draft Collective Investment in Transferable Securities (contractual scheme) regulations 2013
The Committee consisted of the following Members:
† Ashworth, Jonathan (Leicester South) (Lab)
† Bebb, Guto (Aberconwy) (Con)
† Birtwistle, Gordon (Burnley) (LD)
† Cairns, Alun (Vale of Glamorgan) (Con)
† Clappison, Mr James (Hertsmere) (Con)
† Clark, Greg (Financial Secretary to the Treasury)
Dorries, Nadine (Mid Bedfordshire) (Con)
† Flynn, Paul (Newport West) (Lab)
† Hands, Greg (Chelsea and Fulham) (Con)
† Hemming, John (Birmingham, Yardley) (LD)
† Leslie, Chris (Nottingham East) (Lab/Co-op)
† Mowat, David (Warrington South) (Con)
† Newton, Sarah (Truro and Falmouth) (Con)
Paisley, Ian (North Antrim) (DUP)
Roy, Lindsay (Glenrothes) (Lab)
Ruddock, Dame Joan (Lewisham, Deptford) (Lab)
Stringer, Graham (Blackley and Broughton) (Lab)
† Wood, Mike (Batley and Spen) (Lab)
Dougie Wands, Committee Clerk
† attended the Committee
Fifth Delegated Legislation Committee
Monday 3 June 2013
[Annette Brooke in the Chair]
Draft Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013
4.30 pm
The Financial Secretary to the Treasury (Greg Clark): I beg to move,
That the Committee has considered the draft Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013.
It is a pleasure to serve under your chairmanship, Mrs Brooke.
The regulations set out the legal framework under which tax-transparent funds will be introduced in the UK. We are introducing two new vehicles, both of which will be subject to Financial Conduct Authority authorisation, and which are collectively known as authorised contractual schemes. The first is the co-ownership scheme; the second is based on the existing limited partnership models.
The background is that the UK investment management industry serves millions of customers around the globe, and is one of the UK’s success stories. It is a key part of our financial sector, managing nearly £5 trillion of funds, and earning an estimated £12 billion a year for the UK. About a third of European assets under management are managed out of the UK, and the industry is a significant provider of high valued-added jobs, with clusters of expertise in London and Scotland, and across many UK regions.
However, the sector is about more than just the management of funds. It is also about where the funds themselves are located. The establishment of a tax-transparent fund vehicle is an important part of our programme to ensure that the UK remains competitive as a European centre for funds to be domiciled.
Once introduced, these funds will be suitable for use in many roles, whether by themselves, as stand-alone schemes, or as part of other structures. Introducing them will also help to ensure that the UK can take full advantage of the opportunities presented by the undertakings for collective investment in transferable securities IV directive.
The UCITS IV directive governs more than 70% of the net value of European funds for collective investment in transferable securities. In 2010 it enabled fund managers for the first time to operate cross-border UCITS master funds. That means that feeder funds from across different member states will be able to invest for the first time into a much larger master fund, pooling their assets and thereby benefiting from economies of scale and greater investment diversity.
For that structure to work well, the master fund must be tax transparent. That means there is no taxation of income in the master fund itself. The feeder funds, and any other investors, are then taxed as normal in their
own jurisdiction on their investment return. In that way, the Exchequer does not lose revenue. Instead, investors pay tax as appropriate based on their circumstances.As I mentioned, we are introducing two types of authorised tax-transparent funds. Both types being considered are contractual funds under the UCITS IV directive. One is the co-ownership scheme. It is a new type of fund structure in the UK, but is already in place, and used extensively, in other European member states. Legislation being introduced separately will provide that, for the purposes of UK capital gains tax, such funds will be treated as opaque. That means that the investors’ holding in the fund—not the underlying assets held by the fund—will be the relevant asset for investors’ capital gains tax purposes.
We are also introducing an authorised limited partnership scheme, which will be based on the already well recognised unauthorised limited partnership vehicle currently used in the UK, and which will be fully transparent for the purposes of both income and gains.
Given the existing availability of the funds in other domiciles, there is a commercial demand and, indeed, a competitive requirement, for similar vehicles to be available in the UK. Once they are introduced, the tax-transparent funds will enable UK fund managers to take advantage of the opportunities created by UCITS IV, and to establish master funds in the UK.
