§ 2.25 p.m.
§ Lord McIntosh of Haringey rose to move, That the draft order laid before the House on 27th July be approved [27th Report from the Joint Committee].
§ The noble Lord said: My Lords, the purpose of this order is to improve protection for charities which invest in common investment funds. Common investment funds are unit trusts in which only charities may invest. They provide a means of investing which is simple and tax efficient. For smaller charities in particular, they enable funds to be invested more widely, while minimising risk.
§ At present, the trustees of common investment funds are exempt from the Financial Services Act 1986 and are therefore not regulated in the same way as other unit trusts. As charities, common investment funds are regulated by the Charity Commission. In 1996 the Treasury and the Charity Commission jointly consulted on the future regulation and structure of common investment funds. The Government are grateful to all who responded. Respondents generally supported the policy aims to strengthen regulation and increase investor protection.
§ Following consultation, it was concluded that it was necessary to strike a balance between the need for greater regulation and the desire to keep the costs of management and compliance as low as possible. That could be done by removing the exemption for the trustees of common investment funds.
§ In future any trustees who carry out investment business which is regulated under the Financial Services Act will need to be authorised by IMRO (the Investment Management Regulatory Organisation) and must comply with their rules and codes of conduct. The change will enable the common investment funds to be regulated as part of the financial services industry. That benefits charities by providing additional reassurance that those responsible for the funds comply with rules and regulations established for investment business. Charities which invest in common investment funds will also become eligible for compensation for the first time under the investors' compensation scheme.
§ Since the proposed change was announced last year, common investment funds have been considering what changes they should make to enable them to comply with the proposed changes in legislation. Many of them propose to restructure. At the request of the financial services industry, the order contains a transitional period to enable common investment funds which are restructuring to 532 do so at their half-year evaluation date. That makes the process simpler and cheaper. An economical transition will benefit the charities which invest in common investment funds. I beg to move.
§ Moved, That the draft order laid before the House on 27th July be approved [27th Report from the Joint Committee].—(Lord McIntosh of Haringey.)
§ Lord Phillips of Sudbury
My Lords, this order is complicated and technical but it is of great importance within the charity sector. I should declare an interest as a solicitor whose firm acts for a number of the charities which will be affected by this order, and in particular the Charities Aid Foundation.
Over the years, some of the charities concerned have established common investment funds for the reasons clearly set out by the noble Lord, Lord McIntosh. Some of them now take the view that the removal of exemption from the trustees of the existing common investment funds will place the funds concerned in a problematic position. Some have decided that the better course is not to restructure so as to comply with the Financial Services Act under the aegis of IMRO but rather to set up OEICs (open-ended investment companies). For various reasons which it is not appropriate to explain here, some charities are of the opinion that the OEICs offer better scope and prospects for their investors.
As the noble Lord pointed out, the common investment fund is a particularly advantageous beast for small charities with relatively small funds. Such charities would otherwise not receive wholesale rates and would not have the advantage of best management. Secondly—this is really the point of my intervention—the fund is of particular advantage to those charities which have only a narrow constitutional right of investment; that is, a right of investment confined to the provisions of the Trustee Investments Act 1961 as amended.
As many of your Lordships will know, the statutory limitation requires that at least a quarter of the portfolio of the charities within the 1961 Act has to be invested in what are called "narrow range investments", which are generally thought to be disadvantageous in the modern investment world.
The problem is that OEICs do not have the particular advantage currently enjoyed by the common investment fund which, in effect, allows charities with whatever investment powers to invest in them without restriction. That will not be true of OEICs. Therefore, those common investment funds which wish to transmogrify into OEICs rather than restructure so as to comply with the new regime, might well find themselves caught between the devil and the deep blue sea.
The Government have, quite rightly, listened to representations and provided a six-month transitional period. However, the likelihood is that that will not be long enough to see the existing trustee investment legislation changed so as to allow small charities with limited investment powers to transfer their funds from the existing common investment funds into OEICs.
533 There is in existence a Trustee Bill drafted by the Law Commission and largely promoted by the Association of Charitable Foundations. That Bill overcomes this technical problem, which, in effect, if passed will eliminate the 25 per cent narrow range band of investments.
