New clause

HC Deb 05 June 2000 vol 351 cc121-5

Lords amendment: No. 270, after clause 229, to insert the following new clause—Open-ended investment companies— (".—(1) In this Part "an open-ended investment company" means a collective investment scheme which satisfies both the property condition and the investment condition. (2) The property condition is that the property belongs beneficially to, and is managed by or on behalf of, a body corporate ("BC") having as its purpose the investment of its funds with the aim of—

1. (a) spreading investment risk; and
2. (b) giving its members the benefit of the results of the management of those funds by or on behalf of that body.

(3) The investment condition is that, in relation to BC, a reasonable investor would, if he were to participate in the scheme—

1. (a) expect that he would be able to realize, within a period appearing to him to be reasonable, his investment in the scheme (represented, at any given time, by the value of shares in, or securities of, BC held by him as a participant in the scheme); and
2. (b) be satisfied that his investment would be realised on a basis calculated wholly or mainly by reference to the value of property in respect of which the scheme makes arrangements

(4) In determining whether the investment condition is satisfied, no account is to be taken of any actual or potential redemption or repurchase of shares or securities under—

1. (a) Chapter VII of Part V of the Companies Act 1985;
2. (b) Chapter VII of Part VI of the Companies (Northern Ireland) Order 1986;
3. (c) corresponding provisions in force in another EEA State; or
4. (d) provisions in force in a country or territory other than an EEA state which the Treasury have, by order, designated as corresponding provisions.

(5) The Treasury may by order amend the definition of "an open-ended investment company" for the purposes of this Part.")

Motion made, and Question proposed, That this House agrees with the Lords in the said amendment.—[Miss Melanie Johnson.]

Mr. Deputy Speaker

With this we may discuss amendments (a) and (b) thereto and Lords amendments Nos. 271 and 558.

Mr. Flight

The new clause that will be inserted in the Bill by amendment No. 270 is technical, but it is important for domestic and international funds. Domestically, it will govern the regulations to which the fund vehicle is subject and whether that is prospectus law or the marketing of collective investment schemes. For companies established outside the UK, it will determine the tax regime that will apply. Therefore, accuracy and clarity of definition are important.

The new clause provides that a company will be open-ended only if it satisfies the two conditions—the property and investment conditions—that are set out in the Bill, and amendments (a) and (b) relate to the investment condition. Under subsection (3) of the proposed new clause the investment condition will be satisfied if a reasonable investor is able to realise his investment within a reasonable period. Our amendments would sharpen up that test.

Under amendment (a), a company will not be open-ended if the investor can receive his money back on the liquidation of the company, but the Government's definition does not appear intended to include a liquidation. A company's byelaws often provide that it is to be wound up at a specified later date, so someone who becomes an investor close to that later date could be deemed to be able to realise his investment within a reasonably short period. Therefore, different categories of open or closed-ended could apply, depending on when different investors invest in a fund.

Amendment (b) would impose important restrictions on what is meant by realising an investment. As it stands, the condition will be satisfied, as is normally the case, if shares are transferable and the investor knows that he can sell his shares to someone else. It would be wrong to treat a company as open-ended for that reason. Our amendment uses the words in the undertakings for collective investment in transferable securities directive which allows cross-border marketing within the European Union of certain classes of collective investment scheme. That wording also appears in the Financial Services Act 1986 and it should continue to be used. The concept of an open-ended company relates to one that can buy back its shares and our wording covers that.

It is wrong to provide for a company to be open-ended if the expectation is that the investment can be realised within a reasonable period. We thought about submitting a specific definition of time although we did not wish to undo the constructive negotiations that are taking place between the Treasury and the industry. However, it will be useful for the FSA to specify what "reasonable" means so that there is clarity. That is particularly important for non-UK funds where an unknown change in the tax position could have a material effect on UK investors.

For example, if the rules of a fund provide for a right of redemption to arise one year down the line and the fund manager thinks that that is outside the reasonable period required by investor conditions, he will proceed on the basis that the company is not an open-ended investment company and therefore not a collective investment scheme. If the regulator or tax inspector takes a different view, there will be conflict and a tremendous tax row.

I raised this issue in Committee, but there is still a lack of clarity in the Bill. What would happen if one investor says that the period is reasonable and another says that it is not? The fund could be open-ended if it followed the advice of one and closed-ended if it followed the advice of the other.

There might be scope to address the issue by FSA regulation, but it would be helpful if the Government could tell us that they are committed to tidying up these loose ends and potential conflicts.

Miss Melanie Johnson

Amendment (a) seeks to specify the time at which the expectation of the reasonable investor whom we have postulated for the purposes of the investment condition leg of the OEIC definition should be assessed. It proposes that the assessment should take place when the investor decides to participate in the scheme.

The Government have stressed the importance of flexibility in all the debates on the definition of an OEIC. By defining an OEIC in the Bill and introducing regulations governing their incorporation and operation, we are facilitating important developments in the UK collective investment schemes industry, and it is essential that we do not stifle future innovation by being overly prescriptive in framing the definition. Indeed, when the Government introduced the current definition, the Opposition's spokesman in another place welcomed it as providing a much more flexible and forward-looking definition of open-ended investment schemes.—[Official Report, House of Lords, 30 March 2000; Vol. 611, c. 942.] The Opposition amendment would introduce an element of ambiguity that is absent from the definition. To specify the time he decides to participate in the scheme begs the question whether that is when the investor makes his decision or when he will participate, which could be some time later than his decision.

