letter: “I would appreciate it if the FCA could clarify its position on that request. As you know, the Committee intends to take further evidence on these proposals and I look forward to discussing this with the FCA in the near future.”