FSA consultation document 164 proposes a number of radical changes intended to ensure the conditions which led to the collapse of 19 split-capital investment trusts cannot happen again and to rebuild confidence and trust in the sector and the wider financial services market.
Even if it succeeds in preventing the same type of failures happening again, it cannot prevent something else going wrong in future. But it will make other catastrophes less likely as it strengthens the whole governance and disclosure context for investment trusts.
The AITC is firmly behind the FSA in its objectives and we think that, in the very short space of time it has had to deliver this document, it has done an outstanding job. Inevitably, given the timescales involved, there are one or two areas where we would like to see amended wording to the proposed changes to the listing rules and we also have a couple of alternative suggestions regarding some of the governance proposals.
We are in complete agreement with the FSA on the principle of clearer and more prominent disclosure of the risks associated with gearing in the prospectus and other promotional literature.
Had there been prominent warnings that there was a possibility that geared zeros could be wiped out, the industry would not now be facing such a tide of recrimination. There should be restrictions on the amount that an investment trust can invest in another investment trust if that trust also invest heavily in trusts.
However, there is nothing wrong with the fund of funds concept per se. Indeed, it is a legitimate and desirable activity. But we would like to see the proposed wording amended so it makes clear that funds investing in funds that invest in the market are OK but that funds investing in funds that invest in funds will be severely restricted.
We have ourselves asked all split-capital and quasi-split trusts to disclose holdings in other splits on a monthly basis and we are pleased the FSA's proposals on disclosure would bring this about. But the current proposals would require additional disclosure by all investment companies, which would be simply burdensome to some but could even be harmful to shareholder value for others.
Trusts that are building a position in a holding or dealing in illiquid stocks do not want the market to see them coming every month.
We would like all investment companies to be required to disclose all holdings in our universe of split and quasi-split funds (about 130) on a monthly basis, with a few exceptions in specific circumstances. For the other holdings, we believe biannual disclosure of the full portfolio is sufficient and would more closely reflect the position of open-ended funds.
Our proposals on governance are based on a combination of demanding greater disclosure by boards and justification for many of their decisions than is currently the case or envisaged by the FSA's proposals.
We will propose that the nomination for re-election of directors by the board should not be automatic but should follow a discussion on the matter by the independent directors in the absence of the individual concerned. If it is decided to nominate him or her for re-election, the board should explain why in the annual report.
In this way, shareholders can have confidence in the continuing independence, competence and contribution of directors or, in the worst case, would have sufficient information to decide to vote against them. On this basis, we do not believe employees or professional advisers of the manager need to be barred from being directors.
If a manager is not capable of servicing an investment trust client without having a representative on the board, they do not deserve to keep the contract. But we would prefer boards to be allowed to have one representative of the manager.
Daniel Godfrey is director general of the Association of Investment Trust Companies