Alternative Investment Fund Designation Bill [HL]

Lord Livermore Excerpts

2nd reading
Friday 1st March 2024 Lords Chamber

[Lord Livermore (Lab)]

My Lords, it is a pleasure to take part in this debate and to listen to and learn from contributions from many genuinely expert noble Lords. I congratulate the noble Baroness, Lady Altmann, on securing the Bill and pay tribute to her not only for raising this issue to the prominence it deserves in your Lordships’ House and for the hard work I know she has put in to get her Bill to this stage, but for her tireless campaigning on behalf of consumers, pensioners and investors, not just on this topic but on many others over many years.

In her excellent and persuasive opening speech, the noble Baroness made an extremely compelling case for action. I agree strongly with much of her analysis and many of the objectives of her Bill. I will briefly review some of the key points that underlie the Bill.

First, we have seen in the debate today a clear consensus on the importance of this sector to the UK economy. It makes up over 30% of the FTSE 250 and supports vital economic growth areas, as well as a wide range of environmental and social investments. It is also clearly a sector that we as a country should feel pride in. As the noble Lord, Lord Macpherson of Earl’s Court, and the noble Baroness, Lady McIntosh of Pickering, said, UK investment trusts are a long-standing British success story, offering for over 150 years access to ready-made portfolios which the vast majority of investors could neither put together nor manage themselves. The noble Baroness, Lady Bowles of Berkhamsted, who has highlighted this issue in your Lordships’ House several times already, today took us on a thorough and concerning tour from her own expert perspective of how we ended up where we are today.

It is clear from what we have heard in this debate that charges disclosure rules, derived from the EU, have been inappropriately applied to UK-listed investment trusts. As a result, those companies have been forced to show misleading information to investors, exaggerating the costs of holding their shares. Despite the Financial Services and Markets Act specifically empowering UK regulators to shape financial regulation in the national interest, this inappropriate application has made UK-listed investment companies appear misleadingly expensive for investors to hold.

This has likely given rise to three key consequences. First, it has contributed to UK investment trusts being starved of capital because waves of selling, lack of buyers and share price weakness have stopped capital raising for vital growth sectors, as UK investment companies suffer an exodus of capital from institutions and wealth managers.

Secondly, funding has materially declined as investors use non-UK-listed investments or riskier individual shares instead. This has exacerbated the UK’s shortage of an important source of growth capital for the very areas that we need the private sector and pension funds to support, since most investment trusts invest in real assets, including vital infrastructure projects such as schools, motorways, affordable housing, police and fire stations, and NHS hospitals. Taking the right action now could bring stability back to the investment trust sector and help to harness the power of UK pensions, ISAs and retail investments in order to better support the British economy.

Thirdly, UK-listed investment trusts have been made to look uniquely unattractive compared with our global competitors. Investors are needlessly switching out of UK markets, depriving consumers of dependable dividend-paying investments and denying them access to ready-made portfolios that could add diversification and improve their long-term returns.

The Financial Services and Markets Act specifically introduced the secondary competitiveness objective in order to speed up the pace at which regulators can act when UK competitiveness is under threat. Yet that does not appear to be happening here. Neither does it appear that the new consumer duty is being upheld, as the current system arguably misinforms consumers by exaggerating the costs involved and preventing them making properly informed decisions about what investments to buy.

Ultimately, the Bill of the noble Baroness, Lady Altmann, calls for the Government to act with urgency. That must be right. There is widespread and cross-party agreement, as reflected in the contributions we have heard in today’s debate, that these rules clearly are not working for UK-listed investment trusts. The ultimate responsibility for remedying that and making progress must lie with the Government.

We have been reminded during today’s debate that, in his most recent Autumn Statement, the Chancellor asked the FCA to take action to remedy the problem of charges disclosure regulations forcing investors to sell UK-listed investment trusts and driving pension funds to buy overseas investment companies instead. Since then, what has changed? It would appear that nothing has changed; in fact, the exodus of capital from the investment companies sector has actually accelerated. Having recognised that the rules guiding charges disclosures for UK-listed investment companies are misleading investors, the much-needed urgent change simply has not materialised. I would therefore be grateful if the Minister could set out when she responds to the debate the concrete steps that the Government will now take to remedy this problem. Action is needed; if the Government decide to take the appropriate action, we will support them in that.

I end by once again congratulating the noble Baroness on her Bill. 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. This Bill unarguably makes the case that urgent action is required. I hope that this debate, as well as the further passage of this Bill, will help to expose these issues and compel the Government and regulators to move further and faster than has so far been the case.

Alternative Investment Fund Designation Bill [HL]

Lord Livermore Excerpts

3rd reading
Friday 10th May 2024 Lords Chamber

[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.