Packaged Retail and Insurance-based Investment Products (Retail Disclosure) (Amendment) Regulations 2024
Baroness Blake of Leeds
That the Grand Committee do consider the Packaged Retail and Insurance-based Investment Products (Retail Disclosure) (Amendment) Regulations 2024.
Baroness Blake of Leeds (Lab)
My Lords, I start by thanking your Lordships for attending today’s debate on these four statutory instruments, two of which were raised as instruments of interest by the Secondary Legislation Scrutiny Committee. With the leave of the Committee, I shall, in moving this Motion, speak also to the Prudential Regulation of Credit Institutions (Meaning of CRR Rules and Recognised Exchange) (Amendment) Regulations 2024, the Securitisation (Amendment) (No. 2) Regulations 2024 and the Consumer Composite Investments (Designated Activities) Regulations 2024. The regulations that we are introducing today will ensure effective, proportionate regulation for the financial sector by laying the groundwork both for the reform of certain consumer disclosure for financial services and for effective prudential arrangements.
I turn to the consumer composite investments—CCI—instrument. The PRIIPs regulation was designed to standardise disclosure both across a wide range of more complicated financial investments and across the EU, in an attempt to improve transparency and enable comparison between products for retail investors. However, as noble Lords are aware, the regime was overly prescriptive and burdensome, with the one-size-fits-all template of the key information document—KID—resulting in the presentation of misleading information to consumers on potential risks and returns. The Government took urgent action to address the most pressing issues with the KID in the Financial Services Act 2021, and this SI delivers on the Government’s commitment to wholesale reform of these EU-inherited rules, with a new regime tailored to UK markets and firms.
This SI provides the Financial Conduct Authority with tailored rule-making and enforcement powers to deliver this long called-for reform and to ensure its effective implementation. The new regime for CCIs will have tailored and flexible rules that address the key issues with PRIIPs, and it will support investors to better understand what they are paying for. The FCA’s consultation later this year will provide an opportunity for a full range of stakeholders to provide feedback on the new regime to ensure that it works as intended.
I turn to the PRIIPs amendment SI. I have heard the concerns from industry about PRIIPs—in particular that current disclosure requirements have had unintended consequences for the investment trust sector specifically. The Government have greatly valued the contributions made by this House, particularly those of the noble Baronesses, Lady Bowles and Lady Altmann—I see that they are in their places—in bringing to our attention the impact of these rules on the sector.
Listed investment trusts are a British invention dating back 150 years, and they are unique to the United Kingdom. Representing over 30% of the FTSE 250 and predominantly investing in illiquid assets, including infrastructure projects and renewables, they play an active role in supporting the Government’s growth agenda. The Government recognise that the prescriptive cost disclosure methodology required by the PRIIPs regulation does not reflect the actual cost of investing in these close-ended funds. Industry has told us that this is negatively impacting on its ability to fundraise, and its competitiveness. Therefore, this instrument will immediately exempt listed investment trusts from the current PRIIPs regulation and other relevant assimilated law, as we finalise the replacement CCI regime, delivering on a key industry ask.
Recognising that the pace of legislative reform can be slow, the FCA has already implemented regulatory forbearance so that firms are able to take advantage of this immediately, before this instrument takes effect. This approach is intended as an interim measure and, in the long term, investment trusts will be included in the scope of the CCI regime, following bespoke and tailored rules befitting the industry. I encourage all sides to come together to find a sensible solution under the future regime, once the FCA consults on new rules later this year.
The Prudential Regulation of Credit Institutions (Meaning of CRR Rules and Recognised Exchange) (Amendment) Regulations 2024 make two amendments. The first is a technical change, supporting the implementation of Basel 3.1—the final round of bank capital reforms following the global financial crisis. Bank capital rules are contained in the Capital Requirements Regulation—CRR—which is part of assimilated law on financial services. This SI will enable revocations of the CRR, allowing the Prudential Regulation Authority to replace those revoked parts in its rulebook, while ensuring that the PRA’s rule-making remains subject to appropriate accountability and scrutiny.
