I refer to my entries in the Register of Members’ Financial Interests. I also wish briefly to thank the Leader of the House for eventually listening to sense and allowing virtual participation in debates of this sort; it has been a positive development.
I know from our discussions that the Economic Secretary to the Treasury agrees with me when I suggest that the Bill provides an excellent opportunity to tidy up and improve the regulatory landscape for investors, particularly those with smaller portfolios. I suggest that, in helping to achieve that aim, we must reduce the needless obstacles to better investing, a good example of which is what are called key information documents, or KIDs. In the past, EU regulations have insisted that every single investment trust must produce KIDs to help investors better to understand what they are buying.
Briefly, for those who do not know what investment trusts are, they are like any other publicly quoted or listed company, such as a Shell or a Glaxo, but instead of managing oil or pharmaceuticals, they manage investments on behalf of their shareholders. They have a very good track record—they have outperformed unit trusts and, indeed, the benchmarks—and over the years they have played an integral role in helping investors to achieve their financial goals. The first one, Foreign and Colonial, was established in 1868, and the largest now, the Scottish Mortgage Investment Trust, is a FTSE 100 company with assets under management of around £15 billion.
Investment trusts have played an important role, yet they are having to labour under these things called key information documents. The EU’s intention might have been good, but the execution has been poor, and perhaps even dangerous. The central problem with these documents is that, as the Economic Secretary knows, they are very misleading, particularly when it comes to the assessment of risk and the projection of returns. The most dangerous aspect is that they ignore the age-old advice that past performance is no guide to the future, because they extrapolate recent returns as a guide to the future; KIDs produced in a bull market—or a good market—will therefore suggest higher returns, and vice versa.
KIDs are also misleading when it comes to risk, in the sense that they use summary risk indicators—SRIs—to express risk in a single figure, from 1 for low risk up to 7 for high risk. They have misled investors into believing that investment trusts are lower risk when they simply are not. It is generally accepted that investment trusts are higher risk, at least in the short term, because of their higher volatility, but long-term investors are prepared to accept that volatility because of their better track record, on average over time, when compared with both unit trusts and the benchmarks.
The real problem for the UK authorities is that although the more experienced investors will just ignore the key information documents, the less experienced, typically smaller, investors will suffer the most. It is little wonder that the industry reaction generally has been very poor: the investment trusts’ respected trade body, the Association of Investment Companies—the AIC—has advised investors to “burn before reading”.
Now that we have left the EU and the transition period has come to an end, and having onshored the relevant EU regulations, Government amendments will enable the FCA to address the key problems, including the misleading performance information and the SRIs. We are now looking to the FCA to conduct a wide-ranging consultation as to the way forward and, as previously promised, to work closely with the AIC and other bodies and investors; it has a duty to act swiftly. I have suggested to the Economic Secretary that the KIDs regime should be completely suspended, and if not, KIDs should be excluded from scope. If they are not, perhaps they should even be allowed to be pushed to one side, to enable proper consultation courtesy of the FCA.
I strongly urge the Economic Secretary to keep a watchful eye on the FCA’s progress. I look forward to hearing from him when he sums up, and to continuing our constructive dialogue on trying to ensure that these unnecessary regulatory hurdles come to an end for the betterment of investors generally. We must remove KIDs from investment trusts so that they can do no more harm.