Alternative Investment Fund Designation Bill [HL]
Wednesday 22nd November 2023
(1 year ago)
Lords ChamberRead Full debate Alternative Investment Fund Designation Bill [HL] 2023-24 Read Hansard Text
Alternative Investment Fund Designation Bill [HL]
Friday 1st March 2024
(8 months, 3 weeks ago)
Lords ChamberRead Full debate Alternative Investment Fund Designation Bill [HL] 2023-24 Read Hansard Text Watch Debate Read Debate Ministerial Extracts
Baroness Altmann (Con)
My Lords, the Bill seeks to remedy legislative errors that have contributed to a haemorrhaging of funds away from UK-listed investment companies. Flawed interpretation of EU regulations, which no EU country has applied as we have, has stoked massive selling pressure, with pension funds, wealth managers and retail investors having to abandon listed investment companies here.
I am grateful to my noble friend the Minister, her officials and other Treasury colleagues, including the EST, my honourable friend Bim Afolami, for their engagement on the Bill. I am particularly grateful for the guidance, knowledge and insights of the noble Baroness, Lady Bowles, and Herbert Smith Freehills, who have helped to draft the Bill. I am also grateful to the officials in the Public Bill Office, who have assisted so ably; my honourable friend John Baron MP, who has raised this issue within government; many industry leaders, such as the London Stock Exchange, the Investment Association and the Association of Investment Companies; and colleagues across the House who support the aims of the Bill.
Investment trusts are a long-standing British success story, democratising investment for small savers and delivering excellent returns. They also provide the only way for most pension funds to gain access to expertly managed specialist portfolios of less liquid assets in UK sustainable growth, infrastructure, social housing and other areas, which pension investors want and need to diversify into and which the Government want them to support.
This important financial sector comprises over one-third of the FTSE 250, and 60% of these companies specialise in managing portfolios of real assets and small growth firms. But waves of selling have led to large discounts in these UK investment trusts and added to the overall weakness of the FTSE itself. Between 2014 and 2021, over £70 billion was raised by investment company IPOs and secondary fundraising, but under £1 billion has been raised since then. The problem has worsened since 2013, when UK-listed investment companies were unfortunately included in the EU-derived Alternative Investment Fund Managers Regulations—AIFMR—introduced after the 2009 global financial crisis, when regulators wanted to bring Wild West unregulated vehicles, like private hedge funds, that potentially posed systemic risk under some regulatory control.
By contrast, UK investment trusts were already well regulated under the requirements of stock exchange listing rules and pre-existing corporate and company law. Boards were providing the governance responsibilities that AIFM regulations were intended to provide for unregulated funds, and they were disclosing all their costs transparently in regular shareholder reporting.
As far back as 2009, our Investment Management Association had written to the EU Commission, stressing the importance of the UK listed-investment company structure to UK financial markets and investors, and stressing that they should be excluded from the AIFM classification. Listed investment trusts were far more extensive and important to UK markets than in other EU countries. Nevertheless, in 2013, all these companies were classified as alternative investment funds. This may have been a minor irritation for UK investment trusts, adding extra costs estimated at £50,000 to £100,000 a year for each fund. AIFM duties included cash-flow monitoring services, asset safekeeping and due diligence over net asset value reporting, which generally duplicated some liabilities of the board of directors. It also introduced potential conflicts of interest, as the investment adviser is allowed to double up as the AIFM. But the sector adapted, absorbing the costs.
Clause 1 would exclude closed-ended investment companies listed on a UK-recognised exchange from the 2013 regulations. In subsequent years, EU-derived MiFID rules for financial product distributors, PRIIPs requirements for retail investors, KIDs and further tightening of consumer charge disclosure rules were all unhelpfully applied to UK-listed investment trusts and REITs. The result has been a disaster for many UK investment companies, which must now disclose exaggerated and misleading investor charge figures. In line with the classic boiling-frog principle, each ongoing layer of regulatory change added extra burdens, now reaching the point of existential damage.
Of course, investors must be fully informed of all charges—those that they pay directly out of their investment each year. However, the combination of UK financial regulations, which have evolved to encourage investors to select investments on the basis of lower cost, charge caps introduced for workplace pension funds and flawed rules intended to give consumers full charges information so that they can make properly informed decisions is having the opposite effect.
Regulators decided that charge disclosures should focus on just one figure: the so-called ongoing charges figure, or OCF. I believe in full transparency with no hidden fees, but information must be clear and not misleading, which is precisely where the problems that this Bill seeks to address have arisen. The way in which the FCA applies the EU-derived PRIIPS and MiFID rules to UK investment companies misinforms investors, telling them that they bear costs that they do not actually pay. No other EU country, by the way, applies those same rules as we do. The inflexibility of the UK requirements, focusing on one reported high-level figure, has undermined this sector, worth more than £0.25 trillion. The corporate expenses for managing these funds and their business are labelled as “ongoing investor costs”, making them look artificially expensive to own and driving investors to switch into overseas companies or higher-risk individual shares instead.
The market dysfunction is exacerbated by UK-listed funds which have chosen simply to ignore the legal requirements, without any regulatory consequences, and by overseas competitors receiving unfair competitive advantage. UK wealth managers and pension funds must double-count or exaggerate investment costs, so they have been selling their holdings, despite large discounts. Also alarmingly, flawed OCFs have caused retail investment platforms such as Fidelity to remove UK investment trusts or incorrectly label them as extremely expensive, blocking retail access to funds that invest in areas such as wind farms, solar farms and battery storage—crucial areas for our future sustainable growth. Investors are now selling these good-value assets on the basis of flawed information. I believe that the obsession with driving down costs is also resulting in investors being misled into believing that the investment charge, the OCF, is more important than expected returns and ignoring the vital elements of investment decisions that need to be understood before purchasing assets, such as liquidity factors and discounts or premia to net asset value.
Clause 2 of the Bill would remedy a clear misinterpretation of the wording in the MiFID regulatory annexe, which the FCA has interpreted differently from everyone else. It states that charges which must be disclosed are any deductions from the value of the investment. For listed companies, consumer value is the share price. It does not, and should not, include the management fees or other expenses that are not deducted directly. But the FCA seems not to agree and refuses to bring its own interpretation into line with everyone else’s, despite the damaging consequences for the markets and our economy. This Bill could help Parliament take back control by excluding investment companies from MiFID disclosure rules which should never have been applied.
The Chancellor asked the FCA to remedy this problem urgently in his Autumn Statement, but its subsequent forbearance announcements, widely anticipated, made no difference in practice. It says that it cannot do more under current legislation, but this seems questionable, since it could simply adopt the interpretation that all other countries have given to these same rules. The FCA could just forbear on its own enlarged interpretation to end the misleading charge disclosures. Does my noble friend agree, or could she check with her department, that the FCA could just bring its guidance into line with everyone else in the world so that its own interpretation of the current legislation no longer causes this market and economic detriment?
Clause 3 seeks to remedy an erroneous interpretation of the PRIIPS regulatory disclosure requirements. These cost disclosures need apply only to funds with a redeemable value, so they should exclude investment trusts. Unlike open-ended funds, investment company shareholders have no right to redeem their investment at net asset value on the next dealing day; they must sell at the market price, possibly at a significant discount. The FCA has suggested that such investments are savings products. I am afraid that seems utterly misguided. They are not savings products; they are not used as such. Just because, for example, Sainsbury’s has a share option scheme does not make all Sainsbury’s shares a listed investment company. Removing those companies from PRIIPS charges disclosures would again stop the requirement to mislead the retail investor by telling them that they are paying costs that they do not directly bear. Of course, the costs are still fully disclosed in the relevant documentation that they must produce.
