The Parliamentary Under-Secretary of State, Department for Business and Trade and Department for Science, Information and Technology (Baroness Jones of Whitchurch) (Lab)

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My Lords, I congratulate the noble Baroness, Lady Bowles, on securing this important Second Reading, and thank her for her engagement on this issue so far. The Bill seeks to address an important concern for the sector which arises from assimilated EU law, and I am grateful for her work, and that of other Members of this House, to raise awareness of this issue.

Representing over 30% of the FTSE 250 and investing in over £250 billion of assets, investment trusts are a British invention dating back 150 years, which nevertheless play a significant role in the Government’s growth mission. Having said that, I must express reservations about the Bill.

As the noble Baroness has rightly identified, EU-derived legislation related to retail disclosure is not fit for UK markets. This is something on which the Government, the Financial Conduct Authority and many Members of this House agree. It is also an area in which the Government are already taking forward action at pace, to address industry concerns.

The packaged retail and insurance-based investment products regulation— PRIIPs—was originally meant to provide more transparent and standardised disclosure for retail investors across the European Union. There are many problems with PRIIPs, as the noble Baroness, Lady Bowles, stressed, and as this House is well aware. It is prescriptive, misleading to retail investors, and prioritises comparability at the expense of consumer understanding.

The Government are therefore committed to replacing the PRIIPs regulation with a new framework for consumer composite investments, and laid legislation to deliver this last month. This will provide the FCA with the appropriate powers to deliver a new disclosure regime which is more proportionate and tailored to UK markets and firms, including for investment trusts.

However, I recognise concerns from industry that PRIIPs cost disclosure requirements have had unintended consequences for the investment trust sector and its ability to fundraise. This is why the Government have also taken exceptional action to temporarily exempt investment trusts from cost disclosure regulation under PRIIPs. Legislation to deliver this reform was debated by this House earlier this week and I know that a number of noble Lords here were part of that debate. As the noble Baroness will know, the House passed the Government’s legislation on this yesterday. I urge all noble Lords who continue to have concerns to embrace the FCA consultation that will follow the adoption of those SIs.

This approach is intended as an interim measure to support firms as we finalise the replacement CCI regime. Recognising that the pace of legislative reform can be slow, the FCA had already implemented regulatory forbearance, so that firms were able to take advantage of this in advance of legislation taking effect. Given that investment trusts market directly to retail investors, it is right that they must provide tailored disclosure on costs, risks and performance to support consumer understanding. Like open-ended funds, investment trusts have management fees and an active investment strategy, which influence the returns provided to investors. While I agree that the current system of cost disclosure is not fit for purpose, in the long term, our reforms under the CCI regime will create bespoke and tailored rules for investment trusts.

Ensuring that retail investors can make informed investment decisions is an important part of ensuring healthy capital markets. Together, the instruments which the Government have already debated will enable the FCA to holistically reform cost disclosure, addressing issues with current disclosure requirements, including for costs. Meanwhile, I can assure the noble Lord, Lord Hodgson, that we are on the same page on the need to deliver economic growth and we believe that the measures we are taking in support of these actions will help the sector to become more competitive.

I hope that that brief summary will provide noble Lords with some reassurance, but there were some specific questions which I will attempt to respond to. Going back to the issue of the FCA’s forbearance statement, which I know the noble Baroness, Lady Bowles, and the noble Lord, Lord Hodgson raised, following the Government’s announcement that we would exclude investment trusts from PRIIPs in the interim, the FCA issued a statement on its own forbearance, in line with these intended reforms. As the FCA has stated, its forbearance is intended to apply along the distribution chain to any firm carrying out business relating to these products, including manufacturing, distribution or marketing.

All firms must, however, continue to comply with other relevant rules and regulations, including the consumer duty and the requirement to ensure that communications are fair, clear and not misleading. The PRIIPs (Retail Disclosure) (Amendment) Regulations will give legislative certainty to firms ahead of the implementation of the new CCI regime. While I recognise that there may be some frustrations in the sector, the operation of the FCA’s forbearance is, at the end of the day, a matter for industry and the regulator.

The noble Baronesses, Lady Bowles and Lady Altmann, stressed concerns about misleading disclosures. As noble Lords will know, investment trusts, like open-ended trusts and unlike shares in other companies, have an active investment strategy and associated fees. It is right that these costs should be disclosed to retail investors through tailored disclosure. Nevertheless, the Government recognise that the prescriptive cost disclosure methodology required by the PRIIPs regulation does not reflect the actual cost of investing in these closed-end funds. The proposed new CCI regime will provide more useful and relevant disclosure to retail investors and more flexibility for tailored disclosure to clients, and will be less burdensome for firms to produce.

The noble Baroness, Lady Altmann, asked why investment trusts are going to be subject to the CCI regime. The proposed new CCI regime will provide more useful and relevant disclosure to retail investors, more flexibility to tailor disclosure to clients, and will be less burdensome for firms to produce. It is right that investment trusts, like other products which directly market to retail investors, must provide tailored disclosure on costs, risks and performance for retail investors. The FCA will use the flexibility provided by the statutory instrument to ensure that those disclosures are tailored to reflect UK markets and firms, and to meet the needs of investors.

In response to the specific question of the noble Baroness, Lady Altmann, this regime will apply to all investment trusts, and they will be required to provide disclosure to retail investors.

I hope I have answered all the questions. I thank the noble Baroness, Lady Bowles, and all noble Lords for their broad support for what the Government are doing. I understand that they want to take this issue further, but I hope I have managed to answer the questions raised today. I echo where I started: I am grateful to the noble Baroness for her continued championing of the investment trust sector and for bringing her concerns to the Government’s attention. However, I hope that, on the basis of the specific issues and reassurances I have outlined today concerning the Government’s ongoing legislative programme, she will agree not to pursue her Bill.

The Financial Secretary to the Treasury (Lord Livermore) (Lab)

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My Lords, I congratulate the noble Baroness, Lady Bowles, on her Bill, and I thank her for her engagement on this issue so far. The Bill seeks to address an important concern for the sector, and I am grateful for the work of the noble Baroness and other noble Lords to raise awareness of the issue. As she has rightly identified, the previous legislation relating to retail disclosure was not fit for purpose. That is something on which the Government, the Financial Conduct Authority and many Members of this House agree, and it is an area in which this Government have already taken forward action to address industry concerns.

Only last month, the Government passed legislation to replace the package retail and insurance-based investment regulations with a new framework for consumer composite investments. That has provided the FCA with the appropriate powers to deliver a new disclosure regime that is more proportionate and tailored to UK markets and firms, including for investment trusts.

The Government also heard concerns from industry that the cost disclosure requirements have had an unintended consequence for the investment trust sector and its ability to fundraise. As a result, the Government took exceptional action to temporarily exempt investment trusts from cost disclosure regulation, with legislation passed last month to that effect.

Given that investment trusts offer their products to retail investors, it is right that they must provide tailored disclosure on costs, risks and performance to support consumer understanding. Together, the instruments that the Government have already passed will enable the FCA to holistically reform cost disclosure, addressing issues with current disclosure requirements. Ensuring that retail investors can make informed investment decisions is a key component of healthy UK capital markets.

I am grateful to the noble Baroness for her continued championing of the investment trust sector and for bringing her concerns to the Government’s attention. I hope she will recognise the genuine difference that her campaign has made. However, given the Government’s legislative interventions to resolve this issue, I am afraid I must express reservations on behalf of the Government on the Bill.