Baroness Bowles of Berkhamsted (LD)
My Lords, I shall speak mainly to the instruments on listed investment companies. I first raised this issue in the House on 6 June last year, attempting to make an amendment during the passage of the Financial Services and Markets Bill. Perhaps history is now catching up with me. I thank the noble Lord, Lord Livermore, then on the Labour Front Bench, for grasping the economic importance of the matter, which he will appreciate even more as Financial Secretary, given the perhaps as much as £40 billion of lost investment in infrastructure, green energy and social buildings.
On one hand, I am pleased with the PRIIPs statutory instrument that was introduced in September, removing investment trusts from PRIIPs, and the cost disclosures part of the MiFID Org regulation and the accompanying FCA forbearance statements. Before I go further, I must flag that this was never about not reporting costs or not providing investors with a full suite of information on fees or all other corporate costs and charges. Investment trusts are listed companies and as such must provide all the transparency for investors that listing requires, including publishing full information in annual reports.
Unfortunately, after the September actions by the Government and FCA, the competitor industry to investment trusts, the open-ended funds and their organisation—the Investment Association—held a members’ meeting and agreed not to do what HMT expected, which has just been iterated by the Minister. They agreed that they would not accept that, at the share level—the investor-holding level—of investment trusts there are zero deductions from investment value.
Convening the meeting, and seeking member agreement, was confirmed by the CEO of the IA, Chris Cummings, at the Lords Financial Services Regulation Committee last Wednesday. Today, Ashley Alder, chair of the FCA, confirmed to the committee that there was no deduction to make from share value —I hope that everyone listened keenly. Chris Cummings further said last week that they did not want any changes to the current practice—the practice that has caused all the problems—until the FCA has completed its consultation and done all the new rules. They do not want any of the interim provisions. In another slide presented to the members’ meeting, it was shown that this could take until 2027. That is plenty of time for the misinformation to continue and to destroy the sector with which they compete.
There are other players assisting them in this anti-competitive effort, including the majority of large retail investment platforms, with the laudable exception of ii, although there may be others. Hargreaves Lansdown, which is the largest and also a member of the Investment Association as it is also a fund manager, spoke at the IA members’ meeting to explain how they—meaning itself and other platforms—would block retail investors from purchasing the shares of investment trusts that put “zero” in the costs to be deducted field of the European MiFID template, or EMT, which also generates the deduction from investment illustrations on platforms. After the meeting, Hargreaves Lansdown, Fidelity, and possibly others that I have not seen, sent out emails to fund managers and investment trust boards and commenced blocking operations for those investment trusts that dared to enter “zero”. Not surprisingly, many investment trust boards capitulated out of fear of being disconnected from the marketplace.
What happens as a result is a continuation of the bogus practice of telling investors they will lose large amounts off the share value of their investment—and guess what? They might buy an open-ended fund instead. For example, if, on the Hargreaves Lansdown site, you click on “How much will it cost?”, there are computations showing—wrongly—that on, say, a £5,000 investment over five years there will be management fee deductions, in some instances of well over £1,000, and even some causing losses. But that is not the case, because those costs are already reflected in the share price. It is very nice to force your competitors into a corner and keep them there until 2027 or longer, if you can continue to use your might, being 45 times larger than the competing sector you are colluding against.
That brings me on to the second pair of the SIs which, regrettably, have done nothing to address the shenanigans that have gone on for the last few years, or to prevent this vast open-ended fund sector using its size and might to continue to gaslight and bully investors—and even regulators—about the role that market share price plays in absorbing and reflecting the internal company costs, just as does the share price of any listed company. You buy the share; you sell the share—there are no deductions from your share price by the company. In fact, I would like to know what mechanism people think that could be done by.
