We will come to that shortly, but to begin with I’d like to highlight a letter I received from a reader about another new rule that came into effect on 1 January, namely the EU Regulation on Packaged Retail and Insurance-Based Investment Products, or PRIIPs. That may sound like another dry subject for another dry week, but this is potentially important for retail investors, and especially those that have been more adventurous explorers of the myriad exposures that can be found in the exchange traded fund (ETF) market.
In the past there have been rumblings that the Financial Conduct Authority (FCA) was concerned about the suitability of ETFs for retail investors, but it stopped short of taking any action to prevent their distribution to non-professionals. That remains the case, and as we explain on page 41 the majority of UK-listed ETFs will still be available, even though a number found themselves temporarily delisted from popular investment platforms for failing to supply the newly required Key Information Document (KID) by the 1 January deadline, along with a number of investment trusts. However, those like our reader that have bought the overseas listed investments offered on these platforms will find they can’t add to their positions – that includes lots of substantial US-listed ETFs that won’t publish a KID.
The irony is that the risk of owning these funds differs little from owning UK-listed ones and, as fund analysts at Numis recently suggested, the KID itself adds little in the way of investor protection. The FCA's intervention in the CFD market will also more than likely have the effect that retail investors are disqualified from using certain products – clients currently have to declare that they understand the risks of CFDs, but the FCA is concerned, among other things, that providers are not doing enough to ensure these declarations are truthful.
Of course, it’s important that investors are protected from an industry that hasn’t always demonstrated it's had their best interests at heart, but I hesitate when regulation is designed to protect them from themselves. Making mistakes is part of the learning process, and the libertarian in me says that anyone who invests without bothering to understand the risks should be left to learn the hard way. The alternative is far less palatable: an ever-increasing march of regulation that slowly erodes the choice responsible private investors have, or pushes them towards expensive intermediaries.