This Private Member’s Bill is a simple, short-form measure to correct regulatory errors that have had increasingly damaging consequences over time. It seeks to offer the fastest-possible legislative route to help industry and regulators uphold the principles on which our financial system is based, as instructed and intended by Parliament.
Sadly, the FCA has failed to take urgent action. Its eagerly anticipated forbearance statement is no resolution and may even add to investor confusion, because UK investment companies now have to report, or are able to report, two different OCF figures, one for the fund KID, which is more correct, and one for the distributor—the OCF—which is still wrong. So the European MiFID template, which is that used by the whole industry for the OCF figure, is unchanged. It is also important to note that the ongoing dithering and delays are leaving many excellent UK investment companies vulnerable to predatory takeover or even to collapse—a collapse that could be alleviated by the rapid issuance of new regulatory guidance, requiring the industry to use EMT data feeds accurately to display correct OCF information. By not requiring these firms to do so, the FCA is responsible for retail platforms and authorised corporate directors but is encouraging them to produce misleading information rather than going by its own statutory duty to ensure that information is clear, fair and not misleading. It is also breaching its duty to ensure orderly markets, maintain international competition and promote growth and sustainable investment in financial markets.
I hope the Government will support this Bill, notwithstanding the apparent concerns that my noble friend the Minister expressed in our recent meeting. Even better, I urge the Government to try to persuade the FCA that it should issue new guidance urgently so that the Bill is not even necessary. I hope that our unique interpretation and application of the legislation, which is damaging vital parts of the UK economy and cutting them off from capital flows at a time when the Government seek to encourage more pension and private funds into productive investments, can be remedied to the benefit of all in society. This Bill is both important and urgent. I beg to move.
Lord Davies of Brixton (Lab)
My Lords, I very much thank the noble Baroness, Lady Altmann, for her detailed and comprehensive explanation of why this Bill is needed. The matter before us is straightforward, and the question that has to be answered is why we would not correct this total inconsistency in the way information is provided to potential investors.
With most investments, the charges are added after you invest the money. With investment trusts, the expenses are included within the price you pay. That is the essential difference. To require these two completely different approaches to expressing expenses is clearly inconsistent and properly addressed by this Bill. This is a valuable way in which to present the issue before us, but it is unfortunate, as the noble Baroness explained, that we have to go through the process of doing it through primary legislation when other avenues might be swifter or more straightforward. Unfortunately, they are not available, for whatever reason, so we have to resort to this legislation.
The key reason why this is important is that expenses are important. There may be a slight difference in tone on this issue between me and other commentators on investment matters, but expenses are important; we know what they are and they can be declared. Issues such as value for money and expected future return are important, but they are to a greater or lesser extent assumptions based on assumptions—they are hypotheticals—whereas the expenses are there as part of the contract that is being entered into. There is a tendency within the investment industry to try to downplay the importance of expenses, but they are crucial and it is right and proper that they are the subject of this Bill.
As someone who has been following the financial press for far too long, 60 years or so, I know that the question of investment trusts makes regular appearances in the financial press. It is a staple of the financial journalist to come up with these articles, and they do it on a regular basis. Nevertheless, they are still a bit of a niche approach to investment; there are certain aspects, and to an extent you are presented with a basket of investments—and, very often, they are being sold to you at a discount. You think, “Well, I’ve got a bargain here”, but you have to ask why they are at a discount and whether there is an additional element of risk that you should have in mind when making your decision.
Nevertheless, those investments should be available, and should be presented with the information in a way that provides what the potential investor needs to know. There is a pension point involved here, because they are suitable investments. In some ways, I think they are more suitable for pension funds, which have the resources and expertise to undertake a proper evaluation of the potential investment. Nevertheless, having the expenses declared in a clear and consistent way is an important principle.
That brings us finally to the question of the FCA. What is illustrated here is the extent to which the Financial Conduct Authority is answerable to Parliament; it is an illustration that it is not answerable to Parliament. I hope that our new financial regulation committee will look at this and arrive at a more consistent pattern, whereby these issues receive proper parliamentary consideration.
Baroness Bowles of Berkhamsted (LD)
My Lords, I declare my financial services interests as in the register. I congratulate the noble Baroness, Lady Altmann, on her speech and on the great energy that she has put into seeking clarity for the consumer, and fairness for listed investment companies and their investee businesses.
A series of legislative time bombs planted under listed investment companies have culminated over the past two years to force misleading information to consumers and strangle a thriving sector that is over a third of the FTSE 250. The first bomb was the alternative investment fund managers directive, and this Bill starts by excluding listed investment companies from the UK version. Industry representations to the EU Commission in 2009 explained that listed investment companies were already significantly regulated and transparent, but they were never explicitly excluded—and indeed the UK itself then removed wriggle room that other countries use. This was the start of the UK ignoring the fundamental structure and regulation attached to a listed company.
AIF categorisation meant that these listed companies had to have fund managers and reporting requirements that are expensive and duplicative of listing requirements and set aside the proper role of company directors. Then the FCA further railroaded listed investment companies along a track that should never have existed. It was the start of pretending that they are the same as open-ended funds when they are not, and the start of misleading consumers into thinking that they should select by the same criteria, focused on assessed net asset valuations and fund manager costs rather than the real market value of shares, bought and sold using the established indicators of premium or discount that signpost market sentiment about assets, performance and costs or expenses. Explicit details of each of those were always presented anyway.
AIF classification seeded the treatment of a listed security as a financial product, which is remarkable given that the definition of a financial product is that it has a value derived from reference values not set by the market. But ignoring market valuation is a central plank of the FCA’s excuses for levering listed investment companies inside subsequent legislative bombs when the EU legislation itself actually did not.
Bomb number two came along with packaged retail investment and insurance products legislation. The clue is in the name—“products”—and as I have said, a listed security is not a financial product, but the FCA pretends it is. The PRIIPs legislation even contains its own definition of the collective investment undertakings to be included. The definition is:
“an investment ... where the amount repayable is subject to fluctuations because of exposure to reference values or the performance of one or more assets which are not directly purchased by the retail investor”.
But listed company shares do not have an amount repayable; you sell the shares on the stock exchange. This is among the issues I have challenged with the FCA. It reverts to suggesting—albeit in witnessed mumbled verbal comment rather than a written response, but witnessed—that there “can sometimes be amounts repayable, in some circumstances”, by which it means insolvency, hardly a mainstream interpretation. In Ireland, when the then FSA’s interpretation first became known, three counsels’ opinions were commissioned, all of which stated that listed investment companies did not fall within the definition, so Ireland kept them out, as did everybody else.
Listed investment companies can be found on stock exchanges all over the world but only the UK, through the FCA, maintains its own irrational interpretation that differs from common understanding. As a consequence, the tangle of ill-fitting and misleading disclosure requirements started which has destroyed the market. Clause 3 removes listed closed-ended funds from the misapplied cost methodology in PRIIPs.
