Clause 1 - Community benefit societies

Co-operatives and CommunityBenefit Societies Bill – in a Public Bill Committee at 2:30 pm on 18th March 2003.

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Question proposed, That the clause stand part of the Bill.

Photo of Mr George Stevenson Mr George Stevenson Labour, Stoke-on-Trent South

With this it will be convenient to discuss new clause 1—Community Benefit Societies: power to restrict use of assets—

'(1) The Treasury may by regulations make provision for enabling any community benefit society, or any community benefit society of a prescribed kind, to ensure that—

(a) assets of the society of a prescribed kind,

(b) assets of the society specified by it in accordance with the regulations, or

(c) all of the society's assets,

cannot be used or dealt with except in a case mentioned in subsection (2).

(2) The cases are—

(a) where the use or dealing is, directly or indirectly, for a purpose that is for the benefit of the community and is of a prescribed kind or, if no kinds of purpose are prescribed under this paragraph, for any purpose that is for the benefit of the community; or

(b) where the circumstances are such as may be prescribed.

(3) Where under the regulations a society has ensured as mentioned in subsection (1) as respects any of its assets, the assets concerned are ''dedicated assets'' for the purposes of this section.

(4) Regulations under this section may, in particular—

(a) provide for the procedure by which a society may ensure as mentioned in subsection (1);

(b) provide for such of a society's rules as are of a prescribed kind to be unalterable, or for them to be alterable only in prescribed circumstances or in circumstances specified in rules of a prescribed kind;

(c) provide that, in any circumstances prescribed under subsection (2)(b), dedicated assets must be dealt with in a prescribed way;

(d) make provision for ensuring that any society, company or other person to whom any dedicated assets are transferred in prescribed circumstances cannot use or deal with those assets except in a case mentioned in subsection (2);

(e) provide for members of a society who lose property rights as a result of the society's ensuring as mentioned in subsection (1) to be compensated for that loss (whether by payment of a prescribed amount or of an amount determined in a prescribed way or otherwise), subject to such exceptions as may be prescribed;

(f) provide for the enforcement of provisions designed to ensure as mentioned in subsection (1);

(g) make provision for the carrying out of investigations by persons appointed by a prescribed person;

(h) confer power on a prescribed person to require persons of a prescribed description to provide him with information in order to enable him to perform his functions under the regulations;

(i) provide for restrictions on the use and disclosure of information obtained by any person in the performance of any function under the regulations.

(5) Regulations under this section may—

(a) impose criminal liability;

(b) confer functions on a prescribed person;

(c) confer jurisdiction on any court;

(d) authorise a prescribed person to make rules binding on persons of a prescribed description and make provision as to the making, publication and enforcement of such rules;

(e) provide for a prescribed person to charge fees sufficient to meet the costs of carrying out any of his functions under the regulations;

(f) modify, exclude or apply (with or without modifications) any enactment or rule of law;

(g) contain such incidental, consequential and supplemental provision as the Treasury consider appropriate;

(h) make different provision for different cases.

(6) The power to make regulations under this section is exercisable by statutory instrument.

(7) No regulations may be made under this section unless a draft of the regulations has been laid before Parliament and approved by a resolution of each House.

(8) In this section—

''community benefit society'' means a society registered (or deemed to be registered) under the 1965 Act which fulfils the condition in section 1(2)(b) of that Act;

''enactment'' includes an enactment comprised in—

(a) an Act of the Scottish Parliament;

(b) subordinate legislation, whether made under an Act or an Act of the Scottish Parliament; and

''prescribed'' means prescribed by regulations under this section.'.

Photo of Mark Todd Mark Todd Labour, South Derbyshire

I thank you, Mr. Stevenson, for being prepared to act as Chairman. Bearing in mind the alternative attraction this afternoon, I am sure that all hon. Members will wish to be brief, and that we will not press you to exercise your responsibilities with any great vigour. I also express my appreciation to those hon. Members who have been able to attend this afternoon.

I propose new clause 1 as a substitute for clause 1. I remind the Committee that the purpose of clause 1 was to permit a voluntary asset lock on the four community benefit societies. It is voluntary in the sense, first, that it would allow new societies to pass a rule locking their assets; and, secondly, that it would allow existing societies to present that option to their members, should they so wish. The provision was meant to ensure that assets could not be used except for the benefit of the community for which the society was originally established, but it would allow the transfer of those assets to another society with a similar purpose and a similar rule.

