Alternative Investment Fund Designation Bill [HL]

Baroness Bowles of Berkhamsted Excerpts

3rd reading
Friday 10th May 2024 Lords Chamber

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.