UK Economy: Growth, Inflation and Productivity

Baroness Bowles of Berkhamsted Excerpts

Thursday 29th June 2023 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, we have had an interesting and important debate and I thank the noble Lord, Lord Eatwell, for putting it on the agenda. We have had wide-ranging speeches about the macroeconomics of inflation, higher interest rates and the woes of productivity and growth. As a business owner in the 1980s, I remember all too well having a commercial mortgage rate around 17%, and inflation being rampant.

While people are hurting again now in a similar way, the remedy exercising my mind is at the more microeconomic level of getting investment into the real economy—for that is the way to growth, productivity and prosperity. My focus is founded on my experience as a patent attorney working with scientists, engineers and management in start-ups and big business alike, because innovation and how to fund development must march together for growth.

An irritation frequently voiced is that the UK’s capital markets have not served UK innovators all that well. Headlines about tech listings going to the US rather than the London Stock Exchange have featured recently, but my heart was breaking long before I became a non-executive director of the exchange —which, by way of a declaration of interests, is a position I still hold, along with other interests as set out in the register. But in this place, I speak for myself.

I am glad that there is now a focus on how to get more investment into productive parts of the UK economy, including from pension funds. That is the right direction of travel, despite the complexities that exist around trustee fiduciary duties and regulator priorities. Pension contributions and investments are so tax-advantaged that looking for public good in the economy from these investments is justified. However, we need to look at the way in which we manage to shoot ourselves in the foot at the microeconomic level, seemingly at the first opportunity.

On Tuesday, we completed the Financial Services and Markets Bill, which includes a secondary competitiveness objective—albeit this was controversial for some, given the misguided approach of the old FSA to its competitiveness objective. However, now that it is there, it is important that it is used to enhance the competitiveness and soundness of the UK’s economy as a whole, and is not just inwardly focused on financial services.

However, all this will be meaningless if the FCA continues to sit on the obvious and unnecessary regulatory damage to the real economy happening now through the decimation of the listed closed-end investment fund regime, also known as investment trusts. These were once a jewel in the London funding ecosystem and a major route for investment in strategic industries and infrastructure, including by pension funds—a jewel of vital importance in the green sector for renewable energy and battery storage, where over £30 billion has been raised and invested in recent years. That is, until July last year, when the FCA and the Investment Association switched off investment funding through new guidance on cost disclosures.

It boils down to ticks in wrong boxes, as I have previously elaborated in detail and recorded in Hansard for 6 June at column 1348. The new guidance came from the Investment Association, on the request and/or instruction of the FCA, even though the FCA website said in January 2022 that, following the extension of the UCITS exemption in the UK’s PRIIPs regulation to 2026, there would just be end-date changes relating to the supply of investor information documents. There was no mention of other changes, implying that the situation would remain as it was until 2026. But, despite a suggested status quo, other changes were initiated, seemingly by this instruction from the FCA to the IA on new guidance.

The guidance has its inspiration in the PRIIPs directive, which is just about to be revoked as unsuitable for purpose in the UK. I can personally attest that the investment trust structure was not properly understood in Brussels when PRIIPs was negotiated, but it has taken this latest UK initiative for guidelines to bring havoc that PRIIPs never did before, nor has in other countries. This is not just a trivial, irritating matter; it is huge, because of the important place that investment trusts have had in the market as a route to collective investment in less liquid instruments, with the holding being made liquid through the listing.

There are various consultations around, to which industry associations and industry participants have made submissions that the new guidance should be revoked. The IA itself has responded to a Treasury consultation, asking if it can revoke the guidance, and letters have been written to the FCA by industry participants. Yet, somewhere in the FCA this is being sat on, instead of rapid corrective action being taken, with the IA saying that it needs amended guidance from the FCA for it to be able to make any changes.

So, while the IA and the FCA each point to the other for updates, new money has been all but shut off since last July because ticks have been put in the wrong boxes. These are multibillion-pound levels of lost investment if you consider the more than £30 billion raised in well under a decade just for the renewable energy and battery storage sector. If we wait much longer, still more enterprises will be starved of funds or, as is already happening, investment will go to Dublin, which, of course, has all the same PRIIPs and MiFID legislation but just has not put ticks in the wrong boxes.

My challenge to the FCA is this: show that you are up to the job and fix this before the end of the summer holidays so that IPOs and fundraising can start again in September. It takes but a word—“stop”—to flick the switch to where it was, doing nobody any harm over a great number of years, and to where the public pronouncements of the FCA seem to indicate it should have remained. We had investment trusts that worked and were lauded for years. We need them back. Every day of delay equates to around £12 million of lost investment to the strategically important clean energy sector. Twelve months, already gone, means over £4 billion and counting since the switch was flicked.

This is not competitive and it is not consumer protection. It is destroying markets, not protecting them, and it is damaging existing funds, blocking both investor opportunity and economic growth. It is setting us behind in meeting environmental targets and it is wrecking the closest thing we have in this country to a sovereign wealth fund.

What is expected of the regulator is continuous monitoring of the impact and outcomes of any guidance or rule, a keen interest in feedback of the market participants, and swift intervention where necessary. The industry body should be equally swift in delivering the decision-useful inputs to the regulator. Heads must be knocked together now for a quick solution, or heads should roll for the billions in lost investment.

I cannot understand why the Government stand by helpless when this disaster is contributing to missed growth and productivity targets, and slipped aspirations to be a global leader in clean energy, as just reported by the Climate Change Committee. The FCA stands in the way of capital queueing to invest in net-zero commitments, and for which the new FiSMA gives an obligation to contribute. Let us do something real for the economy and just get this done. This is a big dent in green finance, for which the Minister has responsibility. I am happy to meet her, or anyone, to help progress this matter. I am again grateful for the opportunity to make this important issue of public and ongoing record.