The coup de grâce came via MiFID II in 2018, when Investment Association guidance—it insists that it follows FCA interpretation—resulted in the UK forcing firms to allocate listed investment companies’ corporate expense numbers into an EU-wide industry reporting data template, which then displays them as ongoing cost forecasts on platforms such as Hargreaves Lansdown, AJ Bell, Fidelity and so on. The displayed information indicates that there are ongoing charges in connection with holding listed investment companies. This is untrue, of course, because the share price has already factored them in: that is what you have bought, and that is why every other country puts “zero” in the template. It also feeds in to wrongly elevate the costs of funds holding investment companies. Everyone in this chain of misinformation, from authorised corporate directors to platforms, is part of an FCA-sponsored failure of consumer duty that has killed off investment by frightening away consumers and causing fake breaching of cost caps.
This coup de grâce would never have happened if the legislation were interpreted as written, but the FCA has, again, its own conniving explanation to wheedle listed investment companies into a slot where they do not belong. It deliberately misinterprets “value”. The annexe of the MiFID Commission delegated regulation is clear that only deductions from the value of the investment should be aggregated as ongoing costs, because that is what the investor loses. But the FCA insists that deductions from assessed net asset value must be included in the cost disclosure and, as a direct consequence, the investor is informed as if they have to pay them again, and annually, when the truth is that the efficiency of the company and its expenses are already taken into account in the actual market share price—share price undeniably being the investment value to the consumer.
Ignoring the harm, the FCA listens to voices urging this fake comparison with open-ended companies. You might as well compare ice cream and toothpaste—they are sometimes both white—even while the FCA’s own consumer panel is warning against simplistic measures such as these. Nowadays, even the superficial similarity with open-ended funds is gone, with most listed investment companies investing directly in real economy assets, not other listed equities. Meanwhile, the FCA takes no action against a few large firms that do not comply, probably knowing it would lose the litigation, showing inconsistency and further distorting competition, knowing that ACDs and smaller firms cannot take the risk.
The FCA also claims that it cannot help, as it has no leverage over an industry-run reporting template, despite the fact that it is based around the FCA’s core misinterpretation and all the actors are regulated by it. It would have to say only, “It is really a zero”, but the leading official has said—witnessed, in the presence of their superiors and more than once—that they do not want zero and “What’s the problem? They can always not list under chapter 15”. That means that they are reading different listing rules than I am. Clause 2(3) clarifies that, for closed-ended listed investment companies, the value is the share price. Other amendments clarify that there is nothing relevant in UCITs.
Baroness Swinburne (Con)
My Lords, eight minutes is guidance, but we appreciate it if people try to stick to it. If the noble Baroness will close, I will be very grateful.
Baroness Bowles of Berkhamsted (LD)
I will exercise my privilege to continue, if the House is willing. It is necessary for such an important subject.
The FCA alleges that it cannot change the rules to undo the misleading cost allocations, as they are in retained EU law, but as has been said, it has to change only its own interpretation. For the record, the damage that the FCA’s illegal, irrational and inconsistent interpretation is causing includes: some £15 billion and counting of lost investment in real UK assets that has largely gone overseas; depriving SMEs in manufacturing, technology and infrastructure companies in the real economy of investment, affecting jobs, tax revenue and causing cheap asset sales to foreign buyers; depriving consumers and pension funds of investment opportunity in the real economy; and causing reputational damage to UK markets and regulation. And, yes, we are being laughed at for this mess. EU people phoned me up at Christmas to tell me that.
Add to that harming international competitiveness and presiding over a market failure caused by knowingly tricking the consumer, and I ask myself how many jobs should go at the FCA. Do not be fooled into thinking that it cannot do anything. It is “won’t”, not “can’t”, and it is accountable for that. If nothing is done, our system is demonstrably broken. This Bill and Parliament can offer a fix.
Lord Reay (Con)
My Lords, I am very pleased to support this Private Member’s Bill, introduced by my noble friend Lady Altmann, which seeks to remove investment companies from the scope of AIFMD, and exclude them also from PRIIPs and CCI disclosure, including concerning costs. As the noble Baroness stated, this would correct regulatory errors. I declare an interest as an owner of shares and some investment trusts.
My noble friend Lady Altmann and the noble Baroness, Lady Bowles, have outlined how we have arrived at this unfortunate situation. I applaud them both for their tenacity and perseverance in attempting to find a solution to this issue. The Bill is required to address the malaise in the listed investment company sector, which has resulted in the withdrawal of investors from the market and depressed valuations. This, in turn, is leading to city brokerage firms exiting the sector, and job losses among salesmen, traders, market makers and bankers.
The malaise extends to the UK equity markets in general, which are suffering from the damaging shift of our pension funds out of equities into fixed income over the past 20 years. The withdrawal of institutional funds, resulting in reduced liquidity and lower valuations, has ramifications for the overall health of the UK markets, and notably in the decisions of UK and overseas companies on whether to list on AIM or LSE rather than other international stock exchanges. A stock market with reduced liquidity and valuations also runs a risk of an increased number of take-privates, which, while not necessarily a problem per se, does serve to reduce the overall size and depth of the public markets. So, while the Chancellor can be congratulated for personally engaging with the Chinese fashion retailer Shein, to persuade the company of the merits of a London Stock Exchange IPO as opposed to a New York listing, I hope that the Treasury might also bring influence to bear to resolve the strife in the investment company sector.
In many ways, the perilous position in which the investment company industry finds itself has similarities with the disastrous unintended consequences brought about by MiFID II, in respect of the unbundling of the costs of research from the services provided by equity brokers to their investing clients. The junior and mid-tier City brokers hit by the additional bureaucracy and associated costs discovered that there was not a market or culture among institutional investors to pay separately for unbundled research. As a result, within a short timeframe, numerous broking firms slashed their research product and sacked their analysts, and some were forced into mergers. Research coverage, particularly for junior companies, has been decimated. This has had a knock-on effect of reducing share liquidity and company valuations.
I welcome the fact that the regulators are consulting on revoking MiFID. Action cannot come soon enough, although much damage to the City’s equity research product has already been done. In both these instances, excessive regulation has resulted in investor withdrawal, and consequently lower share liquidity and valuations. Both situations have resulted in considerable harm to the overall health of the stock market and the equity departments at brokerage houses. Some firms are exiting the investment trust sector entirely. Before this situation deteriorates further, the FCA needs to act by amending its interpretation of existing legislation, or the Bill needs to be passed.
With its new secondary objective of enhancing the competitiveness of the UK market, the FCA should be focusing on resolving the excessive and unnecessary regulatory burdens that have been highlighted by the Bill. Instead, the regulator seems to be spending far too much time and energy introducing consultations, such as its recent paper, Diversity and Inclusion in the Financial Sector. Among other things, this paper proposes requiring firms to set diversity targets which must be disclosed, and to show progress towards meeting them. Firms will be forced to recognise a lack of diversity and inclusion as a non-financial risk. Other requirements of the consultation would suggest that the FCA may be pursuing gender ideology at the expense of women’s rights.
Perhaps my noble friend the Minister can explain how this consultation is compatible with the FCA’s objective of facilitating international competitiveness and the growth of the UK economy, and, further, how this meddling is appropriate while a major constituent part of our listed equity market is struggling as never before.
Lord Macpherson of Earl’s Court (CB)
My Lords, I declare an interest as chairman of the Scottish American Investment Company, which last year celebrated its 150th anniversary, and also as a happy shareholder in several investment trusts. I therefore feel well placed to speak both for retail investors and for the providers of investment trusts more generally.
