Alternative Investment Fund Designation Bill [HL]

Baroness Altmann Excerpts

3rd reading
Friday 10th May 2024 Lords Chamber

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.