EU Budgets: Multiannual Financial Framework 2014-2020 - European Scrutiny Committee Contents


9   Financial services: European social entrepreneurship and capital venture funds

(a)

(33534)

18491/11

+ ADDs 1-2

COM(11) 862

(b)

(33535)

18499/11

+ ADDs 1-2

COM(11) 860


Draft Regulation on European social entrepreneurship funds




Draft Regulation on European capital venture funds

Legal baseArticle 114 TFEU; co-decision; QMV
DepartmentHM Treasury
Basis of considerationMinister's letters of 11 and 19 March 2012
Previous Committee ReportHC 428-xlvii (2010-12), chapter 15 (18 January 2012), HC 428-xlix (2010-12), chapter 9 (1 February 2012), HC 428-l (2010-12), chapter 6 (8 February 2012) and HC 428-lii (2010-12), chapter 12 (29 February 2012)
Discussion in CouncilNone planned
Committee's assessmentPolitically important
Committee's decisionCleared

Background

9.1  The Commission promotes, partly in the context of the Europe 2020 Strategy, the value of the Single Market Act, the Small Business Act and the Innovation Union in support of small and medium-sized enterprises (SMEs).[43]

9.2  One of the levers identified in 2011 by the Commission in re-launching the Single Market Act was the encouragement and development of social entrepreneurship. It defines a social business as an enterprise with the primary objective of achieving a social impact rather than generating profit for owners and shareholders, which operates in the market through the production of goods and services in an entrepreneurial and innovative way, and which uses surpluses mainly to achieve these social goals.

9.3  One of the priority initiatives identified in the Single Market Act was the "setting up of a European framework facilitating the development of social investment funds" so as to contribute to a favourable financing framework for social businesses. The aim is to improve the effectiveness of fundraising by investment funds that target these businesses. In July 2011, the Commission launched a consultation on promoting social investment funds,[44] as part of its Social Business Initiative.[45]

9.4  In April 2011 the Commission said it would consider adoption of new rules to ensure that by 2012 venture capital funds established in any Member State could operate and invest freely throughout the EU. In June 2011, it launched a consultation on a European venture capital regime.[46] The aim was to address the fragmentation of the EU's venture capital markets along national lines, that the Commission considered could limit the overall supply of capital for innovative SMEs, and to create a real single market for venture capital funds in the EU.

9.5  Currently the managers of social enterprise and capital venture funds have to comply with the Alternative Investment Fund Managers (AIFM) Directive, Directive 2011/61/EU.[47]

9.6  With the draft Regulation, document (a), the Commission has proposed, in order to encourage the growth of social entrepreneurship across the EU, uniform requirements for the managers of collective investment undertakings that would operate under a designation "European Social Entrepreneurship Fund" (EuSEF). With the draft Regulation, document (b), the Commission has proposed, in order to encourage the growth of venture capital across the EU, uniform requirements for the managers of collective investment undertakings that would operate under a designation "European Venture Capital Fund" (EVCF).

9.7  Managers of collective investment undertakings that operated under the designations or brands EuSEF or EVCF would benefit from uniform requirements for registration and an EU-wide passport. Social enterprise and capital venture funds that did not wish to operate under those designations would not have to comply with the requirements of the Regulation and would not benefit from the EU-wide passport, unless the manager were authorised within the scope of the AIFM Directive.

9.8  We have considered these proposals four times — in the context of the Government's broad support for the proposals, of a number of detailed issues it had mentioned to us, of further issues raised by to stakeholder groups the Government had consulted, of its impact assessments of the proposals and of progress in negotiation of various issues in the proposals. Our initial reaction was that these proposals appeared unexceptionable and that has remained our view. When we last considered the proposals we learnt of compromise texts of the draft Regulations that accorded with the UK interest. But we asked for the Government's assessment of the acceptability of those compromise texts, which the Presidency was expected to put to the Council for agreement on 20 March 2012. Meanwhile the documents remained under scrutiny.[48]

The Minister's letters

9.9  In his first letter the Financial Secretary to the Treasury (Mr Mark Hoban) tells us that the Presidency is now seeking a general approach through COREPER rather than in the Competitiveness Council and that the Government has no concerns over this decision.

