Thank you for the opportunity to appear in front of you. My name is Chris Cummings, and I am the chief executive of the Investment Association. We represent UK-based fund managers, an industry of some £8.5 trillion used by three quarters of UK households today. We own roughly a third of the FTSE.
Q Thank you, Mr Cummings, for sharing your expertise with us. We all recognise the importance of inward investment, and indeed of the Investment Association, to our economy. The impact assessment for the Bill estimates that up to 1,830 notifications might come in each year under the new national security and investment regime, but those numbers do not capture the fact that almost every start-up seeks capital investment at some point. The requirements to notify are put on the acquirer, but I would like your thoughts on the impact that may have on start-up companies. As part of that, I imagine it will be especially hard to hold merger and acquisition auctions while checking on the outcome of these processes. What do you foresee will be the overall impact on the UK investment climate, and in particular on the ability of our most innovative start-ups to raise capital? I am often told that access to finance is the key barrier to start-ups growing, and staying in the UK as they grow.
Thank you; that is such a pertinent question. Before I address the substance of it, I want to try to describe the work of many of my members, which is broadly portfolio investments. They seek not to acquire a company but to invest, taking a very small stake—a fraction of a percent—of those companies. That provides an opportunity for those companies to receive the investment they are looking for, and enables us as investors to invest in a company, an industry or a whole sector in order to generate a return for the investors whose money we are managing. They tend to be pension funds and insurance companies—institutional investors.
Of that £8.5 trillion I mentioned that we manage, about 80% to 85% comes from institutional investors; the other 15% or so comes from retail: people on the high street saving in individual savings accounts and so on. Our view on the Bill is about how we can continue to do our work to help finance companies in the UK and internationally with the investment collateral that we can bring to bear. We do that in the two major parts of the market: listed companies and unlisted companies.
Perhaps I can address the point you made about small and medium-sized enterprises. We make investments in unlisted companies—of course, small and medium-sized enterprises are not listed organisations—by developing an understanding of sectors and industries. We look for individual institutions that we regard as high-performing—that is, high-performing over a long period of time, because we are patient investors, tending to take a long-term view, unlike colleagues in other parts of the industry, who are more high-frequency, or looking at a two to three-year earn-out period. To help us do that, we need two things. The first is legal certainty around the investment climate here in the UK, so that we understand the rules of the game, so to speak. This particular Bill is helpful in establishing greater clarity about the rules of the game; we do have one or two caveats, but it is helpful. The other is publicly available information, such as analysts’ reports—the type of thing that we as investors would look to receive and interrogate, and on the back of which we would then make an investment decision.
We are really looking for whether the Bill helps make the UK more attractive; whether it helps us funnel savings into productive investment that can help companies grow, create jobs and so on; and whether it is adding to the legal certainty of our investments. You are right to ask about SMEs; our members who invest in higher-growth companies are really keen to make sure that the process is as friction-free as possible, and that there are no surprises. Being very clear about a pre-notification regime is especially important to us, as is something like the five-year review period that could come after a deal has ended. Certainty about those 17 sectors is particularly important as well. That is why we have wanted to maintain a really close dialogue with the officials—the team that has sponsored this Bill—to make sure that no inadvertent barriers have been erected to us deploying that investment in the right way.
One of the suggestions we would like to commend to this Committee is something we have seen work particularly well in Japan, which considered a similar raft of legislation: a blanket exclusion for investment—not for takeovers, obviously, but for portfolio investment, where the investment industry wants to support unlisted or listed companies, and it is clear that there is not a desire to take them over, involve ourselves in the management of those firms, seek a position on the board or secure the intellectual property, but where we are just performing the role of long-term investor. That has been judged as being outside the scope of the legislation, but we commend that to the Committee as a practical step that takes forward the principles of the Bill and secures the “investability” of the UK’s investment landscape.
Q Thank you very much. I note your suggestion regarding the blanket exception for investment funds. I had two quick follow-up points: first, could you say how they would be defined in such a way that would exclude, for example, foreign sovereign investment funds and so on, which might give cause for concern? Also, you said you had a couple of caveats. I take it that is one; what is your other caveat?
Forgive me: I noticed that I missed the point about mergers and acquisitions. We regard the pre-approval facility that officials have mentioned—I believe the last witness mentioned it, as well—which is a way in which the team responsible could be approached ahead of a deal being put together, as a very sensible, practical step forward, as long as confidentiality was absolutely rigorously maintained.
In terms of definitions, we find the Japanese definition quite attractive, and again we commend it to the Committee. It clearly differentiates out investors such as the ones we represent, who are looking to provide capital for a company and share in its success for the benefit of the investors whose money we manage, but are not seeking to take an active role in the management of those companies. We are not looking to put somebody on the board; we are not looking to intervene directly in day-to-day management decisions. Our relationship is with the board chairman and so on, in order to engage in a constructive and strategic discussion, but we stop short of securing assets or taking an active role in management. That is a system that works well.