It was recognised that clause 1 required redrafting in order to enable the Treasury to act through secondary legislation. The proposed new clause sets out the issues on which the Treasury would consult, and the constraints on the freedom of the Treasury to decide to legislate on the matter. It is not possible for the Bill to cover every aspect of the asset locks, as consultation will clearly be required first. However, although the Financial Services Authority will not register a community benefit society unless it has an asset lock in its constitution, it was recognised that

that was not a watertight position and that a community benefit society could choose to convert into a company and then use the assets for whatever benefit it wished, including for the benefit of members of the society.

The strategy unit report that was mentioned on Second Reading referred to the importance of providing security to those wishing to establish community benefit societies, for whatever purpose. It is critical that the asset lock should not impede the efficient running of the society or prevent democratic decisions being made allowing alteration to the means of fulfilling the society's goal—for example, through a merger with another society.

Subsection (1) of the new clause will enable regulations to be made to define which societies can adopt a lock-in, and allow a choice in the scope of assets that can be locked. Community benefit societies vary widely, as we heard on Second Reading, and it may be that, after consultation, asset locks may be judged inappropriate in some circumstances, either in terms of the type of society or the form of assets that it holds.

Subsection (2) allows for flexibility in regulations to define the purposes for which assets may be locked. In my view, it is unlikely that the differentiation will be applied. It is for societies to define their purposes and, if they agree that an asset is locked, to lock it into that purpose. In any case, the purpose would have been scrutinised by the regulator on the establishment of the society. However, it is possible to conceive of circumstances in which a purpose has become so redundant that external guidance is required in relation to an asset transfer. Subsection (2) would facilitate that process.

Subsection (3) is self-explanatory. Subsection (4) sets out the framework for a potential lock-in. Just one element requires further explanation. As existing societies will be allowed to adopt a lock-in resolution, it will be necessary to consider, during the consultation process and in the formulation of any subsequent regulation, whether any member who disagreed with the resolution and assumed his or her entitlement to a proportion of any future break-up value of the society, following its conversion to a company, might require compensation for that loss of a notional asset. He or she would be an extremely far-sighted member, but I suppose that the situation is hypothetically possible. The new clause deals with the need to consult on such matters during the process, which will be led by the Treasury.

Another point worth considering is that the reference to prescribed persons correctly implies that the Treasury may choose to place the regulatory function for the process in new hands, not with the FSA or another existing body. That is a reasonable aspect for further discussion. If, as the strategy unit report suggests, lack of an asset lock is a serious barrier to the use of community benefit society models, one might expect their wider adoption. If that were the case, a new regulatory function might be appropriate. Of course, it might also be appropriate for there to be no regulatory body to carry out that function, but I

would imagine that people would be able to submit that opinion in any consultation process.

I have explained the key features of new clause 1.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I, too, welcome you to the Chair, Mr. Stevenson. This is my first opportunity to serve under your chairmanship, which I expect will be both a great pleasure and a relatively brief one.

Clause 1 gives me the opportunity to make a few introductory remarks, which I hope will be in order, and to echo the comments of the hon. Member for South Derbyshire (Mr. Todd). I congratulate him, as I did on Second Reading, on securing his advantageous position in the private Member's Bill ballot—there can be no more advantageous position than to come top. I also congratulate him on selecting this topic for his intended legislation.

During a constructive and consensual debate in the House on 31 January, we identified the fact that the principles and intent behind the hon. Gentleman's aspiration to see legislation introduced not only survive but attract broad interest and support from the Government and Her Majesty's official Opposition. We are happy to lend our support to the Bill, subject to the proper scrutiny that this House affords to all legislation.

I am also conscious that there are other important events in the House today, so we want to dispatch the Bill as efficiently as we can. It is appropriate for me to draw attention to my entry in the Register of Members' Interests, as I did on Second Reading. I am a parliamentary adviser to the Institute of Chartered Secretaries and Administrators, of which I am a fellow, having been a company secretary of a FTSE 100 company before I entered the House.