I congratulate the noble Baronesses, Lady Altmann and Lady Bowles, for introducing the Bill, and for securing this timely Second Reading debate. I also thank them for their tireless advocacy of sensible regulation that protects consumers, even though, when I was at the Treasury, I was sometimes on the receiving end of their complaints.
The investment company industry is a British success story, but, above all, it is a Scottish success story, contributing to Edinburgh’s role as an international financial centre. Investment companies are an effective way of building a diversified portfolio. Their closed-end nature means that investors are not subject to the vagaries of sustained outflows, and the potential lock-in or gating of their savings. Looking back over their history, they have always been at the respectable end of the savings industry, providing reliability and resilience. Unlike more conventional open-ended funds, investment companies have independent boards, whose role is to put the interests of shareholders first.
Investment companies have therefore provided a great savings vehicle for all investors, including those with modest means, as well as the better off. I was recently looking at the original subscribers to the Scottish American Investment Company back in 1873. They may have included the odd wealthy widow, but they also included one William Mackenzie, a sergeant major of Stirling, who bought 20 shares, as well as John Bothron, a fish curer from Anstruther, Fife, who bought 12. Hard data on who owns investment trusts today is more difficult to come by. However, given the easy access to shareholding provided through the proliferation of platforms, I am confident that the investor base in investment companies is more diverse than it was 150 years ago. The investment trust sector manages some £260 billion-worth of assets and provides important capital to companies who need it, both in the UK and across the world. In short, the sector provides the investment resources for sustainable growth.
Like many in this House, I supported the UK’s membership of the European Union, for all its limitations, and I feel that, whatever its political benefits, Brexit has damaged the performance of the British economy—but that is water under the bridge. Where I can agree with successful advocates of Brexit, such as my former Minister at the Treasury, the noble Lord, Lord Lilley, is that we are all now united in wanting to grasp every opportunity Brexit provides to support economic activity. It is a little disappointing that, seven years on from the referendum vote, the Government have not made more progress in removing unnecessary regulation.
The fact is that the Alternative Investment Fund Managers Regulations 2013 were not the European Union’s finest hour. I admit to being implicated, because I was the Permanent Secretary to the Treasury at the time. As I recall, the Treasury and the FCA did their best to improve its drafting—but clearly not enough. The so-called PRIIPs regulation imposes requirements on investment companies that do not apply to listed trading companies or, even more bizarrely, real estate investment trusts. I am all in favour of transparency when it comes to transaction costs and charges, but, as defined by PRIIPs, the relevant cost metrics are positively misleading and are as likely to harm consumers as to protect them.
I will highlight a couple of areas, and I apologise if they are a little technical. First, the inclusion of future performance estimates based on evidence from past performance is a flawed approach, as any shareholder in Northern Rock or RBS can bear witness to. If any disclosure on performance is necessary, it is surely right that, in line with the current UCITS KIID requirements, past performance becomes a standard disclosure and replaces the need for future performance estimates, which have the clear potential to mislead consumers.
Secondly, I highlight the inclusion of gearing costs in the ongoing charges figure. The cost of the debt must be disclosed without information on the borrowing terms—critically, the interest rate and term to maturity. The key point here is that the costs of gearing do not benefit the investment manager; they are actually paid to the lender. Often, borrowing enhances shareholder value, especially if you took out the borrowing when interest rates were lower.
The flaws in the PRIIPs regulation discourage savers from investing in investment companies. Although I would not like to exaggerate their effect, they are potentially contributing to the scale of discounts to net asset value that many companies are currently experiencing. I therefore welcome the recent publication by the Treasury of its draft statutory instrument on the UK retail disclosure framework. The residual Treasury official in me has some sympathy for the view that, if we are to reform EU legislation, we should go about it in a holistic way. I recognise that it is important to get things right, but the result is that we are missing easy wins, and I fear that the best is becoming the enemy of the good.
In conclusion, I encourage the Minister, even at this late stage, to support the Bill. If she cannot, can she confirm that the Treasury’s and the FCA’s intent is to implement the spirit of the Bill? In short, will they amend the law so that listed investment companies will no longer be classified as alternative investment funds? Can she give us a clear timetable indicating from when any changes to the law will come into effect?
Baroness McIntosh of Pickering (Con)
My Lords, I am delighted to follow the noble Lord. I was introduced to investment trusts by my late father, who was a proud Scot and a modest investor. Sadly, since his passing, my investment portfolio seems to have been on the downward trajectory.
I congratulate my noble friend Lady Altmann on the excellent and timely Bill before us, along with the noble Baroness, Lady Bowles, who is supporting it. I lend my full support for the proposals contained therein. I commit to their energy and enthusiasm for the provisions of the Bill and the aim of protecting investors, whether minor or major, who are shareholders in investment trusts. My noble friend called for the urgent issue of guidance, and I support her request. Can my noble friend the Minister say whether there is any reason why guidance could not be issued? That would support the call from the noble Lord, Lord Macpherson, for an urgent review and revision of the law.
I press the Government on the matter of a consultation. Will my noble friend the Minister bring forward a consultation at the earliest possible opportunity, with a view to introducing legislative measures in short order thereafter? Presumably, that could be by way of statutory instrument and regulations, rather than the need for primary legislation such as that before us today.
Further, does my noble friend the Minister agree with my noble friend Lady Altmann, the noble Baroness, Lady Bowles, and others who have spoken that the current situation is unacceptable and—as the noble Lord, Lord Macpherson, said—highly misleading to potential investors? This is a serious but typical case of gold-plating, whereby, as I understand it, the original directive was not prescriptive but a domestic interpretation, through regulation, added bells and whistles.
This is not the only example of this. From my personal experience of serving as a Member of the European Parliament, I know of the abattoir directive. That was very much a framework directive, but the home department, the Ministry for Agriculture, Fisheries and Food, looked at it as the opportunity to close a number of family-run abattoirs, with the perverse effect that animals had to travel further to slaughter. Another example is the toy safety directive, which, in its domestic implementation, added all sorts of provisions that meant that the donation of second-hand toys to charity shops dried up. That led to the then Trade Secretary—the noble Lord, Lord Heseltine—calling time on that highly-damaging practice to the domestic industry.
In support of the Bill, I can do no better than quote my noble friend Lady Altmann from a recent article in Money Marketing. She wrote:
“UK investment companies have historically been a world-beating success story, offering an excellent way for investors to back sustainable British growth. But this once thriving sector, with over 350 companies quoted on London stock markets and assets exceeding £250bn, is in crisis”.
She concluded:
“It is … galling to see new EU-derived cost disclosure rules, not applied in the EU or any other country”,
undermine
“a once thriving UK financial sector”.
In the words of the noble Lord, Lord Macpherson, the Brexiteers won and have achieved their goal, but they must accept that this is the complete opposite of a Brexit dividend. It is highly damaging to both existing and potential investors, and has been highly damaging to the financial sector. The Bill is an opportunity for my noble friend the Minister to address that, and I hope that she will take that opportunity today.
Lord Hannan of Kingsclere (Con)
My Lords, I congratulate my noble friend Lady Altmann on introducing this proportionate, timely and sensible measure. I also congratulate the noble Baroness, Lady Bowles, on setting out clearly where the existing legislation is going wrong. Some 11 years after the event, I belatedly offer an apology to the noble Baroness and some of her colleagues in the European Parliament. We served there together, representing the same region. In common with a number of Conservative MEPs, I used to tease our Lib Dem colleagues by saying, “They will sign anything that is put in front of them from Brussels. They never read it; they unambiguously support it”. But that was not really true—and it was not true on this occasion.
