Baroness Ros Altmann sits back and relaxes after finally winning a battle with technology to start the Zoom call. Wearing a casual grey Nike sweatshirt and leaning back in her chair, it appears to be an uncharacteristic look for the member of the House of Lords and stalwart of British politics, who is once again, in her words, looking to ‘level the playing field’. She is, however, keen to stress that she is not alone in her mission.
“It’s not just me. There’s a whole group of people. I’m just kind of hanging on in a way.” Altmann laughs off the suggestion that she is responsible for freeing investment groups from the constraints of regulation. “I was just lucky enough to get the bill drawn in the [private members bill] ballot.”
On November 22, Altmann introduced her Alternative Investment Fund Designation Bill in the House of Lords. The bill seeks to amend the 2013 Alternative Investment Fund Managers Directive (AIFMD) regulation to remove listed investment companies from being categorised as alternative investment funds.
Altmann explains her motivations behind the bill. She says: “I felt so strongly that legislative change might be needed because the regulator [the Financial Conduct Authority (FCA)] and the government have been made aware of the crisis that has arisen in the investment trust sector and nothing has been done.”
Altmann places heavy emphasis on the word ‘crisis’, performing it, almost as if she is coaxing support from the benches in the Houses of Parliament, rather than just chatting on our one-on-one Zoom call. This style comes naturally to Altmann, the former Secretary of State for Work and Pensions, who has built her reputation as the leading UK pensions expert not just through her doctorates, but her devoted activism and drive for pension reform.
In both pronunciation and repetition, Altmann is insistent there is a crisis.
Crisis? What crisis?
Under the current AIFMD legislation, listed investment companies are considered as alternative investment funds. Altmann argues that this ‘misnomer’ means that these listed companies have been “swept into the same bucket as hedge funds, private equity funds, unit trusts and open-ended funds.”
Altmann stresses that this designation laid the foundations for the current crisis, which has only reared its head in the last few years.
The first factor, Altmann asserts, is that all companies considered as alternative investment funds are required to disclose all ongoing costs, as per the EU-derived Packaged Retail and Insurance Based Investment Products (PRIIPS) and Markets in Financial Instruments Directive (MIFID) regulations.
Under PRIIPs, listed investment companies must publish their ongoing fund charges as the top line of their total costs — despite the fact that investors do not pay these fees. A discrepancy, Altmann argues, which makes UK-listed investment companies less attractive to an investor.
“All the EU competitors, or US competitors, don’t disclose these exaggerated or fictitious costs as ongoing charges to their investors.” Altmann explains, “so suddenly, retail investors were being told they were paying much higher charges [for their UK based investments] than they were and much higher charges than competitors who weren’t following these rules.”
Altmann continues to point towards the impact of the industry associations who, in their efforts to protect investors, have inadvertently escalated the crisis.
“The industry associations have increasingly looked to direct investors into low-cost investments, but ironically, at the same time, you’ve had the regulator telling everybody that they need to disclose these fictitious charges.” Altmann lets out a frustrated laugh. “These two things are not compatible. You have to inform investors clearly and not misleadingly, but if you follow the European-type rules that only the UK has adopted, you are not being clear, you are actually misleading investors.”
Mark Sherwin, senior adviser on financial reporting at the Investment Association, disputes Altmann’s suggestion. He says: “Focusing too narrowly on cost, rather than the wider question of whether a product provides value, creates a risk that investors are guided away from products that may be better suited to their needs and goals and could lead to worse outcomes for them.”
Sherwin continues: “A good cost disclosure framework will help investors and advisers to identify products with the potential to offer long-term value. The existing requirements have inadvertently caused confusion about fees for listed closed-ended funds, resulting in negative effects on investing decisions. As such, we welcome the growing consensus that the current cost disclosure regime is in need of a major overhaul, preserving transparency while providing more decision-useful information.”
Altmann contends that the crisis has arisen because, in this case, the desire to be transparent and the desire to protect the consumer are incompatible. Her tone becomes suddenly serious again when it is suggested that, should her bill pass, investment groups may become less transparent and a potential cause for concern for investors.
“The idea of transparency and disclosure is well-meaning, I’m all in favour and have been campaigning for years for companies not to hide costs for consumers,” Altmann says. “We seem to have gone from a system which didn’t tell investors the charges they were actually paying, to one which tells investors that they’re paying charges that they’re not actually paying.”
Seeing through regulation and legislation
“The cost disclosures put in front of consumers — whether on the Association of Investment Companies website, whether the investment company website or the investment platform — are nothing short of shocking.” Sunil Chadda erupts as he unleashes a deluge of information. “There is no explanation as to what the various cost metrics and cost disclosures are or what cost items they include or exclude.”
