Financial Services and Markets Bill

Part of the debate – in the House of Lords at 5:15 pm on 30 March 2000.

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Photo of Lord Kingsland Lord Kingsland Conservative 5:15, 30 March 2000

By Amendment No. 252VA the Government are altering the definition of "open-ended investment companies". These are the only bodies corporate which constitute collective investment schemes and so are subject to the extra marketing restrictions on authorised persons contained in Clause 231; to the requirement for the manager to be authorised under the Bill; and to United Kingdom offshore funds tax legislation which treats capital gains as if they were income.

The substantive part of the amendment seeks to change the definition of when the company is to be regarded as open-ended. The Government have accepted that, unless there is an express right to redeem, redemptions made should not make the investment company open-ended unless the redemptions are at the option of the investor. As the Minister is aware, the Government consistently refused our amendments to this effect in another place, even though this was exactly what the UCITS directive provided.

We, the Opposition, welcome the new clause, subject to one important caveat, which I shall explain in a moment. The clause appears to provide a much more flexible and forward-looking definition of open-ended investment schemes. It should allow the establishment in the United Kingdom of a greater variety of products, thereby enhancing the competitive position of the United Kingdom as a place in which to operate such schemes.

The ability to develop new products is, as Members of the Committee are well aware, of vital importance to the United Kingdom investment funds industry if it is to respond to the changing needs of investors and maximise its potential for international growth. We would welcome the Minister's confirmation that these provisions are intended to encourage innovation and development, already well established in other jurisdictions, of authorised investment companies where redemption periods may vary. Indeed, an "investment company with variable capital" may well be a more accurate description of such companies than is contained in the present title.

There are concerns that the wording in subsection (3)(a) could, notwithstanding the exemptions in subsection (4), have the effect of bringing within the definition a closed-ended company with a finite life. The example might be of a company set up for a fixed period of 10 years, at which point it would be liquidated. An investor who invested in such a company in year nine would have a reasonable expectation that he would be able to realise his investment within a year, which would be a period appearing reasonable to him.

That could have unexpected consequences for tax status, for example. Would that company be regarded as open-ended under the proposed definition? We would welcome clarification on that point before Report stage. One way of avoiding this possibly unintended effect may be to refer in subsection (3)(a), to the realisation of the investment being, "at the request of the investor", rather than as a result of a corporate decision which was known in advance. We would also welcome confirmation that the new definition will allow scope for a wider range of authorised funds which are intended for domestic consumption and which do not seek to benefit from the UCITS passport.

With that caveat in mind, it will not be necessary for us to move Amendments Nos. 252XA, 252A, 252AA, 252AB and 252AC. Amendment No. 252AD concerns the definition of "operator". The current definition, which is the same as that in the Financial Services Act, covers unit trust schemes with a separate trustee and open-ended investment companies; but it does not cover other types of collective investment scheme. The identification of who is the operator is important for the purposes of the definition of a collective investment scheme in Clause 229, and for determining whether someone is carrying on a regulated activity which includes establishing and operating a collective investment scheme in accordance with paragraph (8) of Schedule 2.

Finally, I turn to Amendment No. 254YK. As the Committee is aware, Clause 264 of the Bill contemplates individually recognised overseas schemes becoming recognised schemes. The provisions of the clause are unclear as to whether such schemes must have a trustee or depository. The amendment is intended to make it clear that, if the scheme takes the form of an open-ended investment company, it must have a depository; and if the scheme takes some other form, it must have a trustee or depository. That would be consistent with good market practice and would be for the protection of consumers.