Any words specifying a particular time are unnecessary because it is clear that the relevant time of the assessment to be made by the hypothetical investor is immediately prior to hypothetical participation in the scheme. The fact that the investor and his investment are hypothetical means that the idea of him deciding to participate is the wrong approach to the point. The proposition needs to expressed in conditional language—hence if he were to participate… The fact that the investor is hypothetical also ensures that the test is flexible. It is a test that can be applied from time to time to allow for the possibility that a closed-ended company can become open-ended and vice versa, on account of significant changes to the way in which the operation of the company and its constitution are structured which push the company over the boundary between the two types. The test has been put together with the need to accommodate changes specifically in mind. This is a dynamic industry—we must have a dynamic definition.

Mr. Tyrie

To be perfectly honest, I have not got a clue what the Minister is on about. I may be alone in that, but for my benefit at least, will she summarise in plain English what she is trying to say?

Miss Johnson

I shall endeavour to do so. There are two types of investment companies—open-ended and closed-ended—and both need to be clearly defined. Schemes can move between one arrangement and the other, depending on how quickly they can be realised. That point was made by the hon. Member for Arundel and South Downs (Mr. Flight). We want a definition that is flexible but not unduly ambiguous, and we are concerned that the Opposition amendment would introduce ambiguity that is absent from our present definition.

Mr. Flight

Our particular concern is that under the present arrangements a scheme can be open-ended and closed-ended at the same time, depending on when an investor invests.

Miss Johnson

I am not sure whether the hon. Gentleman's point relates to liquidation, with which I am about to deal. I am puzzled by his remark, which does not square with what I understood to be the effect of the Opposition amendment. It is clear that under the hon. Gentleman's proposal the test would exclude a company that was about to go into liquidation. We are talking about a reasonable investor. Someone who invests in a company knowing that it is about to be liquidated—and, for all he knows, it may be an insolvent liquidation—is not a reasonable investor That is a question of common sense. The same goes for the other exclusions: a reasonable investor would not invest in the expectation that the company was going to default.

Mr. Flight

Many closed-ended investment companies provide that their life will end by liquidation at a certain date. If an investor, who may or may not be fully aware of that provision, invests within six months of that date, his investment will have a life of only six months and will then be liquidated, so he could be judgeable as investing in an open-ended company. That situation particularly applies to closed-ended non-UK funds. That has tax consequences because his investment, which he thought was to be in a closed-ended fund, becomes open-ended and does not have distributing status. The investor thus ends up with an income tax bill on the total return rather than capital gains tax as he expected, so the matter is one of liquidation in the context of closed-ended funds that end their life in the liquidation of assets.

10.30 pm

Miss Johnson

The answer to that point is that we emphasised when we introduced the definition that its aim and effect is to cover companies that look, to a reasonable investor, like open-ended collective investment schemes. I appreciate that the hon. Gentleman is alleging that a closed-ended scheme looks like an open-ended one if it is approaching liquidation, but that is not our understanding of the way in which it would be regarded.

The investor's expectations could involve consideration of when he would be able to invest in the company and when, having done so, he would be able to realise his investment. A reasonable investor's overall expectations of potential investment in a company when its status with respect to the definition is being judged will determine whether it meets the definition. The matter is therefore definitional rather than one of proximity to liquidation.

Amendment (b) specifies what is meant by "realise his investment". The effect would be to limit realisation to the repurchase or redemption of the shares or their sale on an investment exchange arranged by the company. That would be an unacceptable limitation on the means by which an investor can realise his investment. It would prevent the development of OEICs allowing realisation by other means in certain circumstances and thus restrict the types of OIECs that the Government, the FSA and industry may in future want to be made available.

In another place, the Opposition expressed interest in the definition allowing scope for a wider range of authorised funds which are intended for domestic consumption—[Official Report, House of Lords, 30 March 2000; Vol. 611, c. 943.] The amendment would run counter to future efforts to do precisely that.

Similar companies established outside the UK must be capable of coming within the definition. For example, companies may have a mixture of shares—some redeemable, some not. Those partly open-ended, partly closed-ended companies enable investors to realise their investments without having their shares redeemed, repurchased or sold, perhaps by raising loan funds to pass on to investors who want to realise their investments.

In such a case, the hypothetical reasonable investor should look at the company as a whole. He will think to himself, "If I invest in this body, would I expect to be able to realise my investment and be satisfied that the value would, on the whole, be calculated in the specified way?" If the answer is yes, the company should fall within the definition. Amendment (b) would preclude that.

However, I reassure Opposition Members that the forms of realisation that they specify are covered by the current definition. With that, and my earlier comments, I hope that they will find it possible to withdraw the amendment.

Mr. Flight

We had not intended to put the issue to the vote; it is highly technical. I believe that the Government's intent is bona fide, but there are still some problems. Perhaps we might discuss the matter, as it is purely an industry one. The broad intent must be clarity for an investor in assessing whether he is investing in an open-ended or closed-ended company. We do not wish to press our amendment to the vote.

Lords amendment agreed to.

Lords amendments Nos. 271 to 442 agreed to.