For all the reasons we have heard, this legislation was using a sledgehammer to miss a nut. This was legislation intended as a response to the financial crisis, but, as somebody put it, when there was a general melee in the bar brawl, instead of looking for the person who started it, they just hit the nearest person.
I remember the unanimity in this country against the AIFMD in 2013, in the industry itself, in the City more widely and among all the political parties. I remember one of the fund managers saying, “This is such a needless and costly measure that we are exploring whether just to break it and pay the fine and call that a fee. We think that that may be less intrusive than having to assimilate the compliance costs”.
I assumed that, the day after Brexit, this would be at the top of the list of the measures to be axed, since it had literally no support. In fact, I had assumed—rather innocently and naively, I now see—that the first response of the Government after Brexit would be to go back and look at all the measures that the UK had opposed and voted against in council, and at the departmental arguments raised against them, and then see whether those still applied. I am afraid that that has not happened. I had underestimated what Milton Friedman called the tyranny of the status quo: the way in which, however irrational and arbitrary your arrangements, some people have found a way of making a living out of them and become opponents of change.
I am afraid that this is one of the dynamics that makes deregulation very difficult. AIFMD is maybe not the best example, but it is an example none the less of the entire industry opposing something, yet, once people have assimilated the compliance costs themselves, they lose interest in repeal. Indeed, in some cases it is not just that they lose interest in repeal; they do not want the next guy to come in and undercut them, so they sometimes perversely become advocates for the thing they used to oppose, because they now see it as a barrier to entry.
By the way, this goes way beyond the field of financial services. It applies to some of the more bizarre SPS and food safety things we have inherited, right the way through to the REACH directive. People say, “Well, the industry is now in favour of it”. Of course they are—once they have taken on the compliance costs. However, the role of a Minister and of a Government is not just to act as the agent, tool or mechanism of the existing producer interest, but to think about the companies that do not yet exist and about the consumers, the start-ups and the entrepreneurs.
As some of your Lordships know, I was quite wet about Brexit: I wanted a Swiss-type deal all the way through, and I argued that we should have maintained a lot of the accumulated single market measures, which would have solved a lot of problems. We did not do that. The Theresa May Administration took a different attitude, and we paid a fairly high price in the disengagement talks for the right to regulatory autonomy. Okay; I am on board with that if that is the policy. However, surely we can all agree that the worst of all worlds is to pay that price in the talks and then not use the regulatory autonomy. It is bizarre to insist on the ability to have these freedoms and then, even in a case like this, where all sides agree that we are doing something costly and needless, we do not use them.
I get that there will be probably a majority in this House who, in other areas, want a much closer deal now with the EU and to go back into some kind of customs union arrangement. Fine; but I think we are all agreed that we are now autonomous and competing globally in financial services, and we need to make the City of London a place where people want to invest.
I close by saying to my noble friend the Minister that when she sees my noble friends Lady Altmann and Lady McIntosh of Pickering, and the noble Baroness, Lady Bowles—and indeed, I assume, the noble Baroness, Lady Kramer, although she has yet to speak—all effectively lining up and saying, “We need to be doing more to take advantage of our Brexit freedoms”, perhaps something has gone wrong and this is the time to act.
Baroness Kramer (LD)
My Lords, as the first of the winding-up speakers, I will just say that in this area I lack the expertise of everyone who has spoken up to now, so I will not attempt to summarise the contents of the Bill or discuss the detailed nature of the industry. However, I hope the Government understand that although the Bill may have many highly technical elements, in fact a much more fundamental issue is being addressed. Frankly, it is about the survival of a crucial and key part of our financial sector that makes up both the life of the City of London and of Edinburgh, and of our financial services industry more generally.
I do not think I have ever before participated in a debate where every speaker from every side of the House—for example, the noble Lord, Lord Davies of Brixton, on the Labour Benches, and there is another Labour Member to follow—is of the same view, be it the noble Lord, Lord Hannan, the Cross-Benchers, the Liberal Democrats or the Conservatives. I hope that the Minister will understand the message embedded in that. We are looking at an issue of real significance and urgency, and I stress the word “urgency”.
The one group resistant to tackling this issue in a timely way, minimising the damage already done and preventing further damage, appears to be the regulator, the Financial Conduct Authority. The Government are in a position, through Treasury, to invite the FCA to take a look again at the regulation it has in place and encourage it—I know they cannot instruct it—to act much more rapidly to stem the issues raised today and the sense of anger across this House, because the regulator seems quite complacent in its response to a deep and underlying problem.
It is clear from today’s speeches that we are dealing with the most extraordinary misapplication of legislation and gold-plating, and I doubt whether a single person in either Chamber would defend those two fundamental approaches. I join others in giving special thanks to the noble Baroness, Lady Altmann, and my noble friend Lady Bowles. It is extraordinary that, although we have an expert regulator, we have had to rely on the chance factor of expertise in the House of Lords in order to perhaps be able to force action. I hope the Government will look at the expertise and resources embedded in the FCA, because I cannot believe that if it truly understood this issue, it would be taking the complacent approach it seems to be taking.
There are obviously beneficiaries from this approach, but none of them are British. The United States will be a major beneficiary of the outflow of business, as will, ironically, Luxembourg, Paris and Dublin. As I say, it is very much a gold-plating issue, as many of us here today have discussed.
I wanted to pick up on an issue the noble Lord, Lord Reay, raised: the FCA’s focus on diversity in financial services. I hope my speech will not be seen as an endorsement of that. It is important that our whole industry and every sector understand the issues of diversity, but in no way should that be a distraction from dealing with a fundamental issue concerning the listed investment companies.
In conclusion, these Benches are entirely behind the noble Baroness, Lady Altmann, my noble friend Lady Bowles and the others who drafted and shaped this legislation. I recommend that the Government hand them the pen, as they really have the ability to sort this problem out. However, if they cannot do that, will they turn directly to the FCA and again invite it to take the necessary steps? I think there are powers they can use to issue that invitation in fairly strong language and with strong impact, in order to get a resolution—and rapidly.
Lord Livermore (Lab)
My Lords, it is a pleasure to take part in this debate and to listen to and learn from contributions from many genuinely expert noble Lords. I congratulate the noble Baroness, Lady Altmann, on securing the Bill and pay tribute to her not only for raising this issue to the prominence it deserves in your Lordships’ House and for the hard work I know she has put in to get her Bill to this stage, but for her tireless campaigning on behalf of consumers, pensioners and investors, not just on this topic but on many others over many years.
In her excellent and persuasive opening speech, the noble Baroness made an extremely compelling case for action. I agree strongly with much of her analysis and many of the objectives of her Bill. I will briefly review some of the key points that underlie the Bill.
First, we have seen in the debate today a clear consensus on the importance of this sector to the UK economy. It makes up over 30% of the FTSE 250 and supports vital economic growth areas, as well as a wide range of environmental and social investments. It is also clearly a sector that we as a country should feel pride in. As the noble Lord, Lord Macpherson of Earl’s Court, and the noble Baroness, Lady McIntosh of Pickering, said, UK investment trusts are a long-standing British success story, offering for over 150 years access to ready-made portfolios which the vast majority of investors could neither put together nor manage themselves. The noble Baroness, Lady Bowles of Berkhamsted, who has highlighted this issue in your Lordships’ House several times already, today took us on a thorough and concerning tour from her own expert perspective of how we ended up where we are today.
