Packaged Retail and Insurance-based Investment Products (Retail Disclosure) (Amendment) Regulations 2024

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Packaged Retail and Insurance-based Investment Products (Retail Disclosure) (Amendment) Regulations 2024.

My Lords, I start by thanking your Lordships for attending today’s debate on these four statutory instruments, two of which were raised as instruments of interest by the Secondary Legislation Scrutiny Committee. With the leave of the Committee, I shall, in moving this Motion, speak also to the Prudential Regulation of Credit Institutions (Meaning of CRR Rules and Recognised Exchange) (Amendment) Regulations 2024, the Securitisation (Amendment) (No. 2) Regulations 2024 and the Consumer Composite Investments (Designated Activities) Regulations 2024. The regulations that we are introducing today will ensure effective, proportionate regulation for the financial sector by laying the groundwork both for the reform of certain consumer disclosure for financial services and for effective prudential arrangements.

I turn to the consumer composite investments—CCI—instrument. The PRIIPs regulation was designed to standardise disclosure both across a wide range of more complicated financial investments and across the EU, in an attempt to improve transparency and enable comparison between products for retail investors. However, as noble Lords are aware, the regime was overly prescriptive and burdensome, with the one-size-fits-all template of the key information document—KID—resulting in the presentation of misleading information to consumers on potential risks and returns. The Government took urgent action to address the most pressing issues with the KID in the Financial Services Act 2021, and this SI delivers on the Government’s commitment to wholesale reform of these EU-inherited rules, with a new regime tailored to UK markets and firms.

This SI provides the Financial Conduct Authority with tailored rule-making and enforcement powers to deliver this long called-for reform and to ensure its effective implementation. The new regime for CCIs will have tailored and flexible rules that address the key issues with PRIIPs, and it will support investors to better understand what they are paying for. The FCA’s consultation later this year will provide an opportunity for a full range of stakeholders to provide feedback on the new regime to ensure that it works as intended.

I turn to the PRIIPs amendment SI. I have heard the concerns from industry about PRIIPs—in particular that current disclosure requirements have had unintended consequences for the investment trust sector specifically. The Government have greatly valued the contributions made by this House, particularly those of the noble Baronesses, Lady Bowles and Lady Altmann—I see that they are in their places—in bringing to our attention the impact of these rules on the sector.

Listed investment trusts are a British invention dating back 150 years, and they are unique to the United Kingdom. Representing over 30% of the FTSE 250 and predominantly investing in illiquid assets, including infrastructure projects and renewables, they play an active role in supporting the Government’s growth agenda. The Government recognise that the prescriptive cost disclosure methodology required by the PRIIPs regulation does not reflect the actual cost of investing in these close-ended funds. Industry has told us that this is negatively impacting on its ability to fundraise, and its competitiveness. Therefore, this instrument will immediately exempt listed investment trusts from the current PRIIPs regulation and other relevant assimilated law, as we finalise the replacement CCI regime, delivering on a key industry ask.

The second amendment will expand the definition of a recognised exchange, moving from referring only to domestic investment exchanges to include those from overseas. This will enable stocks and shares from qualifying overseas exchanges to benefit from lower capital and liquidity requirements when used as collateral to secure financial services. This will broaden our definition, making the UK comparable with international counterparts such as the EU and the US, supporting our competitiveness.

Finally, I turn to the Securitisation (Amendment) (No. 2) Regulations 2024. The SI extends a temporary arrangement allowing UK banks to treat EU securitisation products as though they originate from the UK, provided that they meet the standards of the simple, transparent and standardised framework. This means that banks and insurance firms holding such products may be able to benefit from lower capital and liquidity requirements. The current arrangement is due to expire at the end of December 2024, which would mean that no additional EU STS securitisations would be able to enter into the temporary arrangement after this date. This could impact on the range of investment options for UK market participants, so the Government are legislating to extend this arrangement to June 2026. This extension will allow UK authorities to make a more informed decision about the non-time-limited designation of EU STS securitisation products. This decision should take into consideration the recent EU securitisation regulation, adopted in June 2024. These regulations are expected to be implemented by the three EEA EFTA states over 2025. The extension granted by this instrument will ensure that a single decision can be taken with respect to the EU single market.

In closing, these SIs will empower regulators to ensure that our financial services industry is subject to a rulebook that is fit for purpose, more proportionate and tailored to UK markets. I hope that noble Lords will join me in supporting these regulations and their objectives. I beg to move.

