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14 July 2002

Reform will aid trusts sector

Investment trusts, the oldest form of collective investment vehicle, which were invented in Scotland in the 1860s, are set to emerge as unlikely beneficiaries of Sandler's proposed reforms, if Blair's government implements them in full.

Approximately £20 billion is currently invested in Scottish-based investment trusts, around 30% of the UK total.

But since the 1970s the sector has grown more slowly than some other financial services sectors, partly as a result of so-called "commission bias". This has made it more lucrative for Independent Financial Advisors to recommend products which can pay out commission - such as personal pensions, unit trusts and open-ended investment companies (OEICS) - rather than lower-charging investment trusts.

If Sandler's calls for tax changes were to be heeded by Chancellor, Gordon Brown, the sector - which has its own share of troubles following last week's systemic collapse of the split capital sub-sector - would experience a dramatic fillip.

Sandler wants investment trusts to receive the same tax breaks as unit trusts and OEICS, avoiding value-added tax on fund management fees at the same time as allowing them to compete as holdings in pensions. This was in line with evidence presented to Sandler by the Association of Investment Trust Companies (AITC) earlier this year.

It could well bolster the total assets in trusts managed from Scotland - which includes the Alliance Trust, Scottish Investment Trust and Edinburgh Investment Trust as well as relative minnows. There are also troubled split-capital trusts such as Danae and Britannic Global Income.

The industry body, the AITC last week welcomed Sandler and said the report was likely to level the playing field.

Daniel Godfrey, the AITC's director general, said: "The financial services industry needs a radical shake-up, as the present competitive dynamic is geared towards rewarding the distribution of products at the expense of consumers.

"If this is reversed, with the proposals on simplified products and adviser commission, the playing field will be levelled for products that offer consumers advantages, such as investment trusts."

However, Godfrey questioned the emphasis placed by Sandler and the separate CP 121 "depolarisation" review, being organised by the Financial Services Authority, on "high-end" intermediaries such as IFAs. "Shouldn't they also be looking at tied sales houses?"

The AITC claims the benefits of investment trusts include lower charges, strong long-term performance and low entry fees.

They have independent boards of directors whose purpose is to maximise shareholder value.

Godfrey added: "The AITC is pleased that the Sandler report has recognised the unfairness of the VAT treatment of investment trusts in comparison to other mutual funds. We are looking forward to working with Customs & Excise and the Inland Revenue to bring this to a conclusion.

"The AITC, as a major sponsor of financial education, is delighted to see the report's emphasis on this area.

"The government, Financial Services Authority's and industry must now recognise that if they will the ends, they must also will the means and find the money to educate consumers about financial matters."

Ian Fraser
www.sundayherald.com