It is clear from what we have heard in this debate that charges disclosure rules, derived from the EU, have been inappropriately applied to UK-listed investment trusts. As a result, those companies have been forced to show misleading information to investors, exaggerating the costs of holding their shares. Despite the Financial Services and Markets Act specifically empowering UK regulators to shape financial regulation in the national interest, this inappropriate application has made UK-listed investment companies appear misleadingly expensive for investors to hold.
This has likely given rise to three key consequences. First, it has contributed to UK investment trusts being starved of capital because waves of selling, lack of buyers and share price weakness have stopped capital raising for vital growth sectors, as UK investment companies suffer an exodus of capital from institutions and wealth managers.
Secondly, funding has materially declined as investors use non-UK-listed investments or riskier individual shares instead. This has exacerbated the UK’s shortage of an important source of growth capital for the very areas that we need the private sector and pension funds to support, since most investment trusts invest in real assets, including vital infrastructure projects such as schools, motorways, affordable housing, police and fire stations, and NHS hospitals. Taking the right action now could bring stability back to the investment trust sector and help to harness the power of UK pensions, ISAs and retail investments in order to better support the British economy.
Thirdly, UK-listed investment trusts have been made to look uniquely unattractive compared with our global competitors. Investors are needlessly switching out of UK markets, depriving consumers of dependable dividend-paying investments and denying them access to ready-made portfolios that could add diversification and improve their long-term returns.
The Financial Services and Markets Act specifically introduced the secondary competitiveness objective in order to speed up the pace at which regulators can act when UK competitiveness is under threat. Yet that does not appear to be happening here. Neither does it appear that the new consumer duty is being upheld, as the current system arguably misinforms consumers by exaggerating the costs involved and preventing them making properly informed decisions about what investments to buy.
Ultimately, the Bill of the noble Baroness, Lady Altmann, calls for the Government to act with urgency. That must be right. There is widespread and cross-party agreement, as reflected in the contributions we have heard in today’s debate, that these rules clearly are not working for UK-listed investment trusts. The ultimate responsibility for remedying that and making progress must lie with the Government.
We have been reminded during today’s debate that, in his most recent Autumn Statement, the Chancellor asked the FCA to take action to remedy the problem of charges disclosure regulations forcing investors to sell UK-listed investment trusts and driving pension funds to buy overseas investment companies instead. Since then, what has changed? It would appear that nothing has changed; in fact, the exodus of capital from the investment companies sector has actually accelerated. Having recognised that the rules guiding charges disclosures for UK-listed investment companies are misleading investors, the much-needed urgent change simply has not materialised. I would therefore be grateful if the Minister could set out when she responds to the debate the concrete steps that the Government will now take to remedy this problem. Action is needed; if the Government decide to take the appropriate action, we will support them in that.
I end by once again congratulating the noble Baroness on her Bill. It is a timely piece of legislation exposing a significant problem that has been left unsolved for too long, at considerable cost to both the sector and the wider economy. This Bill unarguably makes the case that urgent action is required. I hope that this debate, as well as the further passage of this Bill, will help to expose these issues and compel the Government and regulators to move further and faster than has so far been the case.
The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)
My Lords, I, too, congratulate my noble friend Lady Altmann both on securing this important Second Reading debate on her Bill and on her excellent contribution setting out the challenges that she hopes to fix. I am grateful to her for her engagement on this issue; I hope that it will continue as we continue our work in this area. I am also extremely grateful for all the contributions made in your Lordships’ House today. I note that there was violent agreement that something must be done; I hope to set out the Government’s plans to do this, but I will ensure that my colleague, the Economic Secretary to the Treasury, has a look at Hansard because it is important that he understands the breadth of feeling and some of the important issues that were raised.
As noble Lords have heard, this Bill would amend the Alternative Investment Fund Managers Regulations to remove listed investment companies, also known as investment trusts, from scope. It would also make amendments to other assimilated law, formerly retained EU law, in order to make changes to cost disclosure requirements for listed investment companies.
The Government share my noble friend Lady Altmann’s drive to champion the investment company sector and ensure that the UK’s capital markets continue both to thrive and to drive forward our economy. It is true that, over the past two years, there have been relatively few initial public offerings globally; the UK has not been immune to those trends. This market turbulence has also impacted the investment company sector, in which the UK is undoubtedly a world leader. However, London continues to be Europe’s leading hub for investment; it raised more capital in 2023 than Frankfurt and Amsterdam combined.
The Government are committed to building on the UK’s strong foundations in this area by taking forward, through the smarter regulatory framework, ambitious reforms to streamline the regulatory rulebook, boost investment into UK markets and improve the competitiveness of the UK as a listing destination.
Investment companies are a wonderful British—more specifically, Scottish, according to the noble Lord, Lord Macpherson; he is right—invention dating back more than 150 years. The way in which they have become such a backbone of our investment economy is quite incredible. I assure all noble Lords that the Government are committed to supporting this very important sector.
However, I must express some reservations about my noble friend Lady Altmann’s Bill, although we recognise the rationale behind its being brought forward. I will first address the amendments that would exclude listed investment companies from the Alternative Investment Fund Managers Regulations, or AIFMR. Amending the scope of these regulations could have a significant impact. It would not be appropriate for the Government to change the regulatory perimeter using this Private Member’s Bill in isolation, without proper and appropriate consultation and further consideration.
As part of building a smarter regulatory framework for financial services, the Government are already carefully considering how to make AIFMR more streamlined and more tailored to UK markets. The Government recognise the concerns about regulatory inefficiencies for listed investment companies under AIFMR. However, we are also conscious that some investment companies value being regulated financial services providers; at this point, I note the warnings put forward by my noble friend Lord Hannan.
Given the spectrum of views on this issue, it is vital that the Government provide an opportunity for all impacted stakeholders to comment. It is for this reason—this is the first time that it will be publicly known, I think—that the Government will consult in the next quarter on how the UK should approach AIFMR. This will, I believe, fulfil my noble friend Lady McIntosh’s requirement for some consultation. Obviously, we want to do this as speedily as possible, but we need to get information from the industry, the investment companies sector and beyond about how to take it forward. Once we have that, we should be able to move fairly rapidly.
We know that only through careful consultation and consideration can we provide listed investment companies with the longer-term certainty of an appropriate regulatory framework. I agree with the noble Lord, Lord Macpherson: sometimes, it is really important to get these things right. Although some people often criticise the Treasury for taking too long and being—dare I say this as a Treasury Minister? I am not sure—a bit staid and sober, we have to get things right.
Baroness Kramer (LD)
I have a question for the Minister. With much of this gold-plating, I am not sure that the regulator consulted on implementing it. Why would it then have to consult on removing it?
Baroness Vere of Norbiton (Con)
I will come on to gold-plating. I am not entirely sure that everybody is in alignment on whether or not this regulation is implemented, but consultation is just good government. I do not see us making substantial changes to the regulatory scope on the basis of having not done it before we are not going to do it now. We need to get it right, but we absolutely support the investment company sector and want to get on with this. That is why I am so grateful to my noble friend Lady Altmann for bringing this forward, allowing us to have a conversation in the Treasury and beyond.