Turning to our caveats, I mentioned the five-year review period. We undoubtedly recognise the spirit in which this legislation is drafted, but Governments change, as does public opinion. The strength of this Bill is that it is focused around national security. Perhaps a definition of national security may go a little further in helping investors as well, because we could not really strike upon a catchy, well-turned phrase that defined national security, and have a reluctance to move away from national security; we would hate to see the Bill being widened into more public interest ability.
A final point to note would be the interplay between this legislation and the Takeover Panel, which has a different and distinct role to play. The notification percentages are slightly different: it is 25% in the Bill, and 30% in the Takeover Panel, so ensuring that there was no accidental misalignment would be most useful.
Q Welcome, Mr Cummings. You mentioned the feedback from your members about keeping the Bill focused very much on national security. The message that we want to get out there is that Britain remains very much open for business, and that we want to maintain our place in the premier league of foreign direct investment. How has that statement of policy intent, which we published alongside the Bill, landed with your membership?
When it comes to a clarification point around national security, this is similar policy-intent-driven legislation to what we have seen in other emerged markets, such as the US, Germany, France and so on. We do not find that it is out of step with other developed markets. In other jurisdictions—I will take the US as an example—the legislation has started small and then grown as people have become familiar with it. The UK, perhaps because we feel we are playing catch-up—that is not for me to say—has started on a larger scale first. That is why there are queries around scope and around the durations. We look forward to engaging with the definition of the 17 sectors to ensure it is as specific as possible, and to ensure that we understand the operation. We would like to hear from officials and colleagues in ministerial positions on how they see it working in practice, so that the investment community is really clear that the rules of the game have not changed, and that the UK really is as attractive as we want it to be for incoming investment.
As I mentioned, we represent UK-based investment managers, but of course, those organisations are headquartered not only across Europe, but in other parts of the world, particularly the US. We are managing pension scheme money not only for UK savers and pensioners, but from other parts of Europe and places as far-flung as Brazil. If we as investors were looking to make an investment in UK plc, we would need to be clear about where head office was, and where the money was coming from. All those things could be either pre-approved or ruled in court as quickly as possible to ensure that there is not a missed beat in attracting the investment that we all want to see.
Q I forgot to say earlier that it is a pleasure to serve under your chairmanship, Sir Graham. Mr Cummings, thank you for your time today. Are there any particular areas in the Bill that concern you—that you think may put off the investment community from investing? Also, what would you say are the particular strengths of this Bill?
As for particular strengths, we feel that the aspects that deal evidently with national security are strengthening a regime that needed some modernisation.
On the protection of intellectual property, one of the key areas—it is absolutely essential for us as investors—is knowing that if we are investing in a particular company, we are doing so because, depending on the market and sector it is in, we feel that the intellectual property is clear, maintained and protected by clear legal contracts, and that if something goes awry, we, as investors, have recourse to legal sanctions.
There is much in the Bill to be commended. In terms of areas of weakness—forgive me; I feel I have touched on these—it is about ensuring that, as investors, our position is clear and understood. In investing in a company, when doing that not to try to take it over or seize the reins, it is to provide more of a long-term investment to support the company’s development. We do not feel that quite comes through in the way the Bill has been written at the moment. It has been written, rightly, for takeovers. We do not want to be hit by ricochet —by accident—in wanting to continue to support UK plc and find that new barriers have been erected that prevent us doing that, simply because this part of the investment landscape had not been completely thought through. That is a caveat, rather than a point for deep consideration.
That is something we are looking forward to engaging with. When you first hear it, 17 sectors sounds like quite a lot, but having worked through the 17 sectors and looked at some of the draft definitions, I think that each one is justifiable.
We would be keen to point out a few things to the Government. First, the greater the specificity around the definitions, the better. Secondly, we should not rush to change the sectors by adding to them too quickly. Investment needs a degree of stability, and legislative stability most of all.
Thirdly, in consulting with industry and thinking about the operations and practice, I would ask to have industry expertise around the table. We found time and again working with officials—they are hugely valuable, talented individuals, but do not come from a commercial background, almost by definition, although some do—that having the commercial insight, we can play a role in nudging in the right area, to ensure that nothing is hard-coded that would prevent a deal because the nuance has not been appreciated. Having that industry insight would be a big step forward, if it could be accommodated.
Q Good afternoon. The Government’s impact assessment expresses the view that a national security regime such as this does not have much of an impact on overseas investors and their investment decisions, as long as they are comfortable that any interventions are appropriate and the regime is predictable. Do you share that view?
