Alternative Investment Fund Designation Bill [HL]

Lord Macpherson of Earl's Court Excerpts

2nd reading
Friday 1st March 2024 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I declare an interest as chairman of the Scottish American Investment Company, which last year celebrated its 150th anniversary, and also as a happy shareholder in several investment trusts. I therefore feel well placed to speak both for retail investors and for the providers of investment trusts more generally.

I congratulate the noble Baronesses, Lady Altmann and Lady Bowles, for introducing the Bill, and for securing this timely Second Reading debate. I also thank them for their tireless advocacy of sensible regulation that protects consumers, even though, when I was at the Treasury, I was sometimes on the receiving end of their complaints.

The investment company industry is a British success story, but, above all, it is a Scottish success story, contributing to Edinburgh’s role as an international financial centre. Investment companies are an effective way of building a diversified portfolio. Their closed-end nature means that investors are not subject to the vagaries of sustained outflows, and the potential lock-in or gating of their savings. Looking back over their history, they have always been at the respectable end of the savings industry, providing reliability and resilience. Unlike more conventional open-ended funds, investment companies have independent boards, whose role is to put the interests of shareholders first.

Investment companies have therefore provided a great savings vehicle for all investors, including those with modest means, as well as the better off. I was recently looking at the original subscribers to the Scottish American Investment Company back in 1873. They may have included the odd wealthy widow, but they also included one William Mackenzie, a sergeant major of Stirling, who bought 20 shares, as well as John Bothron, a fish curer from Anstruther, Fife, who bought 12. Hard data on who owns investment trusts today is more difficult to come by. However, given the easy access to shareholding provided through the proliferation of platforms, I am confident that the investor base in investment companies is more diverse than it was 150 years ago. The investment trust sector manages some £260 billion-worth of assets and provides important capital to companies who need it, both in the UK and across the world. In short, the sector provides the investment resources for sustainable growth.

Like many in this House, I supported the UK’s membership of the European Union, for all its limitations, and I feel that, whatever its political benefits, Brexit has damaged the performance of the British economy—but that is water under the bridge. Where I can agree with successful advocates of Brexit, such as my former Minister at the Treasury, the noble Lord, Lord Lilley, is that we are all now united in wanting to grasp every opportunity Brexit provides to support economic activity. It is a little disappointing that, seven years on from the referendum vote, the Government have not made more progress in removing unnecessary regulation.

The fact is that the Alternative Investment Fund Managers Regulations 2013 were not the European Union’s finest hour. I admit to being implicated, because I was the Permanent Secretary to the Treasury at the time. As I recall, the Treasury and the FCA did their best to improve its drafting—but clearly not enough. The so-called PRIIPs regulation imposes requirements on investment companies that do not apply to listed trading companies or, even more bizarrely, real estate investment trusts. I am all in favour of transparency when it comes to transaction costs and charges, but, as defined by PRIIPs, the relevant cost metrics are positively misleading and are as likely to harm consumers as to protect them.

I will highlight a couple of areas, and I apologise if they are a little technical. First, the inclusion of future performance estimates based on evidence from past performance is a flawed approach, as any shareholder in Northern Rock or RBS can bear witness to. If any disclosure on performance is necessary, it is surely right that, in line with the current UCITS KIID requirements, past performance becomes a standard disclosure and replaces the need for future performance estimates, which have the clear potential to mislead consumers.

Secondly, I highlight the inclusion of gearing costs in the ongoing charges figure. The cost of the debt must be disclosed without information on the borrowing terms—critically, the interest rate and term to maturity. The key point here is that the costs of gearing do not benefit the investment manager; they are actually paid to the lender. Often, borrowing enhances shareholder value, especially if you took out the borrowing when interest rates were lower.

The flaws in the PRIIPs regulation discourage savers from investing in investment companies. Although I would not like to exaggerate their effect, they are potentially contributing to the scale of discounts to net asset value that many companies are currently experiencing. I therefore welcome the recent publication by the Treasury of its draft statutory instrument on the UK retail disclosure framework. The residual Treasury official in me has some sympathy for the view that, if we are to reform EU legislation, we should go about it in a holistic way. I recognise that it is important to get things right, but the result is that we are missing easy wins, and I fear that the best is becoming the enemy of the good.

In conclusion, I encourage the Minister, even at this late stage, to support the Bill. If she cannot, can she confirm that the Treasury’s and the FCA’s intent is to implement the spirit of the Bill? In short, will they amend the law so that listed investment companies will no longer be classified as alternative investment funds? Can she give us a clear timetable indicating from when any changes to the law will come into effect?