Statement on communications in relation to PRIIPs and UCITS

In view of concerns how costs of closed-ended funds, also often referred to as investment trusts, should be illustrated in the PRIIPs Key Information Document (KID) or be treated in the UCITS Key Investor Information Document (KIID) of investing UCITS and in disclosure material of investment advisors recommending closed-end funds to their clients, the Financial Conduct Authority has issued a statement.
Specifically, as closed-ended funds have a corporate structure whose identity is separate from the one of shareholders, they tend to have „corporate“ costs which may not be directly attributable to the investment product, the units of the closed-ended fund. Therefore, there were concerns that the costs included in the KID and KIID may not accurately reflect the costs associated with such fund units and that the disclosure of costs in an aggregate form may not be so reasonable given the „corporate“ costs of closed-ended funds.
#### Current requirements under PRIIPs for disclosing costs of closed-ended funds
The current PRIIPs Regulation retained from the EU necessitates a standardized disclosure document, the KID, for each investment, including shares in listed closed-ended funds. The goal is to provide retail investors with comprehensive and comparable information about the investment, particularly regarding costs and risks. Article 8.3(f) specifically mandates the disclosure of all costs borne by retail investors, both direct and indirect, to illustrate the cumulative impact of these expenses on the investment. This requirement encompasses various costs, such as one-off, recurring, and incidental expenses. To ensure uniformity and clarity, the PRIIPs RTS outlines methodologies for computing these costs and specifies the expenses that must be incorporated.
#### Current requirements for UCITS investing in closed-ended funds
UCITS investing in closed-ended funds must adhere to the retained Key Investor Information Regulation as far as their disclosures in the KIID are concerned. This regulation sets out the form and content of the KIID, including the charges relating to investments (Annex II). Article 3 of the regulation also mandates that disclosures be „fair, clear and not misleading“.
#### Current requirements for investment firms engaged in advising on or the distribution of closed-ended funds (MiFID II requirements)
MiFID II imposes obligations on investment firms that recommend or market financial instruments to retail investors. One critical aspect is the disclosure of costs and charges associated with these instruments. As part of the presale requirements, investment firms are mandated to provide retail investors with a clear breakdown of aggregated one-off and ongoing costs and charges linked to the financial instrument. In the case of listed closed-ended funds, where PRIIPs disclosures are already in place, MiFID II aligns with these figures for cost disclosure. Investment firms are expected to utilize the information provided in the PRIIPs KID when presenting cost-related details to retail investors.
#### Current ongoing efforts to replace retained EU legislation (REUL) and the FCA’s temporary „requirements“ as far as disclosures of closed-ended funds are concerned
Currently, several actions are underway to replace the PRIIPS regulation with own regulations that are commensurate to the investment product and its specific characteristics. A first draft of a proposed replacement regulation has recently been published (EventID 24020). Furthermore, the FCA launched a discussion paper in 2022 (EventID 18956) about how disclosures for PRIIPs products should look like, thereby specifically seeking feedback on the delivery of the disclosures, their presentation, and their content. In view of the fact that these efforts are still ongoing and that closed-ended funds are still subject to the retained regulations, the FCA has concluded the following:
FCA allows listed closed-ended funds and related entities, including distributors of such, to provide additional factual information alongside the aggregated cost figures in the KIDs. This supplementary information can include a breakdown of costs to offer investors a clearer understanding of the components contributing to the aggregate figure. For instance, clarifying costs that are primarily corporate rather than directly related to the investment itself.
Additionally, these entities may incorporate such explanations into other consumer-facing communications, extending beyond the confines of the KID disclosures. The FCA assures that, despite the restrictions outlined in the UCITS KIID and PRIIPs KID requirements, it won’t take enforcement action against firms providing this supplementary information or deviating from the prescribed format to offer enhanced clarity to consumers.
However, the FCA also reminds of the importance of adhering to other relevant rules and obligations, notably the Consumer Duty, Principle 7, which emphasizes fair and clear communication, and the obligations to act honestly, fairly, and in the best interests of clients.