Alternative Investment Fund Designation Bill [HL]

Lord Davies of Brixton Excerpts

2nd reading
Friday 1st March 2024 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, I very much thank the noble Baroness, Lady Altmann, for her detailed and comprehensive explanation of why this Bill is needed. The matter before us is straightforward, and the question that has to be answered is why we would not correct this total inconsistency in the way information is provided to potential investors.

With most investments, the charges are added after you invest the money. With investment trusts, the expenses are included within the price you pay. That is the essential difference. To require these two completely different approaches to expressing expenses is clearly inconsistent and properly addressed by this Bill. This is a valuable way in which to present the issue before us, but it is unfortunate, as the noble Baroness explained, that we have to go through the process of doing it through primary legislation when other avenues might be swifter or more straightforward. Unfortunately, they are not available, for whatever reason, so we have to resort to this legislation.

The key reason why this is important is that expenses are important. There may be a slight difference in tone on this issue between me and other commentators on investment matters, but expenses are important; we know what they are and they can be declared. Issues such as value for money and expected future return are important, but they are to a greater or lesser extent assumptions based on assumptions—they are hypotheticals—whereas the expenses are there as part of the contract that is being entered into. There is a tendency within the investment industry to try to downplay the importance of expenses, but they are crucial and it is right and proper that they are the subject of this Bill.

As someone who has been following the financial press for far too long, 60 years or so, I know that the question of investment trusts makes regular appearances in the financial press. It is a staple of the financial journalist to come up with these articles, and they do it on a regular basis. Nevertheless, they are still a bit of a niche approach to investment; there are certain aspects, and to an extent you are presented with a basket of investments—and, very often, they are being sold to you at a discount. You think, “Well, I’ve got a bargain here”, but you have to ask why they are at a discount and whether there is an additional element of risk that you should have in mind when making your decision.

Nevertheless, those investments should be available, and should be presented with the information in a way that provides what the potential investor needs to know. There is a pension point involved here, because they are suitable investments. In some ways, I think they are more suitable for pension funds, which have the resources and expertise to undertake a proper evaluation of the potential investment. Nevertheless, having the expenses declared in a clear and consistent way is an important principle.

That brings us finally to the question of the FCA. What is illustrated here is the extent to which the Financial Conduct Authority is answerable to Parliament; it is an illustration that it is not answerable to Parliament. I hope that our new financial regulation committee will look at this and arrive at a more consistent pattern, whereby these issues receive proper parliamentary consideration.