Key facts
- The FCA is proposing new rules for investment trusts to restrict the power of board members nominated by substantial shareholders.
- The proposed changes aim to prevent conflicts of interest and protect smaller investors from activist campaigns.
- Under the proposals, these board members would be banned from voting on decisions related to the shareholder's interests.
- New rules would also tighten oversight on fees charged by incoming investment managers.
- The consultation is a response to criticism of the FCA's handling of activist campaigns, notably by Saba Capital.
The Financial Conduct Authority (FCA) is initiating a consultation to revise the UK listing rules for investment trusts, aiming to curb the influence of substantial shareholders who also act as investment managers. This move comes after significant criticism of the regulator's response to aggressive activist campaigns, such as those led by Saba Capital.
The proposed amendments seek to address conflicts of interest where a board member is nominated by a substantial shareholder. Under the new rules, such members would be prohibited from voting on decisions, deals, or fee arrangements that directly concern that shareholder. The FCA believes this will strengthen the existing requirement for boards to act independently of their investment managers and reduce the risk of harm to smaller investors.
Furthermore, the FCA plans to broaden the definition of a 'related party' to include incoming investment managers, thereby preventing potential overcharging. If a new manager's proposed fees exceed 0.25% of the fund's size, a market announcement and board approval will be required, along with an independent expert's verification of reasonableness. For fee arrangements exceeding five percent, a full shareholder vote will be necessary, with the related party excluded from voting.
Funds will also need FCA and shareholder approval for material changes to their published investment policies. The FCA is considering a complete ban on voting for substantial shareholders who become investment managers or a 20% vote cap, and is seeking industry feedback on these options.
The consultation was prompted by concerns raised by investment trusts, including former Edinburgh Worldwide Investment Trust chair Jonathan Simpson-Dent, who accused the FCA of leaving the industry vulnerable to activist investors. Industry bodies like the Association of Investment Companies, represented by CEO Richard Stone, have welcomed the proposals, stating they would enhance investor protection. Christian Pittard from Aberdeen Investments also supported the FCA's targeted approach to strengthening rules while preserving shareholder engagement.