With any new piece of legislation, and certainly one of this character and this far-reaching, investors will always want to understand the motivations that led to it being introduced, how it will work in practice and whether we can give case studies as quickly as possible to prove that it does work in this way.
The important thing—I cannot stress this enough—is how it gets spoken about by Ministers. That enduring political support for investment carries such weight with investors. More than the words on the page, what matters is how it is presented—how Ministers then talk about the desire to continue to attract investment and how they make themselves available to investors.
All major economies, because of the covid-19 crisis, are seeking new levels of investment, whether for individual corporates or infrastructure investment, let alone Government debt. We feel very strongly that the UK has a tremendous story to tell. Introducing new legislation such as this at a time when, bluntly, we are looking for more investment to come into the UK, will require a degree more explanation. The way it has been phrased so far, as national security and almost as a catch-up activity with other developed jurisdictions, is fine. However, if Ministers make themselves very much available to investors to explain how this will work, and make a bonus of the pre-authorisation facility, so that if investors are troubled that an investment they are considering could attract attention, there is an ability within 30 days —that is a really important point: within 30 days—to have it pre-approved and then stood by, that will go a long way in the investment community.
As you can tell, we will have to paddle a little bit harder, but that has the potential to be a short-term explanation for a long-term gain. Potentially, that is fine, but I say again that we hope Ministers will seize the opportunity to explain this to investors, the course will be set and we will not see further iterations or scope creep from national security to other sectors, which then becomes a little more worrisome.
Q Thank you. Decisions under this legislation will initially be taken by the Secretary of State. In the United Kingdom, the way that Ministers exercise the authority given to them by legislation, and indeed the way that Governments or Prime Ministers exercise the authority that comes down through the concept of the royal prerogative, is governed as much by tradition, convention and understanding as it is by hard legislation. Recently, we have seen an increasing number of occasions when Governments have chosen to do things that are allowed but are completely unprecedented and not according to the usual traditions and conventions. There are some notable examples here, and clearly a number of examples from the outgoing President of the United States. Does that give you a concern that legislation might be passed giving a Minister power under certain understandings, but that the understandings themselves might have no legal force, so a future Minister might exercise that power in a way that is very different from what had been expected or intended when the legislation was passed?
Forgive me, but it is obviously not my role to advise future Ministers on attitudes they may take. I can simply say, from an investor’s point of view, that we prize stability, predictability and accountability beyond all things. Making sure that the rule of law applies and that there is no handbrake turn in policy direction matters hugely. Investment is being sought by every economy around the world, and it would be a very rash Minister indeed who decided to unpick something that is a great strength of the UK and one of our global competitive advantages: a system based on the rule of law and an approach to policy making that is entirely transparent and accountable to Parliament, which gives the investment community great confidence that the UK retains its position as being one of the safest places in the world to invest in.
From our perspective, that accounts for one of the reasons why our investment management industry here in the UK is globally pre-eminent. The UK is not only the largest investment centre in Europe; we are bigger than the next two or three added together. Only the US is a bigger market, and that is because of its substantial domestic scale. When it comes to international investment, the UK is streets ahead of its competitors. We would very strongly urge any parliamentarian, and certainly any Minister, to think twice before taking actions that would have a lasting consequence for our international reputation.
Q Thank you, Mr Cummings, for a very good presentation. I just want to go back to your point about the blanket exclusion for investment managers. First, you say that is the situation in Japan, but maybe you could say where else it exists. Secondly, why is it needed? I totally accept that, on the whole, the investments being made by your members will not fall within the trigger points, because they will not be taking over 25% of Shell or even some small companies, but they might do in certain circumstances.
Thirdly, to what extent do hedge funds represent members within your organisation? Obviously, they have greater capacity, or greater natural affinity, for investing in smaller companies—not always, but in certain cases. They might actually fall within the remit of the triggers, so I do not quite see how we could implement the blanket exclusion, if from time to time there are exceptions to the exclusion.
Thank you for asking me to clarify; I apologise that I was not as clear as I should have been. The hedge fund community has a representative organisation. It is a splendid one that can do a tremendous job in speaking for them, and I would not put myself in that position; I would not try to speak for them. We have members that invest substantially through private markets into smaller and unlisted companies. Again, it comes down to intention. The intention is not to invest in such a way as to take over the company and to seize the reins; the intention is to make an investment that is in the strategic direction of the company, to support its growth.
I am trying not the use the term “passive investment”, because we are anything other than passive when it comes to investing, but it is an approach that is designed to support the company, rather than to change dramatically the company’s ownership or direction, or to land one of our members on its board—in effect, they would then be part of the management and governance of that company. I hope it is more than a subtle definition; it is a distinction with a real difference. That is part of why we think it is an important distinction to make.
