9 Financial services: European social
entrepreneurship and capital venture funds |
+ ADDs 1-2
+ ADDs 1-2
Draft Regulation on European social entrepreneurship funds
Draft Regulation on European capital venture funds
|Legal base||Article 114 TFEU; co-decision; QMV
|Basis of consideration||Minister's letters of 11 and 19 March 2012
|Previous Committee Report||HC 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 Council||None planned
|Committee's assessment||Politically important
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).
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, as part of
its Social Business Initiative.
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.
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.
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.
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 Treasury has scrutinised the Presidency texts
with the Financial services Authority and agree that sensible
and suitable investor protections and regulatory safeguards have
- 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;
- 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.
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
For the consultation document and a summary of responses see http://ec.europa.eu/internal_market/consultations/2011/social_investment_funds_en.htm.
(33328) 16628/11: see HC 428-xlv (2010-12), chapter 10 (20 December
For the consultation document and a summary of responses see http://ec.europa.eu/internal_market/consultations/2011/venture_capital_en.htm.
See headnote. Back