I turn to the second element: cost disclosures. My noble friend Lady Altmann has rightly identified that EU-derived legislation is not currently fit for purpose, as many other noble Lords, the Government and the Financial Conduct Authority would agree. The packaged retail and insurance-based investment products regulations, commonly and more easily known as PRIIPs, were originally meant to provide more transparent and standardised disclosure for retail investors across the European Union. Noble Lords are well aware that there are many problems with the EU PRIIPs regulation. It is prescriptive, misleading to retail investors and prioritises comparability over a wide range of financial products at the expense of consumer understanding.
That is why, as part of the Edinburgh reforms, the Chancellor announced that, as a priority, the Government would reform PRIIPs. We have already made significant progress on delivering this commitment. Most recently, at the Autumn Statement last year, the Government published a draft statutory instrument to replace PRIIPs with a new framework tailored to UK markets.
We understand industry’s concerns regarding broader legislation that prescribes firms to calculate their costs as they are required to do so now, and so the Government and the regulator have not stopped there. At the same Autumn Statement, the Government announced that they would bring forward the repeal of relevant cost disclosure provisions in the markets in financial instruments directive, or MiFID, alongside the replacement of PRIIPs.
Many noble Lords have mentioned that the FCA has published the forbearance statement, and some feel that it has not gone far enough. I will ensure that the FCA is made aware of the debates that noble Lords have had today. There has been significant criticism, which it will no doubt be interested in, and some suggestions of how it might be able to go forward.
I hope that this brief summary has provided sufficient reassurance to my noble friend Lady Altmann, and to all noble Lords, that the Government are treating this as a priority. We have a comprehensive plan to alleviate the harms faced by the investment company sector, but are committed to making sure that we get it right for the long term, to ensure that 150 years already gone by becomes another 150 years in the future.
I have mentioned consultation, so I will move on from that to cover some points raised in the debate on timelines. I accept that, for many noble Lords, and indeed Ministers, it is never fast enough. This was mentioned by my noble friend Lord Hannan and the noble Lord, Lord Macpherson. We are delivering a very ambitious programme to build the smarter regulatory framework for financial services. At Mansion House, the Government removed almost 100 pieces of unnecessary EU legislation from the statute book, and now we are looking at wider reforms—those mentioned in the debate today and others, including Solvency II—that will deliver the biggest potential benefits.
I note that my noble friend Lord Hannan would have liked us to go through things in a different way. The Treasury is very much focused on looking at where we can have the biggest and quickest potential benefits to economic growth. We are conducting a phased approach to bringing in this change of regulation because we must also ensure that the system and different financial sectors can cope with this change in legislation.
I note the invitation from the noble Lord, Lord Macpherson, to make commitments from the Dispatch Box on certain matters. I am not able to do so just yet—maybe soon.
There is debate around gold-plating. I hope that that will all be laid to rest as we are able to reform this and ensure that we have the right framework going forward.
My noble friend Lady Altmann mentioned investment companies being removed from platforms. We note and recognise the frustration that some investment companies feel at having been removed from investment platforms. I reassure her that, although this is a commercial decision, the Government and the FCA are well aware of this issue and are carefully considering what options are available. Ditto in the use of the EMT, the MiFID template. This is a voluntary template, but we understand that it may not be providing the best information to retail investors at the current time.
Many noble Lords have noted the competitiveness of the UK capital markets. That is what underpins the smarter regulatory framework. Despite recent challenges, the UK has many vibrant and dynamic capital markets, and they remain some of the deepest and strongest globally. However, we cannot rest on any laurels; we have to keep moving forward in this area. That is why the Government are delivering on my noble friend Lord Hill’s listings review, the wholesale markets review, and the Chancellor’s Edinburgh and Mansion House reforms.
The noble Lord, Lord Davies, mentioned the FCA’s activities and scrutiny of the regulator’s role. My noble friend Lord Reay mentioned the FCA’s D&I work, as did the noble Baroness, Lady Kramer. Parliament does have scrutiny over the FCA and many other regulators. Assimilated law is being replaced, in line with the UK’s domestic model of regulation. This means that the UK’s independent financial services regulators will generally set the detailed provisions in their rulebooks, instead of firms being required to follow EU law. This approach was following two consultations and it received broad support across the sector. Parliament debated this approach during the passage of the Financial Services and Markets Act 2023, and it secured parliamentary support then.
The Government recognise the importance of effective parliamentary scrutiny of the regulators, including their approach to rule-making and other activities that they may choose to undertake. That is why FiSMA 2023 introduced additional mechanisms to strengthen Parliament’s existing ability to scrutinise the regulators’ work, including requirements for the regulators to notify parliamentary committees, such as the new Financial Services Regulation Committee, of their consultations and to explain, when publishing final rules, how representations by parliamentary committees have been considered. I warmly welcome the formation of that committee. It will be hugely helpful, and it is quite right and proper that independent regulators are held to account by Parliament.
I will write with a few further comments on the investment in the UK capital markets by UK pension funds and on a few other issues which have arisen and need a fuller response. For the time being, I am very grateful to my noble friend Lady Altmann and many other noble Lords for their continued championing of the investment company sector.
Baroness Bowles of Berkhamsted (LD)
I am sure that my interruption is unwelcome, for which I apologise, but it is quite important. Further consultations have been measured and, as my noble friend Lady Kramer pointed out, the aspects of PRIIPs and MiFID where there has been gold-plating that is causing these problems were never consulted upon. It is within the gift of the FCA to make changes.
These cost disclosure issues have featured massively already in two consultations from the Treasury on PRIIPs and in evidence that was submitted to the Treasury last summer, after my own attempt to amend FiSMA 2023. On these discrete issues, legislation does not need to be amended; what the FCA is doing needs to be amended. Support has been heard from these Benches and the Labour Benches for the Government taking more intrusive action. Has that message been received or are we still bogged down in officialdom and consultations? That is what we want to know.
Baroness Vere of Norbiton (Con)
As I set out in my closing remarks, the consultation is for AIFMR. It is not related to the other issues that the noble Baroness has raised, because, as she says, they have already been consulted on. That element of it is under consideration by the Economic Secretary to the Treasury. There may be more news fairly shortly.
I am grateful to all noble Lords who highlighted the substantial challenges faced by this uniquely British, nay Scottish, asset. I am also grateful that the noble Baroness brought her concerns to the Government’s attention. I hope I have reassured noble Lords directly that the Government take this issue very seriously, that we are working at pace on finding a resolution and that I will ensure that all Ministers and regulators are aware of the strength of feeling in your Lordships’ House. I hope to have further news in due course.
Baroness Altmann (Con)
I thank my noble friend for her concluding remarks and engagement with this issue. I hope that she will indeed take some of the messages back to the department because, so far, they do not seem to have been taken on board as seriously as one might have hoped. We all want thriving capital markets in this country, and I thank all noble Lords—I will thank them individually rather than taking up the House’s time now—who each explained so clearly why this is so important.
That is where I would urge my noble friend to focus, because the SIs for PRIIPs and MiFID, even if they were introduced “quickly”—which presumably means in the coming months—would still require further consultation before anything changed in the market, unless listed investment companies are excluded from the definition of the CCI. But that is not the current proposal. We are actually keeping them in there, despite the industry unanimously recommending against that; hundreds of members of the industry have said that this needs to be done. If this is not achieved—and it sounds to me as if it may not be in the plan—the Bill would be the quickest way to resolve the problem that is affecting the market now.
I urge my noble friend to urge her colleagues to speak to the industry, because selling waves have begun again. This is depriving the economy and investors in this country of capital that otherwise would be directed here. It seems there is a sense of complacency at the regulator and a fear of change, even when it is clearly required. As so many noble Lords have said, we need to ensure that investment comes back to the UK.
