Alternative Investment Fund Designation Bill [HL]

Lord Reay Excerpts

2nd reading
Friday 1st March 2024 Lords Chamber

[Lord Reay (Con)]

My Lords, I am very pleased to support this Private Member’s Bill, introduced by my noble friend Lady Altmann, which seeks to remove investment companies from the scope of AIFMD, and exclude them also from PRIIPs and CCI disclosure, including concerning costs. As the noble Baroness stated, this would correct regulatory errors. I declare an interest as an owner of shares and some investment trusts.

My noble friend Lady Altmann and the noble Baroness, Lady Bowles, have outlined how we have arrived at this unfortunate situation. I applaud them both for their tenacity and perseverance in attempting to find a solution to this issue. The Bill is required to address the malaise in the listed investment company sector, which has resulted in the withdrawal of investors from the market and depressed valuations. This, in turn, is leading to city brokerage firms exiting the sector, and job losses among salesmen, traders, market makers and bankers.

The malaise extends to the UK equity markets in general, which are suffering from the damaging shift of our pension funds out of equities into fixed income over the past 20 years. The withdrawal of institutional funds, resulting in reduced liquidity and lower valuations, has ramifications for the overall health of the UK markets, and notably in the decisions of UK and overseas companies on whether to list on AIM or LSE rather than other international stock exchanges. A stock market with reduced liquidity and valuations also runs a risk of an increased number of take-privates, which, while not necessarily a problem per se, does serve to reduce the overall size and depth of the public markets. So, while the Chancellor can be congratulated for personally engaging with the Chinese fashion retailer Shein, to persuade the company of the merits of a London Stock Exchange IPO as opposed to a New York listing, I hope that the Treasury might also bring influence to bear to resolve the strife in the investment company sector.

In many ways, the perilous position in which the investment company industry finds itself has similarities with the disastrous unintended consequences brought about by MiFID II, in respect of the unbundling of the costs of research from the services provided by equity brokers to their investing clients. The junior and mid-tier City brokers hit by the additional bureaucracy and associated costs discovered that there was not a market or culture among institutional investors to pay separately for unbundled research. As a result, within a short timeframe, numerous broking firms slashed their research product and sacked their analysts, and some were forced into mergers. Research coverage, particularly for junior companies, has been decimated. This has had a knock-on effect of reducing share liquidity and company valuations.

I welcome the fact that the regulators are consulting on revoking MiFID. Action cannot come soon enough, although much damage to the City’s equity research product has already been done. In both these instances, excessive regulation has resulted in investor withdrawal, and consequently lower share liquidity and valuations. Both situations have resulted in considerable harm to the overall health of the stock market and the equity departments at brokerage houses. Some firms are exiting the investment trust sector entirely. Before this situation deteriorates further, the FCA needs to act by amending its interpretation of existing legislation, or the Bill needs to be passed.

With its new secondary objective of enhancing the competitiveness of the UK market, the FCA should be focusing on resolving the excessive and unnecessary regulatory burdens that have been highlighted by the Bill. Instead, the regulator seems to be spending far too much time and energy introducing consultations, such as its recent paper, Diversity and Inclusion in the Financial Sector. Among other things, this paper proposes requiring firms to set diversity targets which must be disclosed, and to show progress towards meeting them. Firms will be forced to recognise a lack of diversity and inclusion as a non-financial risk. Other requirements of the consultation would suggest that the FCA may be pursuing gender ideology at the expense of women’s rights.

Perhaps my noble friend the Minister can explain how this consultation is compatible with the FCA’s objective of facilitating international competitiveness and the growth of the UK economy, and, further, how this meddling is appropriate while a major constituent part of our listed equity market is struggling as never before.