The UK’s Financial Conduct Authority (FCA) on Friday finally published a consultation paper on proposed changes to its UK Listing Rules for closed‑ended investment funds — investment trust companies — focused on “the management of conflicts of interest.”
The FCA was widely criticised recently for its perceived lack of action amid attacks by New York hedge fund activist investor Saba Capital on numerous investment trusts, including the Baillie Gifford-managed Edinburgh Worldwide Investment Trust plc (EWIT).
EWIT chair Jonathan Simpson-Dent warned that the UK’s entire £275 billion investment trust sector is at risk from activists after Saba Capital succeeded in replacing the entire board at EWIT.
Much of the UK’s investment trust sector is managed by asset managers based in Scotland, including Aberdeen Group and Baillie Gifford.
The Association of Investment Companies (AIC) had urged the FCA to tighten UK Listing Rules after Saba Capital exposed “gaps” in protections for shareholders of investment trust companies.
The FCA said on Friday: “Closed‑ended investment funds have a distinct structure, operating as both listed companies and investment vehicles.
“Shareholders appoint a board, which in turn appoints and oversees the investment manager responsible for delivering returns. Shareholder rights are central to this model, enabling investors to hold boards to account and to influence key decisions.
“The review, announced in March as part of the FCA’s ongoing work on the UK Listing Rules, considers how its rules support strong shareholder rights and effective management of conflicts of interest in a range of potential future scenarios.
“As part of good regulatory practice, the FCA has been stress testing how the rules would operate in different hypothetical situations to ensure they remain robust over time and as markets evolve.
“This has included exploring a range of plausible scenarios to test whether our conflicts of interest framework would operate consistently in future.
“As a result of this work, the FCA has identified a small number of targeted and proportionate adjustments to ensure its rules continue to apply consistently in all relevant scenarios.”
Specifically, the FCA said the adjustments aim to:
Ensure the same protections that apply to arrangements with an existing investment manager also apply when a new manager is being appointed, to ensure consistent protections for all changes to investment manager fees and strategies.
Recognise the association between a director and a substantial shareholder that proposed them for a board appointment, to strengthen the integrity of boards acting independently of any investment manager.
Recognise the conflict arising where a substantial shareholder is also an investment manager and votes on material changes to investment policies, to ensure that the rights of minority shareholders are appropriately protected.
The FCA said it believes these changes are important given the central role of the investment management contract in shaping outcomes for shareholders.
Jon Relleen, director of infrastructure & exchanges – supervision, policy & competition division at the FCA, said: “Strong shareholder rights and minimal conflicts of interest are crucial to well-functioning markets, including for investment trusts.
“These proposals are targeted, forward-looking changes to how conflicts of interest are managed, reflecting the central role of the investment management relationship for these companies.
“We intend to be very careful to not interfere with voting or shareholder engagement, and we want views on whether these changes strike the right balance.”
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “These proposals would strengthen investor protection, particularly when a substantial shareholder like Saba Capital seeks to replace the board and become the manager.
“They address a gap in the rules where a shareholder who wants to manage the company can seize control of the board to promote its own interests at the expense of other shareholders.
“We’d like to extend our thanks to the FCA for listening to our concerns and proposing meaningful reform. We welcome this short consultation period of only seven weeks which should help to get these rules in place swiftly.
“We will work with the FCA and industry to analyse the potential impact of these reforms and get them implemented as quickly as possible. In the meantime, we would expect market participants to respect the spirit of these proposals.
“As the FCA has highlighted, the other important piece of the puzzle is voting reform to make sure all shareholders can exercise their rights. We have been pressing the government to implement the recommendations of the Digitisation Taskforce and it’s encouraging to hear that work is beginning on this.”
Christian Pittard, Head of Investment Trusts and Managing Director, Corporate Finance, at Aberdeen Investments, said: “The UK investment trust model is a genuine success story. Independent boards, real accountability of managers to shareholders, the flexibility of a closed ended structure that actually works in investors’ interests.
“And crucially, ‘one share, one vote’ – giving shareholders a real voice, not a diluted one.
“The FCA is absolutely right to recognise that these features aren’t a flaw in the model, they’re the point. But that doesn’t mean the job is done.
“There is always room to sharpen the rules where they fall short. That’s why we welcome the FCA’s decision to take a targeted, incremental approach rather than reach for wholesale reform.
“Getting this balance right matters: strengthening protections where needed, while preserving the ability of shareholders to engage, challenge and drive change.”