The second SI continues to classify investment trusts as consumer collective investments, despite market-wide concerns expressed in consultation responses by some 340 respondents. The Treasury says that there will be special treatment, but it is not in the statutory instrument. All it has done is amend the old definition of a CCI in an admission that previously, investment trusts were not properly within the definition—all part of the old misinterpretation of “value”.
There has been no clarification of the circumstances in the market. It needs to be clear that investment trusts are financial instruments, like other shares. They should not be confused with savings products, and they are not covered by the Financial Services Compensation Scheme. They must be given all the recognition that derives from being a listed company, with market-set share price which is the value. Is that in the SI? No. Can you guarantee that the FCA will get it right? No. The CEO has made incorrect statements that investment trusts are savings products and muddled that costs are not zero, clearly referencing net asset value, which is not what you hold.
I am sorry to say that this SI is a poor example of what we expected when the future financial framework was proposed and consulted upon. We were promised policy guidance in the statutory instruments, and it is not here, even when there have been the direst circumstances that require it and a massive consultation response in favour of it. All that has been set aside, with nothing to show in the legislation. The only policy is saying they are still a CCI, which, after all that has gone before, is not adequate policy guidance. If you want to know what the right kind of guidance might look like, I suggest referring to my own Private Member’s Bill, which we will be discussing on Friday. I am afraid that the job is not yet done.
Baroness Altmann (Non-Afl)
My Lords, I too would like to address the statutory instruments relating to the PRIIPs and to the consumer composite investments. I am very grateful to the Government for laying these statutory instruments. I would also like to thank the Treasury and the Financial Conduct Authority for the statements they issued in September, and the FCA for its first set of forbearance and its subsequent additional emergency forbearance.
However, like the noble Baroness, Lady Bowles, it appears to me that, despite the clear intentions of the Government and the Financial Conduct Authority, as expressed particularly in the PRIIPs statutory instrument, some parts of the industry are not willing to accept what the Government believe and the FCA have clearly indicated is the right position. That is a particular concern to me.
The Minister rightly pointed out that the aim is to improve transparency and enable comparison between products for investors. The whole point of cost disclosures has always been to help consumers and investors—whether they are retailers, small institutions or others—understand what they are going to be paying for any investment product they buy. We know that, in the past, many of these costs were hidden. As the Minister said, investors need to better understand what they are paying for the product they buy. It needs to be accurately reflected to them, so they know the actual cost of the investments they are considering making or that they are holding.
The Earl of Effingham (Con)
My Lords, I thank the Minister for bringing these statutory instruments before the Committee. I refer noble Lords to my entry in the register of interests. Some of these instruments were developed by the previous Government and some by the current Government. We welcome these measures. Together, they form part of His Majesty’s Treasury’s programme to deliver a smarter regulatory framework for financial services.
The first set of regulations governs packaged retail and insurance-based investment products, known as PRIIPs. This legislation concerns the vital area of retail investment disclosure, which is of great importance to not only the financial sector but everyday British people seeking to secure their financial futures.
The second set of regulations clarifies the interpretation of capital requirements regulation rules and adjusts the criteria for recognised exchanges. This change is essential, as it seeks to ensure that our prudential regulation, particularly in the light of evolving international standards, remains finely tuned to support our unique market parameters.
The third set of regulations refines the transparency, risk retention and reporting requirements for securitisation issuers. It should help bolster investor confidence and market stability, which we all desire. Securitisation, which packages assets together for sale to investors, plays a key role in supporting credit availability and economic growth.
Finally, the fourth set of regulations introduces new standards for consumer composite investment products—those that pull together multiple asset types such as stocks, bonds and other investments. This measure is a prudent step towards fostering trust and accessibility in the UK’s retail investment market.
Although His Majesty’s Official Opposition welcome these changes, we are conscious that we must be careful to avoid overregulation, which could stifle market participation and limit access to credit. Which key stakeholders in the industries affected by these changes have been consulted? In particular, what feedback have banks and insurance companies provided?
