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Since 2003, the Government have been capable of making regulations enabling an industrial and provident society to adopt an asset lock. We now have, at last, a consultation document from the Treasury on the subject. Lo and behold, one of the options canvassed in the consultation is that the asset lock should be the same as that proposed for the CIC.

It is perhaps churlish to take issue with such generosity of spirit—two forms instead of none—but one of the founding principles of this legislation was supposed to be that it would create a distinctive brand for social enterprise. Of course that aspiration was lost as soon as it was decided that a community interest company could not be a charity—although it was accepted that many charities did things that were akin to social enterprise.

I suspect that the Minister, in her usual charming way, will give me an answer along the following lines. First, she will say that the industrial and provident society is a complex and moribund form, and the company is well understood. Secondly, she will say that an industrial and provident society is a democratic organisation, and a company need not be. Both are perfectly legitimate points as the industrial and provident society stands, but the clear intent—expressed both in the strategy unit's report and in the legislative action taken since that report—is to drag the industrial and provident society as a form into the 21st century, and indeed to make it more like a company.

It is also worth pointing out that social entrepreneurs, particularly small community groups, might prefer the form of constitution that an industrial and provident society takes, set out in a simple set of rules, to the memorandum and articles of a company. One of the classic examples of an industrial and provident society is, of course, an allotment association.

The second reason is also unconvincing. If an industrial and provident society can have an optional asset lock, could it not also have an optional undemocratic structure? Why do we need two forms of vehicle performing what, at the end of the day, will be essentially the same function?

The third reason why the 2003 proposal considered that a CIC might be a good idea was the concern that commercial investors might be blinded by the
 
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complexity and diversity of current not-for-profit structures. You will have gathered, Mr. Deputy Speaker, from what I have said so far that I cannot see the increasing plethora of forms that must be filled in helping in this respect. The proposal also perhaps overstates the case for arguing that commercial investors are easily confused simply because one social enterprise might describe itself as a company, while another might describe itself as a charity or an industrial and provident society.

At the risk of over-generalising, what puts off commercial investors is uncertainty: uncertainty about what the enterprise in which they are investing can or cannot do, how its freedom of action might be inhibited by a regulator, and what might happen to its assets if it becomes insolvent. However, if we are looking for certainty in part 2 of the Bill, it is the last thing that we will find.

Let us consider one of the fundamental strands of this new form: the community interest test. According to clause 35(2), a CIC will pass the community interest test

"if a reasonable person might consider that its activities are being carried on for the benefit of the community."

I appreciate that the test is intended to be flexible and an easy hurdle to jump, but doing so is hardly certain. Unlike the test for charities, it is an activities test; in other words, one looks not at the objects of the organisation to determine its status, but at what it is doing or intending to do. Such activities must be "beneficial" to a community, but as those who listened to the debate about public benefit arising from scrutiny of the draft Charities Bill will know—I had the honour to sit on the Committee that considered that Bill—"benefit" is a far from easy subject to define. In the charities context, it has taken the courts 400 years to fine-tune a concept similar to the one that the CIC regulator will be expected to produce overnight.

On looking at the draft regulations, the level of confusion does not really get much better. On the one hand, it is accepted that the employees of a single employer can be a community for the purposes of the test; on the other, that cannot be so if, according to regulation 4(e), a reasonable person would regard the activities as being conducted solely for the purposes of private gain. Again, it is impossible at this point to know what that means for an organisation that ordinarily can benefit private individuals, provided that they are part of the community whom the CIC serves.

There is yet another complication to the test, and it relates to the nature of the activities that a CIC can undertake. As was made clear by Lord Sainsbury when the Bill was in Committee in another place, a CIC does not need to have community interest objectives in its constitution. It could be a general trading company that has simply confirmed that its activities will be for the community interest, which would enable it to undertake trading activities designed to raise funds for the benefit of the community. The example was given of an allotment society running a bar. Doing so is fine, provided that a reasonable person would gather that the real intention was to raise money for the benefit of the allotment owners; the bar could not be an end in itself.

Where does this leave the community interest test? It would seem to place it somewhere in the realm of the social entrepreneur's intentions: provided that they
 
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intend to do good by whatever it is they are doing, they pass the community interest test. Frankly, we will not know the answer until the regulator has been regulating for some years. We need to wait and see how much trading the regulator will let a CIC get away with before it concludes that it is trading for the sake of trading, rather than for the sake of the community it is supposed to serve.

Of course, this might not be such an issue for the commercial investor if they can rely on the regulator one way or another to recover their investment. However, the test makes the CIC brand indistinct to the point where one wonders whether it is really worth having a community interest test at all. Indeed, it has been suggested that the voluntary adoption of an asset lock is more than sufficient evidence of a desire to benefit others. The Government might well discover that that is a less bureaucratic and regulatory way of achieving what we all want in this respect. I should be most grateful if the Minister commented on that specific point when she replies, because it seems to present a sensible way forward.

