Listed Investment Companies (Classification etc) Bill [HL]
(1 day, 16 hours ago)
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Baroness Bowles of Berkhamsted
That the Bill be now read a second time.
Baroness Bowles of Berkhamsted (LD)
My Lords, for the record, I declare my interest as a non-executive director of the London Stock Exchange.
My Bill requires regulators to recognise the inherent characteristics of listed investment companies, and has been inspired by two things. First, the problem currently happening is that legislation and industry standards have forced misleading disclosures to be presented to investors in closed-end listed investment companies. The format imposed tells investors that they will themselves incur the cost of the fund management fees of listed investment companies when, in truth, those fees are paid by the company and are already reflected in the market share price. This suggestion of additional costs has frightened investors away, leading to the loss of tens of billions of pounds of potential investments with resulting economic damage to the country.
Secondly, in conversation with Treasury officials about the statutory instrument to replace PRIIPs some time ago, I mentioned flagging the inherent characteristics of closed-end listed investment companies. They said that they did not know how to define them, so I set myself that task. In honing the formulation, I am grateful for the assistance of market participants involved in listed investment companies: the London Stock Exchange; the Association of Investment Companies; and Nigel Farr and his legal team at HSF, who have given their time generously and voluntarily. I am also grateful to the noble Baroness, Lady Altmann, who has joined me on this issue since the summer of 2023 and whose Private Member’s Bill on similar issues was passed by this House in the previous Session but lost due to the election.
I thank the staff of the Public Bill Office for their time this summer in assisting with the structure and organisation of the Bill into proper parliamentary form. They really are quite remarkable.
My dialogue with the Government and HMT was interrupted by the election, departmental purdah, the change of Government and the Budget preparations. I sent a draft to officials and raised it in our debate on the King’s Speech. I was promised a meeting but, due to the circumstances, it did not happen—although the noble Lord, Lord Livermore, has stated more than once that I made a compelling case on the wider topic.
In September, the Government tabled draft statutory instruments for exemption from PRIIPs and for consumer composite investments to replace PRIIPs. The FCA issued a forbearance statement. However, the remedial changes expected by those actions have been resisted by the open-ended fund sector and some investment platforms insisting that there must be the same format of disclosure for closed-end listed investment companies as for open-end funds, despite their different structure.
Comparison is sought because portfolios held in the different structures sometimes consist of similar selections of listed equities, and they want to compare the fund management charges. However, other portfolios of listed investment companies bear more resemblance to listed conglomerates or listed companies holding property, and still others are more like the portfolios of venture capital companies. In fact nowadays the majority of the sector by number are the alternate portfolios investing in infrastructure, clean energy, social buildings and growth companies.
The economic effect of blocked investment in the alternate portfolios is substantial and the investment is truly lost, whereas equities can still be traded by other means. Nevertheless, that does not negate the fact that investors holding equities via listed investment companies have not enjoyed the shared performance that they would have done without the current market disruption, causing discounts at record levels.
The wisdom of the way in which comparisons are to be done is passing into the hands of the FCA and its consultation procedures. However, the clear fact now is that investors buy and hold shares of listed investment companies. Shares are traded on the London Stock Exchange as for any other listed company, subject to all the regulation, reporting and transparency requirements of listing. That is the undeniable starting point.
When investors want to cash their investment, they sell their shares on the market. There is no buying or selling of the underlying investments that the company holds, be that other equities or wind farms. That is the brilliance of the structure: liquid, tradable shares for the investor while enabling the long-term underlying investment necessary for illiquid things such as infrastructure and growth companies. The closed-endedness and listed structure enables that, and it is defined under listing rules, yet presently the very characteristics that bring this about are ignored. My Bill would correct that.
The meat of the Bill is Clause 2, requiring regulators’ rules, guidance, policy and interpretation to take account of this already regulated closed-end listed structure, most notably that, first, the shares are publicly traded capital market instruments. That may seem obvious but it has consequences, one of which is that it does not qualify for the Financial Services Compensation Scheme because it is different from a fund.
Secondly, the value of the investment is the price at which the company’s shares are traded on the relevant market. Again, that is different from a fund, and as true and obvious as for any other listed share, yet investors are being told something else.
Thirdly, shareholders have no individual right to a proportional share of the net asset value of the underlying assets, nor the right to have their shares repurchased or redeemed at a time of their choosing. This is another big difference from owning units in an open-ended fund. Indeed, this characteristic means that they were never properly included in the PRIIPs legislation, as evidenced by the new SI for consumer composite investments, which has changed the definition to additionally reference shares. I am not sure whether it is intentional, but they seem to have covered all listed shares.
Fourthly, management expenses and all recurring and non-recurring operating expenses are deductions from the net asset value of the company, and are not charges paid directly by the shareholder. Again, that is true and obvious if you think of holding shares in AstraZeneca, BP or Tesco, yet shareholders of listed investment trusts have been told that these costs will be taken again from the value of their investment—that is, off their shares—because of this wrong comparison with funds. Given that even regulators have previously fallen into mistaken statements, not heeding the inherent characteristics that I have explained, and that the eventual corrective actions by the Government and the FCA are still being resisted by the main competing industry, elaborating these facts is by no means redundant.
