Alternative Investment Fund Designation Bill [HL]

3rd reading
Friday 10th May 2024 Lords Chamber

Third Reading

10:09

Motion

Moved by

[Baroness Altmann]

That the Bill do now pass.

[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.

10:15

Yes, we need a level playing field, but we need a level playing field with international and other companies, rather than worrying about comparing apples and pears. MiFID has not been applied; the same legislation has not been applied to any other member state’s domestic listed equities, and no listed companies outside the UK report MiFID costs and charges. This Bill seeks to remedy that error, which is causing such havoc in markets.

Again, the FCA chief did say that discounts have narrowed significantly, so the problem seems to be going away. I am afraid that too is misinformed. The discounts of all investment companies—except for 3i, which has never considered itself an investment company, but has been included in these figures—are now at a 40% premium. But all other investment company discounts have remained around the record levels that they were before, so it seems to me that any complacency is misplaced. I urge my noble friend to meet with us if she wishes to, or to urge others to meet with us, to discuss this really serious problem for the UK economy, our investors and our financial markets.

[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.

10:21

Bill passed and sent to the Commons.