I apologise for winding so gradually up to the question. I did so because otherwise it would make absolutely no sense to the uninitiated. I am not sure that it makes much sense now. Can the Minister give any guidance and assistance to those within the charity sector who are now having to make up their minds as to what to do? Plainly, those that want to transfer to OEICs would much prefer to be able to do so in one fell swoop. They would prefer to move from the common investment funds they now are into the OEICs they wish to become.
The worst of all worlds would be a situation where the new Trustee Bill is not brought before Parliament in time for it to pass into law within the six-month transitional period. It would thus leave those concerned having to obtain the new certification under the new regime. That is an extremely expensive and laborious business. It is expensive not only to the charities and hence to those who invest in them, but also to IMRO. There are a number of novelties in this group of investment funds which may want to become registered under the new regime.
Can the Minister give an assurance that the Government will consider bringing before Parliament, very soon, the Law Commission's Trustee Bill? That, in turn, would enable the trustee investment regime to be altered early enough to avoid the interregnum which would otherwise have to exist and which would cause cost, expense and inconvenience to all concerned.
Finally, perhaps I may make an observation on a separate, drafting point. Paragraph 1(2)(c) defines the pooling scheme fund. It states at the end that it is only a pooling scheme fund under this order where the property concerned is transferred into that fund by or on behalf of a charity whose trustees are the trustees appointed to manage the fund.
My question is simple. Is that wording intended to restrict the charity trustees referred to from appointing professional investment managers, as is the current practice? I am sure it is not. It would be wholly counter-productive to prevent the charity trustees of such pooling schemes from being able to appoint investment managers. However, given some of the past uncertainties, it would help if the Minister were able to say that my interpretation—namely, that they can appoint investment managers—is correct.
§ Baroness Seccombe
My Lords, we on these Benches believe that this order is not controversial and has been widely circulated. We are therefore content to support it.
§ Lord McIntosh of Haringey
My Lords, I am grateful to both noble Lords who have spoken. The noble Lord, Lord Phillips, declared an interest, and I suppose that I should have declared an indirect, non-financial interest as my wife is a trustee of the Charities Aid Foundation and, until three years ago, was trustee of the two common investment funds which it operates. She is no longer, since it restricted the trusteeship of those funds.
The noble Lord, Lord Phillips, from his great knowledge of this area, raises a number of interesting points. I am sorry to have to say at the outset that there is no slot for the Law Commission's Trustee Bill at the moment. But the Lord Chancellor is keen on pushing forward Law Commission Bills, as the noble Lord will recognise, and I hope that we shall be able to get it on to the statute book, after due parliamentary consideration, as soon as possible.
The noble Lord, Lord Phillips, raised specific questions about the transitional arrangements and those common investment funds which choose to go in the direction of being open-ended investment companies rather than adopting the restructuring, as will most of the funds. Nothing in the order affects the ability of organisations to establish open-ended investment companies. The order follows extensive discussion with those who have been involved. The policy was announced in September 1998 and those who wanted to do so should have made a start on it before now. Including the 13-month period between September 1998 and now, and the transitional period provided in the order, all those involved will have had between 14 and 20 months to prepare for it. If there are any specific difficulties which the noble Lord would like to draw to our attention, I am sure that we shall take account of them.
§ Lord Phillips of Sudbury
My Lords, I thank the Minister for giving way. It is a bit tough to say that they should have been preparing their OEICs during the consultation period. There was great uncertainty as to what would emerge from the consultation and only since the way the cookie is crumbling has become clear have OEICs become the preferred alternative.
§ Lord McIntosh of Haringey
My Lords, I understand that point. But since the order, as it emerges, is very much in line with what those who were consulted wanted, they could have anticipated to some extent that they would get what they wanted; we are not entirely unreasonable people. However, as I say, if there are specific difficulties, I am sure that the noble Lord will draw them to our attention.
The noble Lord made a second point about the trustees of pooling funds. I am happy to confirm that nothing in the draft order affects the ability of trustees of pooling funds to appoint investment managers. I hope therefore that the House will see fit to approve the order.
§ Baroness Seccombe
My Lords, as other noble Lords who have spoken declared an interest, perhaps I should do so also. I am chairman of the trustees 535 of Nuffield Hospital Pension Fund. I do not know whether or not that is relevant, but I felt I ought to make that declaration.
§ Lord McIntosh of Haringey
My Lords, unless they use a common investment fund, it is not a relevant declaration. However, I a m grateful to the noble Baroness.
§ On Question, Motion agreed to.