New EU rules "catastrophic" for investment trust investors

EU flag behind barbed wire

A new European directive could lead to more management costs for investors in investment trusts, and less time for fund managers to deal with investment strategy, the Association of Investment Companies (AIC) has warned.

The Alternative Investment Fund Management Directive (AIFM) is a draft piece of legislation issued by the EU earlier this year in response to the financial crisis. It aims to address regulatory gaps in the fund management sector, but has been criticised by investment professionals for being too generalist and for trying to squeeze all investment companies into the same mould.

The AIC is concerned that the directive fails to recognise the structure of investment trusts, and proposes to regulate fund managers when, in reality, it is the board of directors who run investment companies and who are legally responsible for any decisions made.

As well as providing more red tape for fund managers to wade through, the directive could restrict the right to issue new shares to the ‘regulated individual’ - in this case, the fund manager.

Currently, the board of an investment trust can issue new shares to increase its assets under management; it is not the role of fund managers to do so.

The knock-on effect of all this is likely to be higher management costs for investors.

Representatives of the AIC have been talking to the British Treasury, the Financial Services Authority, the European Parliament and the European Commission in an attempt to put forward the interests of its members.

Ian Sayers, the AIC’s acting director general, says: “We feel confident we will be able to get a resolution but because it is so potentially catastrophic we will not let up until we see some amendments.”

Simon Cordery, head of investor relations at F&C Investments, is also concerned. “The directive isn't terribly well thought-out,” he explains. “We're hopeful it will be changed and won't impact on investment trusts, but it is a real threat and it could take us years to get through to the EU.”

The AIC says it is “cautiously optimistic” that it will be able to fight back against the directive; the likely deadline for the legislation to be passed by the EU has already been extended from the end of this year to June 2010.

“The good news is people are listening to the case we are making,” says Guy Rainbird, public affairs director for the AIC. “They are prepared to make changes - how far they are going to go, we cannot say at this stage. But we want investment companies to thrive, not just survive.”

Although there have been some reports that the directive would kill off the investment trust sector, not all experts are convinced this is likely.

Simon Elliott, head of research at Winterflood Investment Trusts, says: “We would be highly surprised if the directive sounds the death knell of the sector. However, there will be implications, although it will be some years before they are implemented.”