Clause 3 contains amendments to the legislation which is the root of the misleading information. This clause is largely redundant because of similar changes made by the Government in the PRIIPs SI. However, the points in Clause 3 are slightly different, are not contradictory and add more clarity to what the Government have done. I beg to move.
Lord Hodgson of Astley Abbotts (Con)
My Lords, the hour is late and the sun is setting. The umpire wishes to remove the bails and draw the stumps and then we can all go home, so I will be very brief indeed. I do not want the House to think that such brevity is in any way lessening my support for the powerful case that the noble Baroness just made, and indeed the case made last year by my noble friend Lady Altmann.
The United Kingdom has a very proud record of pioneering innovations in the financial services industry. The investment trust movement, which has been around for over 100 years, is one such. However, only Britain could find itself in a situation where regulations being introduced as part of its membership of a political economic bloc—the PRIIPs regulations—were going to hamstring one of the most important sectors of its financial markets. Even more importantly, having decided to leave that bloc, and having done so on 31 January 2020, nearly five years later we have still not managed to find a way to answer the questions that the noble Baroness has just pointed out in her very powerful speech.
I do not put this down to a lack of political will: I am sure that the Minister would like to sort it out and that her predecessor, my noble friend Lady Penn, equally would have wished to. I put it down to a sort of extraordinary level of institutional inertia, linked to a huge risk aversion, combined at the same time with a very slow process of policy formation—what one might describe as analogue thinking in a digital age.
I am sure that we will hear from the Minister about the forbearance regulation that the FCA brought in. The House needs to understand that that does not go anywhere towards solving the major problem, which is the launch of new trusts. Nobody will take the time and trouble, or go through the expense, of launching a new investment trust if the forbearance regulations might be brought to an end at any time. It is just not getting to the heart of the problem, as the noble Baroness, Lady Bowles, has pointed out.
What is the answer? What can I offer to the Minister as a way forward? Well, she should get hold of today’s copy of the Financial Times, in which the main headline reads as follows:
“Reeves demands City watchdogs allow greater risk in push to promote growth”.
I suggest to my friend the Minister that, when this debate comes to an end, she goes back to her office, picks up the phone, talks to the Chancellor’s office and says to the Chancellor, “Have I got news for you—I have something you can do straight away that will promote growth in a very important part of the UK financial markets”.
Baroness Altmann (Non-Afl)
My Lords, I too congratulate the noble Baroness, Lady Bowles, on bringing the Bill forward. I also thank Ministers and Bill team officials who have worked so hard on this issue, and the many industry experts, and Herbert Smith Freehills’ legal team, who have made such contributions to this Bill and to my previous Private Member’s Bill, which received support from all sides of this House in the last Session and from which this Bill follows on.
The aim, as we all know, is to protect and revive a success story of the UK’s financial markets—a global leader. Although some may perceive this to be a higher-risk investment, for most consumers it is a lower-risk method of achieving exposure to sustainable growth or real estate investments than buying an individual company’s shares. This is a diversified spread, managed expertly, of a number of companies, so the overall risk should be lower, yet the current regulations and legislation treat these as if they are much higher-risk.
It is very good to see that we have laid the PRIIPs and CCI statutory instruments, and that the Treasury has issued its own statement. The Government seem to have encouraged or enabled the Financial Conduct Authority to issue emergency forbearance that states that the current practice in the markets, which this Bill aims to correct, is inappropriate and should not continue.
Currently, closed-end listed investment companies and their investors, or potential investors, are still not being treated fairly. Were the Bill to be adopted immediately, or as quickly as parliamentary time allows, that would solve the problem. The forbearance was supposed to do that. I will ask the Minister about this. The CCI legislation intended to replace the current system seems still to want to cover listed closed-end investment companies, even though there are clear reasons for them to be treated as an independent sector—they are not like open-ended funds.
Indeed, a highlight are the real estate investment trusts, about which I would be grateful if the Minister could speak today or write to me on. Will the new legislation the Government have proposed include companies such as British Land and Landsec as listed investment companies under the CCI regime? Currently, that seems to be what is implied: they will be classed as CCIs, which would be a significant issue in the market. Does the Minister know of any other country that treats its investment companies, such as REITs, as if they were consumer composite investments?
The CEO of the FCA said, in his reply to the House of Lords Financial Services Regulation Committee:
“Under the Consumer Duty, platform firms should be determining value and listing for retail consumers on a holistic basis, rather than any single data line in the EMT”.
That means that the current practice in the markets is not working for the consumer. I ask the Minister to respond to us with the Government’s attitude to what is happening, as the retail platforms seem to be deliberately not complying with the Government’s wishes.