One overall aspect applies to new clause 1 and the other proposed new clauses. Although I know that it is not a requirement for a private Member's Bill, it would have been helpful, and may yet still be possible if the Government are prepared to consider it, if a regulatory impact assessment had been issued. The nature of the new clauses suggests that one is necessary, and I would certainly welcome such an assessment, which is now the norm and expectation for Government Bills. I understand that the Government examined the Bill as first presented and that they have had a hand in drafting the new clauses, so it is incumbent on them to be consistent with their broad approach and issue a regulatory impact assessment.

That is particularly important, given the lack of explanatory notes, which is understandable, on the difference between the initial Bill and the current proposals. Some of the remarks made by Members on Second Reading have been sensibly considered in the drafting of the new clauses, but without explanatory notes, a regulatory impact assessment would be helpful. There is a degree to which that imposes a regulation, or at least an effort and burden, on those who so ably support the Minister, but I hope that an assessment will be forthcoming.

We do not take issue with the principle of a voluntary asset lock. In fact, as was said on Second

Reading, we fully support and understand the principle. However, it is important to consider that, as the hon. Member for South Derbyshire has just noted, the new clause throws much of the burden of the Bill on to the consultation process. There is no longer a clear expectation with a somewhat simpler approach to the process.

I understand the complications. We are dealing with assets that are funded, often by past generations, and there is an inherent trust in the process that the assets exist for the co-operative and community benefit societies that they are owned by or applied to. The consultative process, through new clause 1 and others, makes it incumbent on us to consider whether putting the burden on to secondary legislation is wholly appropriate. That will have a regulatory impact in itself, which must be borne in mind, and it may increase uncertainty rather than certainty. That is particularly important when dealing with assets.

I noted with interest that it was expected that the regulatory requirement for the monitoring and assessments of the transactions would fall primarily to the Financial Services Authority, although the hon. Member for South Derbyshire made it clear that was not necessarily the case. The current Government's approach is that it is better to have one overarching financial services regulatory authority rather than a number of them because, one would hope, that results in greater consistency, fairness and understanding. There is also the opportunity to give the authority an educational role, particularly on some of the more esoteric entities that exist—not least co-operatives and community benefit societies. However, we all recognise that the FSA has taken time to establish itself, and it is difficult to imagine that there would be the requisite expertise across a number of bodies. The remit of the Financial Services Authority, as granted to it under the Financial Services and Markets Act 2000 is due for review near the end of the year—the precise date would be helpful if the Minister were willing to give it. Therefore, this is a good opportunity to consider the possibility of extending the FSA's remit, along with a number of other issues.

I am anxious to hear from the Minister because we are considering new clauses and this is her first opportunity to explain a number of the phrases in them. Much will depend upon the understanding that lies behind the secondary legislation that could be required on a number of occasions, and on its effectiveness and frequency.

In subsection (3) of new clause 1, the defined term is ''dedicated assets''. It is intensely important for all concerned to understand clearly what is meant here by that term. Leading up to that definition, we see regulations relating to, in subsection (1)(a),

''assets of the society of a prescribed kind'',

that cannot be used except, in subsection (2)(b),

''where the circumstances are such as may be prescribed''.

So the whole thing is being pushed into the future, for future debate. As the dedicated assets will be the subject of the potential transactions and provisions of the Bill, it would be helpful to have those delineated in a more concrete way.

More important, we must consider the Government's view on whether a precedent is being set with regard to the asset lock, and whether there is not a hidden agenda but a potential for these provisions to be prayed in aid in relation to other entities and assets that are not necessarily encompassed, owned or operated by co-operatives and community benefit societies. A number of the issues that are tackled in the new clause prejudge what the Government will have to consider in making their proposals resulting from the consultation—now closed—that followed the performance and innovation unit's worthy and well-received charity law reform report. Again, it would help the Committee to know where the Government believe that the proposals conform with the expected results of the consultation and with their views as to the legislation that is likely to flow from the charity law reform report.

Three pieces of legislation are likely to emanate from that report. One is charity law reform, another—

Photo of Mr George Stevenson Mr George Stevenson Labour, Stoke-on-Trent South 2:45 pm, 18th March 2003

Order. I am a little concerned that the hon. Gentleman is prejudging what might become legislation and is starting on that basis. I am sure that he will take that into account.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I am grateful. It is slightly awkward in that I am trying to tease from the Minister what I hope will be her prepared answers. My point in mentioning three potential pieces of legislation is that I anticipate, in addition to Bills from both the Home Office and the DTI, a Treasury Bill.