Other jurisdictions have been through similar experiences. The Japanese example is so relevant, because it is only a year or so ago that the Japanese Government were considering very similar legislation. As a result of consultation, they came up with the approach that we are suggesting: to exclude the activities of investors, insurance companies and so on, because it is around the intentionality—not wanting to take an active role in the management or to change the company’s direction, but to support through investment rather than to seek control.
The US has a similar modus operandi. It is not quite as framed in the legislation as it is in Japan—again, just through history. The approaches that we have seen in Germany and France also nudge in the direction that I am describing, so there are parallels. The Japanese experience is the closest match that I can offer the Committee, but we will continue to do further investigations and to feed in ideas through the Bill’s stages and through the consultation on individual sectors.
Q There is a fairly fine line in smaller companies in which an investment manager takes a major stake. There is a fairly fine line between having an active role in its management and having very close scrutiny of its management. From my own experience in the business, the investment manager keeps a very close eye on it in those cases. If they do not, quite a lot of risk is involved. That is quite a crucial grey area, and it therefore makes me think that a blanket exclusion would create problems. It might be viewed by private equity companies or whatever as being an unfair advantage to investment managers.
Certainly, we are keen to see those smaller and medium-sized companies get access to as much growth capital and investment as they need. Part of our enthusiasm for this piece of legislation, and indeed others, is that it is an opportunity to re-excite the UK public about the opportunities for equity—for shareholder participation in fast-growing companies. That is partly why we are so keen to work with your Committee and others to communicate the message.
Perhaps a clearer distinction could be found for the difference between listed and unlisted companies. That is perhaps where we could focus our attention more, on explaining—I am not sure that “blanket exception” is quite the right language for me to use because that seems to be a one-and-done exercise and perhaps there would be more to it than that—but focusing the attention on the listed sector, where it is much more obvious that we as investment managers are investing for the long term rather than seeking control over the company. I hope that would allay some of the concerns that you rightly mention.
Q Thank you, Mr Cummings, for being a witness today. I want to come back to the point about capacity in terms of the mandatory notifications. As described, do you think it is going to be able to cope with that, and just how opaque are some business organisations and ownership? With that opacity, will they realistically get to that within 30 days? That is my first question. Secondly, in terms of many transactions, the Government have no legal powers over retaining jobs or research and development in the UK—thinking about SoftBank, Arm and many others. Do you think there is a need to plug those sorts of gaps or deficiencies?
You rightly raise the question of scale and resources. It is one of the things we have been consulting our members on, and having discussions with others, to try and get a better view of what the notification process would be, who would notify, who would then respond, the scale of the team in the Department that would be exercising due diligence in the applications and whether the system could cope. Bluntly, what would concern us deeply is having a 30-day notice or turnaround period that the Department regularly missed, because that would then create a shadow over this particular piece of legislation. It would gum up the works and, frankly, none of us would wish to see that.
Looking at how the regime works at the moment, with very few notifications, there seems to be a scale difference between where we are today and what the legislation proposes. We would like to hear more from Ministers on how they are going to address that and what the processes would be. There have been discussions about a portal, a very brief form of five pages or so that would be easy to complete, but I think a degree more of reassurance on that point would not go amiss—as would the confidentiality. There is so much around any investment process and the acquisition process that has to remain entirely confidential, that investors would require and would be looking for reassurance that these conversations could be held in the strictest of confidence and that nothing would appear until the right time. In terms of scale and resources, it is a point that we share your interest in.
I was making a note of the point you raised on transactions, but could you repeat that part of the question? Apologies.
Q No problem. It was just about various deals, with the example of, say, SoftBank and Arm, and the protection of jobs, research and development and pensions in the UK, and whether the Government need to plug that gap to give assurance and protection here in the UK to those elements.
Thank you, and apologies again for omitting that. This is something that we, as the investor community, have been observing for the last few years at least, looking at the different requirements that Governments have tried to put on acquiring companies—Kraft Cadbury and so on, through to SoftBank—and seeing what has happened there, and the role that the takeover panel has been asked to play to police or report on those activities.
The intent behind the Bill at the moment seems to be for national security to preserve intellectual property in that R&D capacity here in the UK. If that is going to be seen through, transparent and accountable mechanisms need to be clarified in the Bill, on how that will work in practice, what resources will be in place to measure, monitor and report it, to whom it would report, and any sanctions that would be applicable afterwards. Those are definitely areas that we feel deserve further scrutiny.
From our point of view, as investors, the last thing we want is to invest in companies where we feel the IP is protected and the R&D facility is well known to us, but where within one, two or three years there has been either a change of management or further changes that mean that IP has been moved or duplicated elsewhere. That is a very legitimate concern.