Chadda, an Ambassador of The Transparency Task Force (TTF) and as a Secretariat Member of the All Party Parliamentary Group on Personal Banking and Fairer Financial Services, explains he has been following Altmann’s bill closely — with mixed feelings. Over the course of an intense half-an-hour, Chadda has demonstrated a fraction of his impossibly deep and intrinsic knowledge of the industry that has led him to contribute to over 40 FCA consultations. Similarly to Altmann, Chadda is sharply critical of the PRIIPs regulation. “The FCA owes all market participants an explanation and an apology,” Chadda says passionately. “In my whole lifetime, PRIIPs has been the most incompetent and damaging regulation I’ve ever seen.”
Despite their shared scepticism of the regulation and authorities, Chadda heeds warning on Altmann’s bill.
“I really like [Baroness Altmann], she has been a force for good,” Chadda explains. “But on this one, I think she’s wrong. Simply because there has been a lack of consultation with the buyer side of the market. I think the FCA have been on the backfoot with this and it has been the government and the Treasury that have forced the FCA to act.”
Chadda argues it is the responsibility of the FCA to ensure investment groups are transparent across the sector, regardless of size and stature of the company. He advocates for greater clarity and communication in the disclosure of costs paid by investors.
“The FCA needs to communicate properly with all market participants and not just the industry, because we’re the buyers,” Chadda stresses. “The investors are unaware about what is going on. I don’t think any investor group has been contacted and the TTF haven’t been invited to join in this. This whole conversation [on cost disclosure] has gone down one track involving one side of the market and has left the buyers side out.”
When drawn on possible solutions the FCA can implement, Chadda becomes incandescent, as if the answer is staring the authorities right in the face. “There should be different cost disclosure rules, depending on the structure of these investment companies. For these rules to be full and complete, they need to explain what costs are included and excluded — and why.”
Chadda’s extraordinary verve takes a downturn and his tone becomes more placid, lacking its usual vigour. He elaborates, with a tinge of hopelessness, “only by providing transparency through a clear and well thought out cost regime can confidence be restored in the market. But I have serious doubts as to whether that’s going to happen.”
The FCA responds
In response to the criticism levelled at them, the authority issued a short statement. A spokesperson for the FCA said: “The rules determining cost and charges disclosure are set in legislation, which we cannot amend. The government has committed to repealing the relevant legislation. Once this is done it will enable us to design and deliver a new comprehensive cost disclosure framework.
“Until then, we have provided interim measures that support better cost disclosure for investment companies. These are a step towards wider reform of the cost disclosure regime, but are not the long-term solution.”
The statement continued to provide further background information to the statement: “Where cost disclosure obligations are prescribed in legislation (e.g. PRIPPs legislation and UCITS disclosure requirements), the FCA cannot instruct firms to breach the law.
“We are aiming to consult on a new UK disclosure regime to replace PRIIPs in H1 2024. The new regime will emphasise proportionality and flexibility to deliver useful information that supports consumers to make effective investment decisions.
“We have already sought views from the market via our Future Disclosure Framework Discussion Paper, which we published in December 2022,” the FCA concludes.
What next for Altmann?
There are still a significant number of hurdles for Altmann’s bill to clear before it is ratified into UK legislation. The bill has to pass through its second reading, committee stage, report stage and third reading in the House of Lords, before the same stages are repeated in the House of Commons. Only then will the bill pass to its final stages in which final amendments and royal assent will be granted and the bill is turned into law.
Given the intricacies of policy making, Altmann’s bill is not going to be introduced into law just yet. But, does the Baroness see an end to what she considers to be a ‘crisis’?
“I do expect it to improve one way or another. These discounts are ludicrous. Either the funds will be taken over by foreign buyers on the cheap or you’ll get more buybacks. Neither of those is a satisfactory outcome.” Altmann says, “The logic would suggest this will improve. Given that we’re back to the discount levels that we saw in 2008 and other areas of the UK markets are not collapsing in this way, I would expect that it will improve. But that’s not meant to be investment advice for anybody.”
At the end of our second Zoom meeting, which had been split by yet another technical issue, Altmann becomes increasingly passionate. “I would hope, from the point of view of the national interest and growth and long-term sustainable growth, that this is sorted out much quicker than currently looks to be the case.”
The passion turns to what can almost be described as pleading. “The more people that complain to the government or the regulator about this the better.” Altmann persists. “If people aren’t happy about it, they should express their views as to why or how it needs urgent change. This shouldn’t be a leisurely thing.”
As urgent as Altmann may stress the crisis to be, there remain several questions her bill will have to answer — both from the industry and parliament.