Baroness Kramer (LD)
My Lords, this House has heard from three experts, and it will now hear from a layman—I will be extremely brief. My position and that of these Benches is very strongly to support the Bill. As we have heard, especially from the noble Lord, Lord Hodgson, and my noble friend Lady Bowles, listed closed-end investment companies are absolutely fundamental to investments in longer-term, more illiquid activities exactly of the kind the Chancellor has discussed promoting.
I want to disabuse some of the conversation suggesting that the Bill actually increases risk. The Bill overturns an error in the existing regulatory arrangement that, in effect, forces a double-counting of costs for holistic closed-end investment companies, versus other kinds of funds. It is simply an error that has resulted from the complex layers of regulation and legislation.
Like others, I congratulate the Government on having very quickly taken some steps to bring in two SIs, and the FCA on having declared forbearance while the detail is worked through. The reality is, however, that we cannot let this drag on from day to day because it is having a very immediate impact. The noble Lord, Lord Hodgson, talked about new companies, but it is basically driving this industry out of the country. We have to act faster.
The two statutory instruments, the forbearance and the FCA were important steps forward, but are not sufficient as they have missed out some key elements. Those key elements need to be tackled immediately. The quickest way the Government could do it is to give fair weather to this Bill.
Lord Altrincham (Con)
My Lords, I thank the noble Baroness, Lady Bowles, for all she has done on this topic and for bringing forward the Bill. I also thank the noble Baroness, Lady Altmann, for her work on this.
It is remarkable, as the noble Lord, Lord Hodgson, pointed out, that we need to look at the fees and how they are shown for these kinds of investments. After all, we have a very traditional structure of investing in this country, and they have wound up being compared to exchange-traded funds, which come from a totally different history of regulation, as they come from the mutual fund industry. It is exactly as the noble Baroness, Lady Kramer, said: it is just a mistake how we come to be in this position. We thank the Government for taking things forward.
We discussed the importance of promoting economic growth within the financial regulations as part of the Financial Services and Markets Act last year. The importance of long-term investment is clearly an objective of the current Government. Listed investment companies are of course in part investment vehicles for longer-term investments, like infrastructure. They give investors exposure both to other listed companies and to unlisted investments. They were historically and substantially owned by insurance companies but, over time, have become attractive forms of investment for private client investors. Therefore, the fee comparison issue matters and must be disclosed properly. Some of these disclosures have been attempted in the accompanying information disclosures, but comparison is then difficult. While this may be a technical disclosure issue, it inevitably becomes a cost of capital issue and an example of where regulation weighs on investment.
The Bill will be very helpful in addressing a real issue right now in asset management. The Bill should reinforce the United Kingdom’s financial markets, increase transparency and protect the interests of both institutional and retail investors. The Bill allows individuals, pension funds and other stakeholders to align their investments with their goals, values and risk tolerances.
The UK’s financial sector has long been one of the cornerstones of our economy and an attraction for global capital. This Bill, in creating, clearer guidelines and definitions, will not only protect investors but enhance the credibility of UK-listed investment companies, and strengthen a form of investing that can benefit the UK economy more broadly.
The Parliamentary Under-Secretary of State, Department for Business and Trade and Department for Science, Information and Technology (Baroness Jones of Whitchurch) (Lab)
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.
Baroness Bowles of Berkhamsted (LD)
My Lords, I thank those noble Lords who have spoken in favour of the Bill. I welcome the proposal of the noble Lord, Lord Hodgson: that I phone up the Chancellor and explain how much money has been missing.
Actually, it is quite interesting looking at the numbers, because there has been much celebration of the fact that the investment forum garnered £62 billion of investment. Well, £40 billion and counting has been lost because of this problem. If we wait until the FCA has come out with its rules and they have all been looked at, commented on, implemented and phased in—because it is going to take that long before they actually have hard effect—we are into 2027. That £62 billion will have been long overtaken by what has not been invested through listed investment companies. It is a question of, you can take a horse to water, but you cannot force it to drink.
Strangely—or not so strangely, as the case may be—the competing industry of open-ended funds is swaying platforms and others to say that they have to continue with the old way and ignore the forbearance or exemption, because the consumer duty requires them to have those numbers on the front page, which is where you go to on the platform. That is their interpretation of consumer duty, so they delist them. If the listed investment company tells the truth and says, “Dear investor, you don’t have to pay these fees—they are already embedded in the company costs”, it is barred from the market.
I am sorry to tell the Minister, and the Treasury officials who maybe helped with some notes, that they are behind the times. It has not worked. They can say it is a matter for the FCA and the industry, but the FCA will say that it is a matter for the industry. I really did not think that the conduct and stability of our markets had been handed to the industry. I thought it was up there as the No. 1 priority of the regulator, and that if the regulator did not do it, the Government had the right to investigate and launch an inquiry. It is not good enough.
I know they have tried. It took us the best part of two years to get there, and yes, something has happened, but there is a competitive aspect to this that is distorting. If that continues, this Bill is a vehicle that might prove useful. I wish it were redundant, but it would be useful if it hung around for a while, for officials to draw inspiration from—which is where it actually originated. For now, it would be a good move to retain its availability and see if it becomes useful. Therefore, I beg to move.