Second Standing Committee on Delegated Legislation
Wednesday 27 October 1999
[Mr. Frank Cook in the Chair]
Draft Financial Services Act 1986 (Restriction of Exemption) Order 1999
4.30 pm
The Economic Secretary to the Treasury (Miss Melanie Johnson): I beg to move,
That the Committee has considered the draft Financial Services Act 1986 (Restriction of Exemption) Order 1999.
The order is about ensuring that there is proper protection for charities investing in certain common investment funds. It follows detailed consultation with those affected. Common investment funds are unit trusts in which only charities may invest. They enable charities with limited funds to invest their funds more widely, while minimising risk, and provide charities with a method of investment that is simple and tax-efficient. Because the trustees of common investment funds are currently exempt from the Financial Services Act 1986, they are not regulated in the same way as other unit trusts. As charities, they are regulated by the Charity Commission.
The order will remove the exemption from the Financial Services Act 1986. In future, any trustee carrying out investment business that is regulated under the Act will need to be authorised by the Investment Management Regulatory Organisation and will have to comply with its codes of conduct and rules. In 1996, the Treasury and the Charity Commission consulted jointly 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 the regulation and increase investor protection.
Our conclusion, announced last year, was that the removal of the exemption for the trustees of common investment funds would strike the right balance between the need for greater regulation and the desire to keep the costs of management and compliance as low as possible. The change will benefit charities by enabling the common investment funds to be regulated as part of the financial services industry. That will provide additional reassurance that those responsible for the funds comply with the rules and regulations established for investment business. Investors in common investment funds will become eligible for the first time for compensation under the investors compensation scheme.
Over the past year, common investment funds have been considering what changes they should make to comply with the proposed changes in regulation. Many are proposing to restructure. At the request of the financial services industry, the order contains a transitional period to enable common investment funds that are restructuring to do so at their half-year valuation date. That makes the process cheaper and simpler. An economical transition will benefit the charities investing in common investment funds.
4.34 pm
Mr. Howard Flight (Arundel and South Downs): The measure is not controversial and, as the Minister stated, it has been subject to widespread consultation. About 21 or 22 common investment fund vehicles are involved, and 10 or 11 fund managers, as well as several thousand underlying charities. The effect of the order is to make CIFs, their managers and trustees subject to the Financial Services Act 1986. It should mean that those involved will not have to make two sets of changes in the light of the Financial Services and Markets Bill, which is presently being considered in Standing Committee. In other words, they will know roughly what that Bill when it is enacted will consist of, and will be able to change themselves in the light of the new legislation, not just the existing legislation.
There will be some regulatory costs. They have been estimated as about 0.1 per cent. of the net assets of CIF funds on a recurring basis, and about 0.02 per cent. as the one-off cost of putting the changes into effect.
It may interest members of the Committee to know that I have discovered that several trustees have been unwilling to act as trustees of common investment funds under the present regime, and have said that they will do so only when the order is put into effect. I read in that both positive and negative elements: the positive is that the regulations under the Financial Services Act are clearer and more straightforward, and the negative is that trustees' liability will be reduced when they come under the FSA, in comparison with what occurred under the old regime.
I have only one question: at present, the formation of a CIF is handled by the charity commissioners, who usually conduct lengthy negotiations on the merits of the CIF, its investment policies and so on. I am not clear whether there will be two parallel application processes in creating the new vehicle, so that not only the Financial Services Authority but, because of the charitable status involved, the charity commissioners too, would be approached. Will the Minister enlighten us as to whether that is so, or whether—although I cannot think that this will be the case—the draft order removes the charity commissioners from the application process?
Miss Melanie Johnson: The hon. Gentleman has asked two questions. First, he asked whether there would be just one change in making the transition to the new arrangements; I think that he saw me nodding to confirm that, but I place the fact on the record now. His second question was whether we will need the approval of the Charity Commission for charity CIFs. The answer is that the approval of the Charity Commission and of the Financial Services Authority will be needed for charity CIFs.
4.36 pm
Mr. Brian Cotter (Weston-super-Mare): The measure is clearly uncontroversial, and it is good that the costs associated with it—a fact that always causes concern—will be very low. I am glad to learn from the Minister that the compensation provisions will be strengthened, and also that the measure has been welcomed by trustees. On that basis, we support it.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Financial Services Act 1986 (Restriction of Exemption) Order 1999.
Committee rose at twenty-three minutes to Five o'clock.
The following Members attended the Committee:
Cook, Mr. Frank (Chairman)
Allen, Mr.
Baker, Mr.
Campbell-Savours, Mr.
Coaker, Mr.
Cotter, Mr.
Flight, Mr.
Heald, Mr.
Hoyle, Mr.
Iddon, Dr.
Johnson, Miss Melanie
Lewis, Mr. Ivan
Morgan, Ms Julie
Robertson, Mr. Laurence
Stoate, Dr.
Twigg, Mr. Stephen
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