Photo of Mr George Stevenson Mr George Stevenson Labour, Stoke-on-Trent South

Order. There might well be a Treasury Bill, but that is not what is before us today. We need to return to the clause and the new clause.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

Given that the Treasury Minister is here—I understand that, although this is a private Member's Bill it has benefited from consultation with the Treasury—I shall mention the third piece of legislation so that you can tell me whether I am genuinely out of order, Mr. Stevenson. The third piece of legislation is an industrial and provident societies Bill. Can the Minister tell us whether this Bill anticipates that one, in which case it is important for the broad sweep of what we are dealing with, or whether the Bill is, as lawyers would say, sui generis? Does what we are dealing with have implications for something that is already in the legislative pipeline?

I hope that the Minister's ultimate reassurance will be forthcoming on that, because new clause 1(5)(a) contains a power to introduce regulations that ''impose criminal liability''. As all hon. Members know, it is one of our important duties to scrutinise legislation properly where we are imposing criminal liability on any person or entity. I should like the Minister to look carefully at what is intended by ''criminal liability''. Is that in line with current

companies law liabilities that the criminal law encompasses, or is something more imposed?

Photo of Mr Simon Thomas Mr Simon Thomas Plaid Cymru, Ceredigion

As the potential new regulations under the new clause could, as the hon. Gentleman points out, impose criminal liability, it is surely important to tease out once again whether resolutions before both Houses would be made by the affirmative or negative procedure.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

The hon. Gentleman raises an important point and anticipates where the argument was leading me. Any imposition of criminal liability under secondary legislation would obviously have to be made under the affirmative resolution procedure. I dare say that the Minister anticipated that question, and I look forward to her response.

I could go into the clause in great detail, but I am mindful of what we all said at the outset of the Committee. However, I am concerned only that, although the legislation attempts to describe and prescribe what will give effect to the worthy intent of the Bill's promoter, the provisions are in the nature of a blank cheque to the Government, which is a little dangerous. That is so in relation to criminal liability, the point which the hon. Member for Ceredigion (Mr. Thomas) joined me in making, which also leads to concerns that the Bill is a bit premature, given the Government's current thinking, although I hope that it is not. Given that the promoter has raised the issue, I hope that the Government have had the opportunity to think such matters through carefully. I look forward to the Minister's reply.

The only other point that I flag up, and which the Minister may deal with today or later, is whether there is a potential for tax-driven transactions. In my experience of sitting round company board tables, whenever assets are involved there is always a great danger that some people—often advisers with vast fees—will come up with clever schemes. Those schemes often need a great deal of numerical analysis in order to establish whether they are a genuine benefit to the enterprise, or whether they are driven by tax and tax savings. From what I have read in the Bill and the new clauses, I am unclear as to whether a tax attractiveness element could enter into transactions. From my initial reading, I see nothing to suggest that a tax-saving opportunity deriving from secondary legislation should not be a reason for an exemption under the asset lock.

A potential tax saving or benefit should not drive the process. The assets must ultimately not only be made available to the communities that they serve but be seen in that light, rather than be friable, so to speak, across various entities in order to save tax. I rather suspect that the Treasury would endorse my view on that. However, there is no limitation or express provision, and I therefore look for some reassurance on the matter.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I take this opportunity to welcome you to the Chair, Mr. Stevenson. I look forward to serving under your chairmanship.

I congratulate my hon. Friend the Member for South Derbyshire on not only securing his private

Member's Bill but the way in which he constructively set out the purpose of the new clause and why it is to replace the original clause. I also thank him for the co-operation that he has shown since Second Reading. He ably set out not only the purpose of the clause but the very subsections and how they apply. I do not intend to repeat his arguments; rather I will confine myself to answering some of the specific points made by the hon. Member for Eddisbury (Mr. O'Brien), who speaks for the Opposition. I was slightly surprised that he suggested that the Bill may be premature, given the backing that he expressed for it on Second Reading. However, I interpret his tone as fairly constructive, and I am happy to answer some of his detailed points.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

If clarification is needed, it is purely in relation to the strategy unit's report and my concerns about what is likely to flow from that, and whether the Bill is anticipating it, rather than standing on its own.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

We are certainly not anticipating the strategy unit's report. This is a fairly complicated area of policy. It takes time to get all the details right and it is not possible within the timetable set down by Parliament to consider all the details within the framework of a private Member's Bill, which is why the Government are happy to support new clause 1. We will certainly be happy to publish a regulatory impact assessment of the Bill. In fact, we look very carefully at the regulatory impact of all Bills and we hope to have one in the public domain before we come to debate this Bill in the future.