We on these Benches really want to see a marketplace that is both free and fair. We believe that consumers deserve clear, accurate and accessible information that empowers them to make informed choices and educated decisions. It is with this principle in mind that we approach these regulations.
Baroness Blake of Leeds (Lab)
My Lords, I thank all noble Lords for their contributions on these important SIs. I again emphasise that they represent an important step in ensuring that our approach to regulation of financial services is effective, proportionate and tailored to the UK.
I will pick up on some of the specific points raised. The noble Baroness, Lady Bowles, expressed concern about the FCA consultation. The FCA will consult on its proposals for the new CCI regime by the end of this year, as we have said; we look forward to its final rules being published in the first half of 2025. This will provide an opportunity for stakeholders to provide the necessary feedback on the new regime to ensure that it works as intended. Firms will transition to providing disclosure under the new CCI regime following an appropriate transition period, which the FCA will set out in due course.
Following on from that, I turn to why we are talking about investment trusts and not just shares. As we know, like open-ended funds but unlike other shares, investment trusts 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, as well as more flexibility to tailor disclosure to clients, and will be less burdensome for firms to produce.
In response to the noble Baroness, Lady Bowles, on why investment trusts do not have zero costs, 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. Nevertheless, it is right that investment trusts, like other products that directly market to retail investors, must provide tailored disclosure on costs, risks and performance for retail investors. This SI gives the FCA the rule-making powers to design a new regime, in consultation with industry, that works for firms and investors.
On why firms are not implementing forbearance now, I say to the noble Baronesses, Lady Bowles and Lady Altmann, that this SI gives legislative certainty to firms ahead of the implementation of the new CCI regime. Although I recognise that there may be some frustrations in the sector, as expressed, the operationalisation of the FCA’s forbearance is a matter for industry and the regulator.
Baroness Bowles of Berkhamsted (LD)
I recognise that the Minister is saying that, ideally, the Government and the regulator have done what they could and industry should follow. Of the two, the Government have been clearer, but we now have a standoff where the regulator says that it is industry’s business and industry says that it is the regulator’s business. Therefore, the starvation of funds from worthy causes is set to continue for at least another year. These are tens of billions of pounds going into just the kinds of things that the Government want: green energy, social housing and infrastructure.
We are talking about tens of billions of pounds—potentially more than you get from an investment summit—so it is strange that the Government are not giving a little more oomph. I imagine the Minister cannot say this straight off, but can the Government strengthen their message and say that these things should be implemented now, or at least when the statutory instrument passes at the latest? There will be no certainty for the future of the investment trust sector if all this is delayed, not actively but passively, for another year.
Baroness Blake of Leeds (Lab)
I hear the passion in the noble Baroness’s voice—I think we all can—and I appreciate the frustrations expressed. But, as set out and agreed by this Parliament, it is for the regulator to set detailed rules in consultation with the industry. That is the position we are in.
Baroness Altmann (Non-Afl)
I am sorry—I know the Minister would like to make progress, but this is a relevant point. She talked about an appropriate transition period and tailored disclosures required to disclose the costs, because these funds are marketed directly to retail investors. It is not clear to me in what manner the direct marketing occurs, so I would be grateful if she could write to me on that.
Does the Minister believe that there are actual investor costs of holding the shares in a listed investment trust, any more than there are costs of holding the shares of another company that is listed on the UK market? That is the current industry practice—to tell investors that they are charged directly for holding these company shares, which is not true. The noble Baroness, Lady Bowles, and I are trying to understand whether the Government and the regulator recognise that consumers do not have such direct costs and, therefore, recognise the importance of not telling them that they do as quickly as possible—or whether they somehow feel that this is not like another company and, even though there are not direct investor costs, the investor needs to be told that there are in some way. I am a little confused.
Baroness Blake of Leeds (Lab)
I thank the noble Baroness. I will write to her to lay out the answers to the questions that she raises. I refer her back to the comments I made about costs earlier in answering.
