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Clause 223
Lords Amendment: No. 268, in page 115, line 1, leave out from ("for") to ("of") in line 4 and insert ("--
(a) financial loss; or
(b) any other loss, or any damage,")
10.15 pm
Mr. Timms: I beg to move, That this House agrees with the Lords in the said amendment.
The amendment is technical; it clarifies subsection (3) of clause 223 and results from concerns raised on Report in another place that the provision might be open to misinterpretation. There was concern that the subsection might be read as requiring the ombudsman to try to construct hypothetical contracts, or to award compensation according to whether there had been a breach of an actual contract.
In fact, the provision was only ever intended to set out the type of loss or damage for which the ombudsman could make awards. To require the ombudsman to make awards based on actual or hypothetical contracts would contradict the principle set out in clause 222 that cases should be determined on the basis of what is
- fair and reasonable in all the circumstances.
Mr. Flight: I raise one point for clarification. The ombudsman schemes allow consumers redress to the courts if they are not happy with the scheme, with a three-year time limit from when they first raise a matter. In several cases, the Personal Investment Authority ombudsman took at least two years to address a matter and time ran out, so the issue is whether the three-year
period should run from the time of the first referral or whether the time taken by the ombudsman should be excluded when calculating the three-year period.
Mr. Timms: The standard limitation period is, of course, six years, although it can vary according to the type of case and according to judicial discretion. If a lengthy complaint was before the ombudsman and a statute bar appeared on the horizon, it would be up to the consumer to institute protective court proceedings to ensure that the limitation period did not run out. Perhaps I could provide the hon. Gentleman with further information to resolve the question that he raises.
Lords amendment No. 269 agreed to.
New clause
Lords amendment: No. 270, after clause 229, to insert the following new clause--Open-ended investment companies--
(".--(1) In this Part "an open-ended investment company" means a collective investment scheme which satisfies both the property condition and the investment condition.
(2) The property condition is that the property belongs beneficially to, and is managed by or on behalf of, a body corporate ("BC") having as its purpose the investment of its funds with the aim of--
(a) spreading investment risk; and
(b) giving its members the benefit of the results of the management of those funds by or on behalf of that body.
(3) The investment condition is that, in relation to BC, a reasonable investor would, if he were to participate in the scheme--
(a) expect that he would be able to realize, within a period appearing to him to be reasonable, his investment in the scheme (represented, at any given time, by the value of shares in, or securities of, BC held by him as a participant in the scheme); and
(b) be satisfied that his investment would be realised on a basis calculated wholly or mainly by reference to the value of property in respect of which the scheme makes arrangements
(4) In determining whether the investment condition is satisfied, no account is to be taken of any actual or potential redemption or repurchase of shares or securities under--
(a) Chapter VII of Part V of the Companies Act 1985;
(b) Chapter VII of Part VI of the Companies (Northern Ireland) Order 1986;
(c) corresponding provisions in force in another EEA State; or
(d) provisions in force in a country or territory other than an EEA state which the Treasury have, by order, designated as corresponding provisions.
(5) The Treasury may by order amend the definition of "an open-ended investment company" for the purposes of this Part.")
Motion made, and Question proposed, That this House agrees with the Lords in the said amendment.--[Miss Melanie Johnson.]
Mr. Deputy Speaker: With this we may discuss amendments (a) and (b) thereto and Lords amendments Nos. 271 and 558.
Mr. Flight: The new clause that will be inserted in the Bill by amendment No. 270 is technical, but it is important for domestic and international funds. Domestically, it will govern the regulations to which the fund vehicle is subject and whether that is prospectus law or the marketing of collective investment schemes. For
companies established outside the UK, it will determine the tax regime that will apply. Therefore, accuracy and clarity of definition are important.The new clause provides that a company will be open-ended only if it satisfies the two conditions--the property and investment conditions--that are set out in the Bill, and amendments (a) and (b) relate to the investment condition. Under subsection (3) of the proposed new clause the investment condition will be satisfied if a reasonable investor is able to realise his investment within a reasonable period. Our amendments would sharpen up that test.
Under amendment (a), a company will not be open-ended if the investor can receive his money back on the liquidation of the company, but the Government's definition does not appear intended to include a liquidation. A company's byelaws often provide that it is to be wound up at a specified later date, so someone who becomes an investor close to that later date could be deemed to be able to realise his investment within a reasonably short period. Therefore, different categories of open or closed-ended could apply, depending on when different investors invest in a fund.
Amendment (b) would impose important restrictions on what is meant by realising an investment. As it stands, the condition will be satisfied, as is normally the case, if shares are transferable and the investor knows that he can sell his shares to someone else. It would be wrong to treat a company as open-ended for that reason. Our amendment uses the words in the undertakings for collective investment in transferable securities directive which allows cross-border marketing within the European Union of certain classes of collective investment scheme. That wording also appears in the Financial Services Act 1986 and it should continue to be used. The concept of an open-ended company relates to one that can buy back its shares and our wording covers that.
It is wrong to provide for a company to be open-ended if the expectation is that the investment can be realised within a reasonable period. We thought about submitting a specific definition of time although we did not wish to undo the constructive negotiations that are taking place between the Treasury and the industry. However, it will be useful for the FSA to specify what "reasonable" means so that there is clarity. That is particularly important for non-UK funds where an unknown change in the tax position could have a material effect on UK investors.
For example, if the rules of a fund provide for a right of redemption to arise one year down the line and the fund manager thinks that that is outside the reasonable period required by investor conditions, he will proceed on the basis that the company is not an open-ended investment company and therefore not a collective investment scheme. If the regulator or tax inspector takes a different view, there will be conflict and a tremendous tax row.
I raised this issue in Committee, but there is still a lack of clarity in the Bill. What would happen if one investor says that the period is reasonable and another says that it is not? The fund could be open-ended if it followed the advice of one and closed-ended if it followed the advice of the other.
There might be scope to address the issue by FSA regulation, but it would be helpful if the Government could tell us that they are committed to tidying up these loose ends and potential conflicts.
Miss Melanie Johnson: Amendment (a) seeks to specify the time at which the expectation of the reasonable investor whom we have postulated for the purposes of the investment condition leg of the OEIC definition should be assessed. It proposes that the assessment should take place when the investor decides to participate in the scheme.
The Government have stressed the importance of flexibility in all the debates on the definition of an OEIC. By defining an OEIC in the Bill and introducing regulations governing their incorporation and operation, we are facilitating important developments in the UK collective investment schemes industry, and it is essential that we do not stifle future innovation by being overly prescriptive in framing the definition. Indeed, when the Government introduced the current definition, the Opposition's spokesman in another place welcomed it as providing
- a much more flexible and forward-looking definition of open-ended investment schemes.--[Official Report, House of Lords, 30 March 2000; Vol. 611, c. 942.]
- the time he decides to participate in the scheme
Any words specifying a particular time are unnecessary because it is clear that the relevant time of the assessment to be made by the hypothetical investor is immediately prior to hypothetical participation in the scheme. The fact that the investor and his investment are hypothetical means that the idea of him deciding to participate is the wrong approach to the point. The proposition needs to expressed in conditional language--hence
- if he were to participate . . .
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