The hon. Member for Eddisbury asked what we needed to consider in detail that has not already been examined by the strategy unit report. We must consider the need for robust mechanisms to ensure that takeovers, mergers and dissolutions of societies are fair and transparent. We need to decide which society should be able to take advantage of the asset lock-in regime; for example, whether asset transfers should be allowed between very different types of community benefit societies such as housing associations and social clubs. We need to ensure that societies with the lock-in can continue to evolve and change their purposes and activities appropriately.

To help with those issues, we must also consider whether we can prescribe for all possible circumstances in the legislation. If not, we may need to consider setting up a supervisory body or giving the powers to the Financial Services Authority. We will think very carefully about whether a supervisory body is needed, and if so, who should carry out that function. That will be subject to further detailed consultation, and there is no presumption about it at this point.

The hon. Gentleman suggested that we examine this in the context of the Financial Services and Markets Act 2000 review. Clearly, many matters will be looked at in the context of that review, but it is not essential that all matters are considered within that context, so I will not say today whether we would use that vehicle to examine the scope of the FSA regulations that he suggested.

The hon. Gentleman also suggested that implementing the reforms through secondary legislation could somehow lead to increased rather

than reduced uncertainty. I do not see any reason why that should be the case. Secondary legislation is just as clear and concrete as primary legislation. The principle behind the Bill has already been accepted. We are just putting the details in place. I can confirm that the Bill will be subject to affirmative resolution. Safeguards are already in place. The enabling power to introduce legislation is limited by subsection (1) of the clause, the two specific purposes of which are linked to establishing an asset lock-in regime for community benefit societies. We are committed to ensuring full and proper consultation on the provisions that we will eventually introduce.

Photo of Mr Simon Thomas Mr Simon Thomas Plaid Cymru, Ceredigion 3:00 pm, 18th March 2003

Can the Minister confirm that she will include the National Assembly for Wales in that consultation? The Bill covers both England and Wales, but there are particular concerns and differences in some community organisations in Wales, which is the home of the co-operative movement, and it would be good to know that she will consult the National Assembly.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I am happy to give the commitment that we will take into account the situation of Wales when carrying out the consultation.

It is true that subsection (5) of new clause 1 allows the Treasury to impose criminal liability through secondary legislation. I have already said that such legislation would be subject to affirmative procedure, and it will be considered in conjunction with the movement and other interested parties. Penalties are already an important part of the legislative framework governing societies and the checks and balances that exist ultimately to protect the interests of societies, their members and those who deal with the sector. If we want an effective asset lock-in regime, we will have to examine criminal liability together with the other details that need to be worked through, but I confirm that the provisions are in line with existing company and society law.

I will be happy to write to the hon. Member for Eddisbury with the precise definition of ''dedicated assets'', and I am sure that we will debate that definition further on Report.

Photo of Gareth Thomas Gareth Thomas Party Chair, Co-operative Party

Has the Minister any time scale in mind for when the consultation on the details of the secondary legislation will begin once, as we all hope, the Bill goes on the statute book?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

As I said on Second Reading, we are committed to implementing the asset lock-in regime assuming the consultation reveals any hidden problems that we had not already considered—we have set out that principle clearly. If the Bill is enacted, officials will immediately start to prepare a detailed consultation on how that regime might be established, but the timing of the consultation paper will depend on the complexity of the issues and the responses that we receive.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I touched on whether there would be any potential for tax, and it would help to have the Minister's reassurance on the record that she is seized of the point.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

Absolutely. As far as I am aware, asset lock-in will not affect the tax status of society's assets. I do not see any reason why tax-driven behavioural effects should arise from the Bill.

On that note, I commend new clause 1 to the Committee, and I hope that all members will support it.

Question put and negatived.

Clause 1 disagreed to.Clause 2A Society's Capacity