We must assume that, despite the complexities and uncertainties surrounding the new form, it will remain in the Bill. The amendments that I tabled in Committee were intended to focus on ensuring that the actions of the regulator were proportionate, explicable and rational. The CIC—and, more importantly, its ability to attract finance—will depend on the actions of the regulator being predictable and proportionate.

The discretions reserved to the regulator seem to appear at any point when the issues get difficult. The regulator thus has to decide the dividend and interest cap, whether the community interest test is passed and, effectively, what the test is. He has to decide whether and how to investigate a CIC and whether and how to intervene in the affairs of a CIC, having determined that it is in the interest of CICs at large that he does so under the Bill. The regulator has to determine whether or not a CIC can change its objects, what guidance should be issued on what subjects and who gets the surplus assets when a CIC is wound up under the provisions of the Insolvency Act 1986. I am afraid that that list is not exhaustive. The Bill should flesh out the discretions and add to our certainty about its effects on CICs by increasing transparency and enhancing the accountability of the decisions taken.

I end on one last helpful note for the Minister. One must hope that the regulator takes one leaf worth taking out of the Charity Commission's book by publishing significant decisions and the reasons behind them. The earlier the information about how the regulator is taking the key decisions is made available, the more likely we are to achieve what we all want from these measures—a real boost for community enterprise and voluntary endeavours throughout our constituencies.

Jacqui Smith: As the hon. Member for Sutton Coldfield (Mr. Mitchell) said, part 2 of the Bill contains a range of provisions to bring the concept of community interest companies into being. We have had an interesting debate about both the principles and the detail at previous stages of the Bill, both here and in the other place. As the hon. Gentleman also made clear, the amendments provide another opportunity to identify some of the key issues around the development
 
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of CICs. I greatly welcome the support across the House for the concept of community interest companies and I would like to take the opportunity, in speaking to the amendment, to say a little more about why the Government are promoting the concept.

We have taken the CIC forward in the Bill not just because it is a useful technical addition to the body of company law, but because we expect it to make a real difference to the way that communities can work creatively and enterprisingly for the common good. That is why the CIC was proposed in the strategy unit report on the not-for-profit sector, and why it was warmly welcome by a wide range of stakeholders when we ran a detailed technical consultation last year. As my right hon. Friends the Secretary of State for Trade and Industry, the Chancellor of the Exchequer and the Home Secretary wrote together when we published that consultation:

"The CIC will create real opportunities for people in areas where they are needed most."

I can also say that, throughout the process of developing the CIC, we have continued to work closely with all the interested parties in the social enterprise sector to try to ensure that the end result achieves what we all want. I should like to take this opportunity to record my thanks to all those who have participated in that effort and been willing to give us the benefit of their experience and their expertise, particularly in the social enterprise sector. As I said, I want to put my thanks to them on the record. I assure them and others that we will continue to work with them to finalise the secondary legislation on CICs, and ultimately to support the new regulator in helping CICs put theory into practice. We want CICs to be a success.

6 pm

The result will be a welcome and useful addition to the range of legal forms available to the not-for-profit sector. There has been much debate here and in the other House about the range of initiatives that the Government are introducing to improve and modernise the legal environment for social enterprise. That debate will continue as other legislation comes forward, for instance in respect of charities. Although I do not want to go over that ground again, I should like to remind the House of why the Government think that CICs will be so useful.

For the first time, social entrepreneurs in Britain will be provided with a tailor-made form of company that is distinctive and easy to use. The CIC will offer a clear and effective mechanism to ensure that assets and profits are used for the good of a community rather than for private gain. In turn, that will make it easier for others, including service users, financiers and supporters, to understand and support the social enterprises that adopt this new form.

One of the key arguments in this matter was, I think, rather underplayed by the hon. Member for Sutton Coldfield. The advantage for those social entrepreneurs who have had to struggle to devise their own version of an asset lock is that this legal form will provide the certainty of an asset lock. That means that they will be able to enjoy certainty when it comes to gaining investment and doing business, and that will be a major step forward.
 
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In addition, CICs will take their place alongside the industrial and provident societies, which are themselves being modified under the ongoing work by the Treasury to update the legislation on mutual societies. They will also complement the various legal options available to charities, which will themselves expanded by the forthcoming Charities Bill. The end result will be a modern range of legal options that reflect and support the breadth and diversity of social enterprise and voluntary activity.

I shall deal briefly with the relationship between CICs and the industrial and provident societies. In Standing Committee, I said that the introduction of the CIC is one of a group of measures proposed in the 2002 report from the strategy unit. That report also recommended a number of measures to modernise the form of the IPS. I disagreed with the hon. Member for Sutton Coldfield when he described the IPS form as moribund, although I do not know whether he was presenting his own view or reporting the opinion of others. Not only did I twitch at that suggestion, but I can assure the House that my Parliamentary Private Secretary, my hon. Friend the Member for Edmonton (Mr. Love), who has a detailed knowledge of the co-operative movement, twitched too.