Could my noble friend perhaps write to me—I hope that we can engage further on the Bill in the coming weeks—on whether it is the FCA’s interpretation of the legislation that is causing the problem? No EU country is interpreting the very same rules in the way that the FCA has applied them to our investment companies. No other investment company, either in the EU or anywhere else, is misleading investors in this same way. If that is the case, the guidance from the FCA could be brought into line with that everywhere else in the world, and that would solve some of these issues in relatively short order.
As I have said, I would be happy to withdraw the Bill or discuss amendments with my noble friend—for example, to add a clause saying that there must be consultation on removal from the AIFMR, if that is considered essential. I hope that the views of the House, which have been unanimously expressed, will prevail, as this matter cannot be left to languish any longer, because the industry of which we are so proud is under existential threat. Capital is fleeing this country and we need it to come back. I thank my noble friend for all her engagement.
Alternative Investment Fund Designation Bill [HL]
Wednesday 1st May 2024
(6 months, 3 weeks ago)
Lords ChamberRead Full debate Alternative Investment Fund Designation Bill [HL] 2023-24 Read Hansard Text Watch Debate
Baroness Altmann (Con)
My Lords, I understand that no amendments have been set down to the Bill and that no noble Lord has indicated a wish to move a manuscript amendment or to speak in Committee. Unless, therefore, any noble Lord objects, I beg to move that the order of commitment be discharged.
Alternative Investment Fund Designation Bill [HL]
Friday 10th May 2024
(6 months, 2 weeks ago)
Lords ChamberRead Full debate Alternative Investment Fund Designation Bill [HL] 2023-24 Read Hansard Text Watch Debate
Baroness Altmann (Con)
My Lords, I beg your Lordships’ indulgence to make a few remarks on the importance of this Bill. I declare an interest as a shareholder in investment companies, and I pay tribute and thanks to my noble friend and her officials for their work. I thank the Public Bill Office, the noble Baroness, Lady Bowles, the noble Lord, Lord Livermore, and all noble lords who supported this Bill at Second Reading. I also thank Nigel Farr of Herbert Smith Freehills and many journalists and industry experts, as well as a group of investment company executives who have been highlighting a problem that affects all of us in this country.
This week, the Treasury Select Committee received evidence from the FCA, the regulator, which clearly demonstrated why this legislation is so urgently required. The UK’s own regulator seems not to understand how this sector works from an investor perspective. A quarter of a trillion pounds from companies that are responsible for and investing in growth companies of the future, in alternative energy and so on, is being mishandled by our regulator. I therefore urge my noble friend the Minister to take back to her department the urgency of speeding this legislation through the other place or, preferably, encouraging the FCA to recognise its errors and immediately change industry guidance on charges disclosures.
It is truly frightening that the FCA told the Treasury Select Committee this week that investment company management fees are directly deducted from the value of an investor’s holding this year. Indeed, we were given a helpful example; the FCA said that
“if you put £100 into an equity investment trust”
and share prices do not change, the investment will be lower in one year’s time
“because of the management fee”.
That is simply not correct. Our regulator has also obliged investment companies to put this incorrect information into their key investor documents, even though it is wrong. This error has now usefully been exposed this week—we did not know this when we were debating the Bill at Second Reading. It lies at the heart of the problem that the Bill seeks to remedy; the value of a listed investment company’s shares is the share price, not the asset value.
Of course, all charges must be disclosed, and indeed they are, but the regulator and government officials seem not to realise that the way investors are given information is misleading them, and creating selling pressure and starving of capital. This is an important part of the UK financial markets, which have always been a success story for the UK. It is undermining and creating existential damage to the very sector that the regulator is responsible for looking after. The investor needs to know what costs are, as any share investor needs to know what costs the company it is investing in incurs, but they also need to know the premium or discount, not just whether their management fee is cheaper or more expensive than an open-ended company, which directly deducts those management fees from the investor holding.
It is globally recognised—apart from here, it seems—that, as an uncontroversial foundational principle of public market valuations, the investor’s value is the share price. The current regulatory interpretation of EU-derived legislation, as transposed into UK law by the FCA, directly contradicts this. The FCA also incorrectly claimed to the Treasury Select Committee that other countries disclose management expenses as we do, entering values for so-called “ongoing charges figures” in the industry-standard data fees, presented for investors to rely on when seeking to inform themselves or when retail platforms inform them of relevant information they need to know. The FCA seems not to know how the EMT actually works.
This is why such legislation is important, and perhaps explains why, so far, the situation has been allowed to continue. The other countries entering so-called consumer costs for their investment companies are not entering the figures as we are; it is simply not the case. I urge my noble friend to urge the FCA to inform itself properly before further damage occurs.
Baroness Bowles of Berkhamsted (LD)
My Lords, I declare my interest as a non-executive director of the London Stock Exchange, and as a shareholder in investment trusts. I thank everyone who has involved themselves in this Bill and on this topic; we had a remarkable and united Second Reading debate.
The Bill is a catalogue of where listed investment companies have been squeezed into fund legislation without any tailoring to their listed company structure, from which a single solution could be selected to solve current market disruption ahead of replacement EU legislation. Reporting formats for management charges were designed for the huge open-ended fund industry and the price formation structure of equity listing and trading never got considered, yet the UK uses that same format for listed investment companies. Therefore, investors are wrongly told at the point of sale that expenses already baked into the share price will be deducted annually from their investment holding—producing severe economic effects, and decimating share prices, IPOs and follow-on funding.
The EU does not consider this format of cost disclosure applicable to listed investment companies, and Swiss regulators now explicitly state that it does not apply, in an open invitation to list there instead of London. Correction does not mean that expense ratios cannot be presented at point of sale; they just need a true explanation. Suggestions on how to do that already exist, and they are better explained, for example, in Australia.
However, Treasury officials and the FCA say that we can wait a year or so for adjustments, claiming it is chiefly macroeconomic circumstances. But if it is all macroeconomic, why have investment trust NAVs been performing well? Unfortunately, NAV is not what the shareholder owns, even if the FCA and its CEO do not understand that, as exhibited at the Treasury Select Committee this week.
Really, it just will not do, and it will not do because the people being hurt are retail consumers owning shares. Mainstream ex 3i discount to NAV is now at minus 15% compared to minus 4% in January 2022. That is way out of line with anything that has happened through crises, or when there have been comparable interest rates to now. Retails consumers owning half of listed investment company shares have suffered a value decline against NAV of £22 billion since the misleading disclosure format started. Another year or more of this retail consumer harm could be avoided, even just by selectively advancing the MiFID proposal contained in the Bill—recognising the truth that, with listed shares, value owned is share value. Let expense ratios be disclosed in their true light, not deceptively described as a deduction from holdings.
Lord Livermore (Lab)
My Lords, I congratulate the noble Baroness, Lady Altmann, on the success of her Bill. I pay tribute to her for raising this issue to the prominence it deserves, and for the hard work that I know she has put in to get her Bill to this stage.
Throughout the passage of the Bill, the noble Baroness has made an extremely compelling case for action. It is a timely piece of legislation, exposing a significant problem that has been left unsolved for too long, at considerable cost to both the sector and the wider economy. The Bill unarguably makes the case that urgent action is required. I wish it well in the other place. I hope it will help to expose the issues involved, and that it might compel the Government and regulators to move further and faster than has so far been the case.