9.10  The Minister then comments that:

  • it is worth noting the proposed Regulations would create an optional regulatory regime for venture capital and social investment funds;
  • it would not, therefore force the UK's existing industry to restructure to meet the requirements of these proposals — funds would undertake their own cost-benefit analysis and would opt-in to the regime only if the benefits to them outweighed the costs;
  • the Treasury has scrutinised the Presidency texts with the Financial services Authority and agree that sensible and suitable investor protections and regulatory safeguards have been included;
  • the Government does not have any significant concerns in this regard about funds that could be established in the UK or use of the marketing passport to sell to UK investors;
  • more generally, the Presidency and Commission have adopted a proportionate approach which suits the risks posed by social investment and venture capital;
  • they have also been very cooperative in incorporating many of the Government's suggested amendments, including a fund of funds structure, improvements to the definition of a "social business" and a requirement for written marketing communication to be "fair, clear, and not misleading";
  • it is regrettable that the UK has not secured enough support to amend the criteria of eligible investors — however the €100,000 (£84,000) subscription test that has been included is nonetheless a significant step forward from the less suitable professional investor definition of Market in Financial Instruments Directive; and
  • the Government therefore believes that the compromise texts issued by the Presidency are acceptable and it has no concerns in supporting these proposals.

9.11  The Minister says finally that:

  • while the benefit of such funds is not conclusively known, their overall goal of improving financing for promising and innovative SMEs and enterprises with beneficial social impact is one that the Government supports; and
  • furthermore, success of these schemes will help demonstrate the benefit of a proportionate approach for financial activities that pose low levels of risk.

9.12  In his second letter the Minister says that:

  • following pressure from one Member State, the Presidency last week circulated a suggested compromise for a "light depositary" requirement in the venture capital proposal and this was rejected;
  • the Government anticipates, however, that the debate might be reopened at COREPER;
  • as we have heard previously the Government believes that a depositary requirement, or a compromise "light depositary" requirement, is unnecessary and will add considerable extra cost whilst providing minimal investor protection;
  • as such, fund managers will be deeply reluctant to operate under the requirements of this Regulation and there is a very strong risk that the European brand will fail;
  • the regime, however, remains optional for fund managers and so none will be forced to take on these requirements; and
  • therefore while a depositary requirement would certainly represent an unfortunate missed opportunity to stimulate venture capital investment in the EU, the text would remain acceptable in the Government's assessment.

The Minister adds that there is no indication at this stage that the depositary debate will be reopened for the European Social Entrepreneurship Funds proposal.

Conclusion

9.13  We are grateful to the Minister for this further information he gives us and note that, even with the possibility of a depositary requirement, the Government assesses the proposals as worthy of support. So, having no further questions to ask, we clear the documents.



43   The Commission's latest documents on these policies are (32702) 9283/11 (32691) 9040/11, (32560) 7017/11 and (33505) 18244/11 + ADD 1: for the first three see HC 428-xxvii (2010-12), chapter 7 (18 May 2011) and HC 428-xxi (2010-11), chapter 6 (23 March 2011); we will be considering the fourth shortly. Back

44   For the consultation document and a summary of responses see http://ec.europa.eu/internal_market/consultations/2011/social_investment_funds_en.htm.  Back

45   (33328) 16628/11: see HC 428-xlv (2010-12), chapter 10 (20 December 2011). Back

46   For the consultation document and a summary of responses see http://ec.europa.eu/internal_market/consultations/2011/venture_capital_en.htm.  Back

47   See http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:174:0001:0073:EN:PDF.  Back

48   See headnote. Back


 
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Prepared 27 March 2012