The Financial Conduct Authority will consult on a new disclosure regime for investment trusts, with the regulator open to making this more flexible.
In a speech at the Investment Association dinner yesterday (October 29), Nikhil Rathi, chief executive of the FCA discussed the growth of private markets and the need to be open to technological and product innovation.
He said: “We see products that bridge private and public markets. Private market active ETFs, already big in the US, are gaining momentum here. With data infrastructure, such as indexation, also developing.
“And we shouldn’t forget investment trusts, a UK success story, channelling capital into infrastructure and growth assets.
“We will consult soon on a new disclosure regime for consumer composite investments - including investment trusts. Until then, the market is relying on industry standards.
“We are certainly open to ideas to make the regime more flexible and proportionate than the inherited EU Priips regime. We recognise that some would prefer zero disclosures on costs.
“Given the potential market impact, such a decision would rightly be for ministers to take as they decide on the legislation.”
Rathi spoke about tokenisation and how it could democratise private assets while lowering costs and enhancing liquidity.
“Asset managers can right now adopt the blueprint we have worked on with the IA for tokenisation, and the FCA Digital Sandbox supports firms trialling more ambitious, advanced cases.
“But to enable distributed ledger technology and tokenisation to really fly, we are collaborating with other regulators on a global approach,” he added.
Transparency
Rathi asked those in attendance whether private markets needed to be approached with risk or an opportunity mindset?
He noted that it was now time to reset the narrative on private markets but this needed transparency, particularly on data to build a clear picture of risks and who owns them.
“One risk is illiquidity - a feature of these assets. This needs careful thought - in our era of ‘predictable volatility’, where market conditions change rapidly.
“Take a leveraged loan being hung up on a bank balance sheet versus stuck in a securitised credit vehicle – should we really care more about one over the other, as long as capital providers can absorb the losses?
“Retail investors must understand that investments cannot be redeemed on demand - their dough might need to stay in the oven longer.
“And industry must be clear-eyed on where costs for potential failures in the supply chain would rest,” he explained.
Proportionate regulation
Rathi highlighted the need for an “enabling and proportionate regulatory approach”.
He said: “The SEC recently updated their Form PF reporting for private fund advisers to provide greater transparency.
“And participants at the FCA’s recent international Capital Markets conference supported regulators having a whole market view. Currently, estimates for even basic metrics like private market AUM vary significantly.
“Next year we will work with you on data collections in our AIFMD review to ensure we do not end up with something half-baked. So that we understand the market, not restrict it.”