To expand slightly on where we were before, this is an important moment for everyone. It is appropriate as we move away from EU language to reflect the significant reform of the new regime, which will be tailored to UK firms and markets. We should make sure that we recognise where we are in that process. In practice, the definition of consumer composite investments is closely aligned with the EU PRIIPs. The regime will continue to apply to products where the amount repayable to the investor is subject to fluctuations because of exposure to reference values or the performance of assets not directly purchased by the investor.
Baroness Bowles of Berkhamsted (LD)
That is the whole problem. If you purchase investment trust shares, the price is set by the market. Obviously, the underlying investments in some way reflect up into it, but the big difference is that the market decides the value all in, just as it does for any other company.
Let us take two examples. You could buy shares in Tritax Big Box, which is an investment trust that owns property of the sort that Amazon and data centres use. It manages those properties and that comes off what the company earns. It does not go knocking on the doors of investors saying, “We have just repainted—hand over some money”, but, effectively, that is what any investor in Tritax Big Box is being told: when you buy those shares, the management costs are going to be deducted from the value of what you own. That is shown in illustrations on platforms. It is completely misleading, so it frightens investors away and we have the scenario we have. It competes against SEGRO, which is listed as an ordinary company. It owns the same kind of buildings and does the same kind of maintenance. When you go to buy SEGRO shares nobody says, “By the way, you are going to have to have deductions”, but the structures are the same. They are both listed companies. The only difference is that one lists under a different part of the listing rules than the other, but the way the costs work and what is internal to the company is exactly the same.
The definition of CCI as the amount repayable cannot be on the basis of the underlying assets. You can sell your shares only on the market. The amendment has been slightly tailored to say “shares or” to cover the point. I know it is difficult when one first comes across these things, but small semantic things make a huge difference to whether something for good is invested in or is not.
Baroness Blake of Leeds (Lab)
I refer to the answer that I gave earlier about costs, but I recognise the detail within the noble Baroness’s question. I commit to write to her on the detail that she raises.
On confidence, in line with the FSMA model of regulation, it is for the expert regulators to set out firm-facing rules. I absolutely agree with that. The new CCI regime will be tailored to the UK, with rules that are more proportionate to ensure that consumers have sufficient information to make informed investment decisions. The regulators remain fully accountable to Parliament and the Government for their actions. In terms of the model of regulation, the House agreed this under FSMA 2023.
Moving on, the noble Baroness, Lady Altmann, spoke about the costs presented in the European MiFID Template. The EMT is an industry-led initiative to support the sharing of key disclosure metrics across the distribution chain. It is not required by legislation. Although I recognise that there may be some frustrations in the sector, the adaptation of the EMT feed to reflect changes to disclosure requirements is a matter for the industry.
Baroness Bowles of Berkhamsted (LD)
I am sorry to interrupt again. I can accept that the EMT is an industry standard; strangely, the open-ended funds sector organisation designed it. However, if the result of something that the industry does is systematically misinforming the market, surely that is a matter for the regulator to act on, rather than just saying, “Oh, it’s the industry”. The Minister just said that the regulator is accountable to the Government. If the regulator allows such misinformation to continue despite its consumer duty, is that not the point at which the Government must intervene, if the regulator is accountable to them?
Baroness Blake of Leeds (Lab)
At this stage in this debate, let me say that I will write to the noble Baroness to lay out the detail on her points.
Looking forward, the important thing is that all Members with an interest engage actively with the upcoming consultation—I feel as though I do not need to say this. Of course, the detail around these rules will be absolutely critical. This goes across the retail disclosure on the FCA consultation. We look forward to the detailed rules that will be published later this year. I think we all know that, last year, the previous Government consulted on the approach, receiving widespread support as a result of that consultation.
That leaves me to thank noble Lords for this informative debate. I know that further discussions on this matter in the Chamber are coming up on Friday. I look forward to seeing the content of the debate as we move forward but I hope that, at this stage, noble Lords will join me in supporting these regulations.