| Financial Services Act 1986 (Extension of Scope of Act and Meaning of Collective Investment Scheme) Order 2001
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Miss Melanie Johnson: I understand that there are currently approximately 80 registered LLPs, some of which are professional partnerships, although a range of other enterprises are included to which the new structures appealed. It is early days, and we may see a change in the profile of LLPs over time. On grandfathering, there will be a new order for the financial services and markets regime. Indeed, it has already been made—SI No. 1062. In due course, that order will need to be amended in a similar way to this one. It is not necessary or appropriate to deal with that now, but we need to do so before N2. It is worth mentioning that LLPs do not have share capital, but I think that the hon. Member for Arundel and South Downs (Mr. Flight) understands that. The effect of the order is to make LLPs capable of being collective investment schemes. The hon. Gentleman asked what that really meant—it does not mean that they must be such schemes. Mr. Flight: I am grateful for the clarification, because one could have taken the view that LLPs had to be such schemes. However, if they are simply capable of being collective investment schemes, one must ask a specific question. If a professional practice is structured as an LLP that wants to use the LLP interest in the same way, as a security—it can certainly sell participations to institution investors and may even be capable of listing the interest—how will that territory be regulated? If it is not suitable to be regulated as a collective investment scheme, it receives no form of regulation in relation to its security characteristic. Miss Johnson: We envisage that, at present, no body corporate other than an OEIC can be a collective investment scheme. The order states that LLPs do not fall within the prohibition. Therefore, if an LLP is structured in such a way that it falls within the definition of a collective investment, it will be regulated. If it is not so structured, it will not be a collective investment scheme, and will not require regulation. The regulation is necessary to meet the possibility that the membership interest is traded in the way that I set out in my opening remarks; otherwise the regulation is not necessary. It is relevant to legal and accounting firms that ordinary business firms will not come within the scope of collective investment schemes. Mr. Flight: I thank the Minister and I apologise. This is tricky territory. Everybody can understand the concept that a collective investment scheme regulation is relevant only when an LLP is, in effect, used as an investment fund. However, where an LLP structure is used by a professional firm, part of the reason for using that structure is to have a two-thirds way house, which is similar to a company, so that outside capital can be brought in and allow a form of limited liability. That is very close to a security, which is why counsels advise that it could fall under the stock and shares definition, although stock and shares are not specifically the traditional territory. If interests in LLPs that own professional firms are offered around the market as an investment, as they could be, which is part of the reason for an LLP, is that process to be regulated? Either the process is not regulated at all or, if it were deemed that it needed to be regulated, it would not be suitable to be regulated as a collective investment scheme. Miss Johnson: If professional firms were to sell their participations as investments, such arrangements would be collective investment schemes. Mr. Flight: Ah. I am grateful to the Minister because that is at the heart of the issue. If that were the case, the professional firms would have to be regulated by the Financial Services Authority and experience all that goes with being a collective investment scheme, which is presumably not the Government's intent. If the LLP is used as a fund, that is fine because it is just another structure for any other form of investment fund. It does not make business sense to regulate professional practices as a collective investment scheme merely because they use the LLP to place interest and get capital. Such a practice should be regulated as a company. Miss Johnson: We do not regulate companies in the abstract, and we do not propose to regulate LLPs in the abstract. I am not entirely clear about what the hon. Gentleman's concerns still are. The LLP interest cannot be shares, because the definition relies on there being a share capital, which, as we have said, LLPs do not have. Collective investment scheme regulation is unnecessary if all the partners participate in the business. The question is whether they are selling investment interests in the LLP, in which case it would become a collective investment scheme. We considered alternative ways of dealing with the issue. The proposals before us have many attractions, not least because they relate to an investment regime with which the industry is familiar and, in terms of regulating the matter, the arrangements are straightforward. The alternatives included leaving LLPs outside the regulatory structure. That would have resulted in serious problems, and I do not believe that the hon. Gentleman urges that course of action. We could have adjusted the definition of a share, which would have resulted in an advertisement for a new partner constituting an investment advertisement or requiring the issue of a prospectus regardless of the nature of the LLP. We did not believe that that was the right course of action. We could have created an entirely new type of investment within the scope of the Financial Services Act 1986 and, presumably, transferred it into the Financial Services and Markets Act 2000 in due course, which seemed unduly complicated. The proposal is a straightforward answer to the issue and should not give rise to problems unless the LLP is behaving as a collective investment scheme, in which case it will need to be regulated. I do not believe that the hon. Gentleman disputes the need to regulate in such circumstances. Mr. Flight: Let us suppose that a law or accounting firm wants to use the LLP structure to bring in outside capital—one of the reasons for that structure having been created—and other, largely institutional, investors. In such circumstances, would it need to be regulated as a collective investment scheme? If so, it would never use the LLP structure, as to do so would bring it within the bailiwick of the FSA: as I said, the person running it would need to be FSA regulated. That is the anxiety. If in a different territory an LLP is being used as an investment fund that invests in venture capital and stocks and shares, for example, there would be no problem, as the collective investment regime would be entirely appropriate. However, if it is simply like placing some stock in the law firm with institutional investors, the appropriate—I do not want to misuse the term ``regulation''—regime is surely the standard corporate regime, which would involve a prospectus and all the other requirements in order to ensure that investors know what they are investing in. The knock-on effect of collective investment regulation makes it unsuitable in circumstances such as I described, of a law or accounting firm raising outside capital. Miss Johnson: We are saying only that an LLP should be regulated as a collective investment scheme when it falls within the definition of section 75 of the Financial Services Act. The order allows LLPs to be so regulated if they fall within that definition, but it is not a requirement in other circumstances. Mr. Flight: I apologise; I do not know whether circumstances such as I described would make such a company subject to section 75. Would a law firm with an LLP structure that intends to raise £20 million of capital by selling off 30 per cent. of the interest in the LLP and to introduce, say, 20 institutional investors, be covered by the section 75 definition? Miss Johnson: I understand that it would not. Question put and agreed to. Resolved,
Wells, Mr. Bowen (Chairman) Allen, Mr. Benn, Mr. Hilary Cotter, Mr. Flight, Mr. Gardiner, Mr. Healey, Mr. Johnson, Miss Melanie McWalter, Mr. Ruane, Mr. Simpson, Mr. Alan Steinberg, Mr.
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| Prepared 2 May 2001 | |
