Listed Investment Companies (Classification etc) Bill [HL]

Baroness Bowles of Berkhamsted Excerpts

2nd reading
Friday 15th November 2024 Lords Chamber

Moved by

[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.

--- Later in debate ---

[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.

Bill read a second time and committed to a Committee of the Whole House.