The IPS form is not moribund: it is very vibrant in many of our communities. Reform is needed for other reasons. The strategy unit proposed the creation of an optional asset lock for the benefit of community IPSs, and the Government are taking its recommendations forward. Considerable assistance is being rendered by my hon. Friend the Member for South Derbyshire (Mr. Todd), who introduced a private Member's Bill in this area. As has been noted, the Treasury published a consultation paper in July on the technical issues surrounding the introduction of the optional asset lock.

The hon. Member for Sutton Coldfield has asked previously, and did so again today, why CICs are needed, given the proposed introduction of an asset lock for IPSs. It is the Government's strong view that CICs and IPSs have different but complementary purposes. The CIC will be ideal for those social enterprises that want the flexibility and familiarity of the company form. The IPS is more appropriate for those that want to be part of the long and proud tradition of mutual and community benefit societies, closely identified with co-operative principles and "one member, one vote" governance. The consultations that the Government have carried out on the strategy unit report and the CIC proposals have strongly supported that view. The whole legal framework for companies will be strengthened, not weakened, by the diversity represented by community interest companies, modernised IPSs and charitable incorporated organisations. I shall resist the hon. Gentleman's admonition that we should mush all those forms together into one. We would lose out if we got rid of that diversity.

The hon. Gentleman also raised the question of what support the Government are providing for community interest companies. The first fundamental point to make is that the creation of the CIC overcomes a real barrier for social enterprise wishing to use the company form. At present, it can be expensive for a social enterprise to set up a company with an effective asset lock. We have estimated that the associated legal costs for social enterprises of setting up an asset lock at present average around £1,500. Even then, the nature and extent of such
 
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asset locks is not usually apparent to stakeholders and not always transparent to funders. Our proposals directly address those concerns, and offer non-charitable organisations that wish to use the company form an asset lock that is ready made, in standard form, and fit for their purposes. We have also designed the community interest test, and the application process, to be as straightforward as possible. The resulting structure should in itself provide significant savings for new social enterprises.

The hon. Gentleman also raised the issue of the fee for registering to become a CIC. It will be set in regulations and it will be comparable to the company registration fee, which is currently £20. The DTI will provide support for the costs of the regulator and his office in the early years, when fee income will not be at a high enough level to allow self-sufficiency. We have also of course recognised the need to support the introduction of the new form in various ways.

The hon. Gentleman highlighted the need for information and I agree that that will be important. Initially, the DTI will produce a series of fact sheets on CICs to provide information, and will work to raise awareness among relevant organisations, especially advisory services. Subsequently, the Bill provides that the regulator is able to provide guidance and assistance on any matter relating to community interest companies and, if necessary, the Secretary of State also has a power to require him or her to do so. Community interest companies, like other enterprises, will also have access to the full range of help and advice that the Government provide through the Business Link service. A range of funding is available for social enterprises, from sources including the devolved Administrations, regional development agencies and local government. Additionally, specific funds have been set up by the Government, such as the adventure capital fund and Futurebuilders, which are available to social enterprises.

The Government have begun the process of preparing the ground for the introduction of community interest companies. We intend that it will be possible to register as a CIC from July 2005 onwards. There is a substantial amount of work to do before that date, not least appointing a regulator and making arrangements for his or her office, which will be based in Companies House in Wales. The appointment process for the regulator is under way, and we envisage that we will be able to announce the successful candidate before the end of the year.

We are in the process of planning for the integration of the regulator's functions into the Companies House company registration and reporting systems. That will provide CICs with an effective one-stop shop when dealing with registration and reporting—one place to go to fulfil the requirements of the company form and the additional requirements of the CIC form.

On the legislative side, on 11 October, we launched a consultation process on the draft regulations to be made under the Bill. The set of draft regulations on which we are holding consultations is substantially the same as the one that I provided for members of the Standing Committee last month. As I said, we intend to continue close dialogue with interested parties when finalising the
 
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regulations, pursuing the consultative approach that we have taken throughout the development of the proposals for CICs. We anticipate finalising the regulations and putting them before both Houses for debate early next year.

I am glad that we have had this opportunity—albeit a relatively short one—to discuss community interest companies, and that we have debated them in some depth in Committee and in another place. The proposals have received considerable scrutiny, especially in the other place, and as I said, we are heartened by the support that the concept has received. The Government are committed to making a success of community interest companies and we are taking the practical steps that will ensure that.

Part 2 provides the right legislative base on which to create that success and to provide opportunities for the social entrepreneurs in our communities, who make such a difference and who will be able to build on their potential by using this new legal form. On that basis, I am sure that the hon. Member for Sutton Coldfield will not want to press his amendment, but I welcome the opportunity that it has afforded us to discuss community interest companies and to put some points on the record, including the considerable progress that we are making towards the development of that form.

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