My Lords, I shall speak mainly to the instruments on listed investment companies. I first raised this issue in the House on 6 June last year, attempting to make an amendment during the passage of the Financial Services and Markets Bill. Perhaps history is now catching up with me. I thank the noble Lord, Lord Livermore, then on the Labour Front Bench, for grasping the economic importance of the matter, which he will appreciate even more as Financial Secretary, given the perhaps as much as £40 billion of lost investment in infrastructure, green energy and social buildings.

On one hand, I am pleased with the PRIIPs statutory instrument that was introduced in September, removing investment trusts from PRIIPs, and the cost disclosures part of the MiFID Org regulation and the accompanying FCA forbearance statements. Before I go further, I must flag that this was never about not reporting costs or not providing investors with a full suite of information on fees or all other corporate costs and charges. Investment trusts are listed companies and as such must provide all the transparency for investors that listing requires, including publishing full information in annual reports.

Unfortunately, after the September actions by the Government and FCA, the competitor industry to investment trusts, the open-ended funds and their organisation—the Investment Association—held a members’ meeting and agreed not to do what HMT expected, which has just been iterated by the Minister. They agreed that they would not accept that, at the share level—the investor-holding level—of investment trusts there are zero deductions from investment value.

Convening the meeting, and seeking member agreement, was confirmed by the CEO of the IA, Chris Cummings, at the Lords Financial Services Regulation Committee last Wednesday. Today, Ashley Alder, chair of the FCA, confirmed to the committee that there was no deduction to make from share value —I hope that everyone listened keenly. Chris Cummings further said last week that they did not want any changes to the current practice—the practice that has caused all the problems—until the FCA has completed its consultation and done all the new rules. They do not want any of the interim provisions. In another slide presented to the members’ meeting, it was shown that this could take until 2027. That is plenty of time for the misinformation to continue and to destroy the sector with which they compete.

My Lords, I too would like to address the statutory instruments relating to the PRIIPs and to the consumer composite investments. I am very grateful to the Government for laying these statutory instruments. I would also like to thank the Treasury and the Financial Conduct Authority for the statements they issued in September, and the FCA for its first set of forbearance and its subsequent additional emergency forbearance.

However, like the noble Baroness, Lady Bowles, it appears to me that, despite the clear intentions of the Government and the Financial Conduct Authority, as expressed particularly in the PRIIPs statutory instrument, some parts of the industry are not willing to accept what the Government believe and the FCA have clearly indicated is the right position. That is a particular concern to me.

The Minister rightly pointed out that the aim is to improve transparency and enable comparison between products for investors. The whole point of cost disclosures has always been to help consumers and investors—whether they are retailers, small institutions or others—understand what they are going to be paying for any investment product they buy. We know that, in the past, many of these costs were hidden. As the Minister said, investors need to better understand what they are paying for the product they buy. It needs to be accurately reflected to them, so they know the actual cost of the investments they are considering making or that they are holding.

More than 30% of the FTSE is at risk here, and there is potential detriment, which it is estimated has already materialised to the extent of many tens of billions of pounds, to the Government’s desire to support long-term growth and, particularly, sustainable growth. Anything undermining investment in this sector is of significant national consequence, and that is why the Government rightly issued their emergency forbearance. These statutory instruments contain elements of what we were trying to achieve with my Private Member’s Bill, which was supported from all sides of the House, including by the Minister’s Front Bench and fellow Ministers.

That is why we need to take the time and the opportunity, as these statutory instruments are coming before the Committee today, to register the deep concerns and to ask the Minister whether she will meet us and look carefully at what is going on in the marketplace, which looks very much like a collective effort to prevent the Government achieving the agenda they are aiming for and to maintain the position that the Government have already said is unacceptable for as long as possible.

The wording of the statutory instrument intends the UK listed, closed-ended investment company sector to,

“no longer be required to … report, the costs of manufacturing or managing shares”,

in these investment companies. Of course, they need to report them in their reports and accounts, and they do. They can also report them elsewhere, but they should not be reported as ongoing investor costs because they are not.

The instrument, according to the documents in front of us, therefore represents an immediate change in policy to address the concerns about the misleading cost disclosures that have resulted in massive selling and an inability to raise new capital. Sadly, what we have seen—notwithstanding the September report from the Capital Markets Industry Taskforce that specifically highlighted that the Government need to do what they have now done in terms of issuing urgent legislation, clarification and immediate transitional forbearance to stop the disclosure of costs that consumers do not bear as if they do bear them—is wording being used by retail investment platforms to justify banning some investment trusts from their platforms if those investment trusts wish to follow exactly what these instruments, particularly the PRIIPS one which is meant to be immediate, require and wish to see happening. It is quite interesting. It was said, for example,

“We want to ensure retail investors understand the cost of investing so that they can make an informed decision between two investment trusts, or indeed a fund and an investment trust.”

In an email, it was said: