§ 6.10 p.m.
§ Baroness Blotch rose to move, That the draft order laid before the House on 13th March be approved [14th Report from the Joint Committee].
§ The noble Baroness said: My Lords, this order would use powers in Section 70 of the Charities Act 1993 to modify the effect of the 1961 Act in relation to charities. Central to the purpose of the order is the importance of achieving an appropriate balance between risk and return in relation to a charity's investments. What is at issue here is the best use of charities' assets; in the first instance by way of investment so as at some time in the future to secure effective work by charities. Also relevant are questions of accountability and safe keeping where possibly substantial assets have been donated by the public and are being held on trust by the charity.
§ Trustees are subject to important obligations of care in relation to such assets and must in general avoid risk. When the Trustee Investments Act was enacted in 1961 it was, therefore, an important liberalising measure, allowing trustees to invest more freely. In particular, it introduced the classifications of "wider-range" investments, such as equities, and "narrower-range", such as government gilts. The Act requires that where trustees divide assets for investment they must do so equally—50:50—into the two classes. The Act also requires trustees to obtain and consider proper investment advice and to have regard for the suitability of investments and the need for diversification.
§ We recognise that there has been concern in relation to the restrictions these provisions have imposed for charities. In addition, professional investment advice has now been strengthened by regulation under the Financial Services Act 1986. Concerns in relation to charities were voiced particularly by the deregulation task force on charities and voluntary organisations, which reported in July last year. The task force review was an important exercise and the Government have responded very 59 positively to its many recommendations. The number of recommendations has meant that to give proper consideration to each we have had to prioritise the action that we take. Already we have made some changes to the Charities Acts of 1992 and 1993 through the Deregulation and Contracting Out Act 1994 and have taken careful account of their relevant recommendations in provisions we brought into force last month and in an important consultation document issued recently.
§ The deregulation task force also recommended a modification to the effect of the Trustee Investments Act in relation to charities and, indeed, other trusts. The Government accept the case for change. This order would mean that, where charities divide funds for investment in pursuance of the 1961 Act, three times as much money would be invested in typically higher growth, wider-range investments, compared to more secure, narrower-range investments—a change from a 50:50 split to 75:25. This is a good and worthwhile measure.
§ I can also inform your Lordships that last week the Treasury issued a consultation document inviting views by the end of June on the proposition that a similar change should be made in relation to trusts generally, using powers in the Trustee Investments Act.
§ The present order does not meet in full the recommendations of the deregulation task force, which proposed a change to a 90:10 split and suggested that consideration should be given to allowing further investment powers beyond those permitted in the definition of "wider-range" powers. I hope that your Lordships will recognise that the current order is, at the least, a substantial move towards that recommendation. The Treasury proposal for further reform is another step in that direction and in that case is the maximum extent to which the relevant modification can be made without amendment to the primary legislation itself.
§ Further amendment is, of course, possible in principle. I am reasonably sure that those who may wish to argue for such change will continue to do so. However, at this stage, the Government's view is that a change to 75:25 is the one they consider it right to make. In relation to this draft order, there is the additional reason that there is a logic in keeping the rules for charities in line with what is proposed, and it is the maximum possible under the law as it currently stands in relation to trusts generally.
§ Charities which consider that there is a particular need for wider investment powers in their individual circumstances are, of course, able to apply to the Charity Commission seeking a modification to their trust deed by a scheme. Investments by charities in common investment funds do not need to be taken into account for the purposes of any division into wider and narrower-range funds under the 1961 Act. Perhaps I may allay any fears which charities might have and say that this order would not compel funds long since divided 50:50 to he re-divided if, over time, more than 75 per cent. of their current value were now in wider-range investments. On the other hand, Section 70(2) of the Charities Act 1993 means that, once this 60 order has been made, a charity will be able to make one further re-division of funds previously divided 50:50 should it wish to take advantage of the 75:25 split.
§ Your Lordships may also wish to know that the power in Section 70 of the Charities Act 1993 enables this order to apply not only to England and Wales but also to Scotland. I am pleased to say that, with the agreement of my right honourable friend the Secretary of State for Scotland, the order will also apply there.
§ I have emphasised the need for a balance in relation to investment and the fact that the Government have accepted the case for considerable change. I recognise that some would like to go further, but I have explained why we are not at this stage persuaded that that would be justified. I invite your Lordships to agree on the current proposals set out in the order.
§ Moved, That the draft order laid before the House on 13th March be approved [14th Report from the Joint Committee].—(Baroness Blatch.)
§ 6.15 p.m.
§ Lord McIntosh of Haringey
My Lords, the House will he grateful to the Minister for introducing the order with a good deal more seriousness than it was introduced in another place last week. There the Minister introduced it in a rather cavalier manner and I do not believe that he knew what would hit him. My honourable friend Alun Michael, who had done his homework on the subject, pointed out a number of grave deficiencies in the order. The order is not in itself wrong but it contains inadequacies which Mr. Baker had not considered possible. I am glad to see that today the Minister's brief has been substantially amended to take account a number of the points made by my honourable friend.
Perhaps I may make clear the extent to which the order is inadequate. The 1961 Act was, in its time, a measure of liberalisation. It gave a degree of freedom to charity trustees to balance their portfolios between equities and gilts and between wider and narrower-range investments. However, by 1982 the Law Reform Committee had described it as being no longer a matter of liberalisation but of severe restriction on the ability of trustees to maximise the return on their investments as they are required to do by law. That was confirmed in 1989 by a Government White Paper. It was confirmed again in 1990 by a National Audit Office report and again in 1991 in the debates on the Charities Bill. Finally, as the Minister reminded us, the deregulation task force described the inadequacies of the 1961 legislation in considerable detail. It made detailed recommendations as to how it should be changed.
As the Minister reminded us more successfully than the Minister in another place did there, the scope of the order is more limited than might appear. First, it applies only to charitable trusts and not to charitable companies. Secondly, the disposition of investments which have already been made, and which have resulted in a balance of investment different from the 50:50 provided in 1961 or the 75:25 provided under this order, will not he affected by the order because those investments can remain.
61 Thirdly, charities—and this is true for many of the larger charities—may have discretion in their constitutions to make investment activity outside the scope of the order. Even if they do not have discretion in the constitution, they may obtain a scheme from the Charity Commissioners to secure exemption. Therefore, on the whole the order will apply only to a minority of charities or perhaps a minority of charity funds, although it will probably apply to a majority of the smaller charities.
But let us think of the opportunities that are being missed in bringing forward this petty little order now instead of taking the issue seriously and trying to give charity trustees the opportunity and the duty to maximise the return on their investments. The Minister reminded us rightly of the changes that have been made in the role of investment advisers under the Financial Services Act 1986. But the 1961 Act takes no account, of course, of the provisions of that Act. Investment advice—I am looking at the Good Trustee Guide produced by the National Council of Voluntary Organisations—may be given by accountants, bank managers, stockbrokers, members of the charity staff or one of the trustees. That provides no protection.
The Good Trustee Guide reminds us that trustees who give investment advice should consider the extent of any professional negligence liability which they may incur by doing so. Would not this have been an opportunity to make sure that the giving of investment advice to charities was codified; that the advantages of the Financial Services Act 1986 were made available to charities; and that they should be required to seek investment advice from those who are approved to give it under the 1986 Act?
I turn now to what is called the measure of liberalisation. Why have the Government not taken the advice of those bodies to which I referred as reporting on the 1961 Act and their deregulation task force not merely to change the percentage from an arbitrary 50:50 to an arbitrary 75:25 but by removing altogether the restriction? I shall not go into the same detail as Alun Michael. I suspect that he was moving into the arguments of Goneril and Regan about King Lear's need for a train of retainers:What need you five and twenty, ten, or five?Seriously, there is no magic in 50:50 or in 75:25. Good investment advice, provided by someone qualified to give that advice and who is regulated by the Financial, Services Act to give it, could well be different for different charities and need not follow the same percentage pattern. Therefore, in that sense too, the order is inadequate.
Above all, after the experience of Barings, we know that there is an urgent need to prevent charities investing all their resources in a single institution, even a single hank, as my noble friend Lord Chandos reminded us last week. That opportunity too has been missed.
62 Of course we shall not oppose the order. It is no worse and very, very marginally better than the original Act. But it is not the order which should be before your Lordships today.
§ Lord Harris of Greenwich
My Lords, by and large I welcome the order although, like the noble Lord, Lord McIntosh, I should have preferred it to go further.
The noble Baroness, Lady Blatch, told us about who had been involved in the decisions. She indicated that the Government had accepted that there was a case for considerable change. She referred to the work of the deregulation task force. The only thing missing from her speech was any reference to the discussions we had in Committee on the Charities Bill when we were applying our minds to exactly those issues we are debating today; namely, whether we should give trustees greater authority to make their own investment decisions.
I am sure that the noble Baroness will be astonished to learn that the noble Earl, Lord Ferrers, was wholly opposed to that amendment and the Government were defeated on the issue. In future perhaps the noble Baroness will pay tribute to the work of your Lordships' House on that issue because if the Government's view had been accepted by the Committee we should not be in the position in which we are today.
As I indicated, I have no difficulty with the central thrust of the proposal. The only point I wish to make is as regards the explanatory note. There are two sentences, the first of which consists of 110 words. It is almost wholly unintelligible. I say "almost wholly unintelligible"; it is wholly unintelligible. Its purpose is to tell trustees what are to be their powers. It seems quite unacceptable that the best the Government can do is provide such an unsatisfactory explanatory note. I cite it as an example of how not to do it. The next order we are to debate—the Contracting Out (Functions in relation to the Registration of Companies) Order—has a wholly admirable explanatory note which explains clearly what are the proposals in the order. I hope that in future the Home Office will do rather better.
§ Baroness Blatch
My Lords, I am grateful to noble Lords for at least saying that they will not oppose the measure, although they would have preferred it to have gone further.
I wish to make only three points in response to what has been said. First, the order does not apply to charitable companies because, as I am sure the noble Lord, Lord McIntosh, knows, the Trustee Investments Act does not apply. I have given an indication that there will be consultations as regards taking that matter further. As regards the Financial Services Act 1986, the order has no power to introduce requirements for that Act in relation to advice. But the point which the noble Lord made is well taken. This is not the measure through which to address that point.
§ Lord McIntosh of Haringey
My Lords, is the Minister saying that Section 70 of the Charities Act would not allow an order to be made to take into account the provisions of the 1986 Act?
My Lords, as I have been reminded once or twice at the Dispatch Box, I am not a lawyer 63 and I shall not give a categorical reply. I shall look into the matter and write to the noble Lord. The point that I am making is that, as I understand it, the Financial Services Act 1986 has no power to introduce a requirement in relation to financial services advice.
I shall not respond to what the noble Lord, Lord Harris, said about my noble friend Lord Ferrers because I do not know the context in which he opposed the amendment or whether any consultation had taken place.
§ Lord Harris of Greenwich
My Lords, it was quite clear that the noble Earl was speaking on behalf of the Treasury and not on behalf of the Home Office.
§ Baroness Blatch
My Lords, therein lies another tale—cautious, ever cautious.
The noble Lord, Lord Harris, referred to the explanatory note. I often agree with the sentiments of what the noble Lord says. The explanatory note does not seem to qualify for the plain English award. I should perhaps say in defence of it that it explains the "legalese" contained within the order. The department goes further than that and issues what I hope is plain English guidance which goes a long way towards helping the charity world and the voluntary sector to understand what is very often extremely complex legislation. We shall continue to do all we can to help to make sense of legislation. I commend the order.
§ On Question, Motion agreed to.