Those funds will also be suitable for other purposes, and fund managers will be able to make commercial decisions about how best to employ them. For example, the new fund structure will allow some investors—in particular pension funds and charities—to retain the benefits of lower rates of withholding tax on their foreign investments under double taxation treaties. Those benefits cannot be retained if investment is made through non-transparent funds.
Whether forming part of a master feeder structure or not, the new funds are an important part of our strategy to support the UK as a competitive location for fund management and domicile.
The Limited Partnerships Act 1907, which partly governs limited partnerships, is modified for the operation of the partnership schemes, and the Insolvency Act 1986 and the insolvency rules and equivalent legislation for Northern Ireland are modified by the proposals, to enable co-ownership schemes to be wound up in the event of insolvency.
In addition to the regulations, other regulatory changes will bring the tax-transparent funds into effect. Regulations governing the tax treatment of UK-resident investors in the new funds will shortly be laid before the House of Commons, covering capital gains tax, stamp duties and the VAT treatment of the funds. Regulations covering those taxes and duties will be made through the negative resolution procedure, whereas the capital gains tax regulations are subject to the affirmative resolution of the House of Commons.
Before any new schemes can be launched under the regulations, it will be necessary for the Financial Conduct Authority to approve its own rules to govern the regulation of the schemes to ensure that they are operated responsibly and appropriately.
The changes pave the way for the introduction of effective and competitive tax-transparent funds to the UK. Without those new vehicles, the UK fund industry
would be unable to take advantage of the opportunities and changes introduced by the UCITS IV directive. Whether or not used in the context of the directive, the funds will help to improve returns for investors, provide new opportunities for the industry and strengthen the UK investment management sector. I therefore commend the regulations to the Committee.4.36 pm
Chris Leslie (Nottingham East) (Lab/Co-op): I thank the Minister for outlining this technical and lengthy statutory instrument. He argued that other countries will benefit from the particular investment instrument model, and there is clear logic in considering whether the UK can also benefit from following a similar architectural arrangement.
I have only a few specific questions for the Minister. How did the Government come up with the figure of £190 billion of additional assets for UK fund managers, and for the additional assets domiciled in the UK by non-UK fund managers? What is the methodology behind that figure, because it seems very precise? There is talk of great benefits for the UK, but the Investment Management Association’s 2007 report on the benefit of UK-domiciled funds to the UK stated that only 0.2% of funds would be spent on local administration and other services. I am therefore interested in the estimated yield that might come to the Exchequer if such extra business is generated or located here.
That brings me to a question about what the estimated increase in tax revenues will be if the Government’s predictions about the increases in UK collective funds are correct. Conversely, it would also be worth while knowing whether there will be any downside in netting off the figure: will there be less tax revenue? Will a UK-domiciled collective investment scheme create less revenue compared with a unit trust scheme of the same size? In other words, we should not look at schemes in isolation; other vehicles and unit trust schemes may be affected. Is there any risk that existing investment trusts become collective schemes to incur lower tax liabilities?
In this era of scrutiny of tax evasion and tax avoidance, some people will raise an eyebrow about the potential for tax loopholes. If the Minister can assure us that nothing in this statutory instrument creates the chance for corporate tax avoidance, this would be a useful opportunity for him to do so. When we hear about tax competition, people always have a slight anxiety about there being some sort of race to the bottom, with one jurisdiction competing with another in a downward spiral, so it would be useful to have that assurance.
Why have the Government decided not to bring the transfer of scheme units under the auspices of the Financial Conduct Authority rules, but to allow scheme operators to make their own arrangements? My understanding is that the FCA has not been brought in, in relation to the regulatory perimeter, in the way that some people expected, so I would be grateful if the Minister clarified that.
The Government have chosen to review the scheme every five years to confirm the benefits. Can he assure us that there will be a written ministerial statement so that we can see that that five-year review is taking place? That would be helpful because there is a lot of activity in Parliament and it is useful to have it punctuated, so
that we notice that the review is taking place and that there will be an opportunity for it to be laid before Parliament.Finally, the explanatory memorandum states:
“There is…a remote possibility of an investor being held to be liable in a foreign court for debts in excess of the value of their units.”
I guess that is the reason for restricting access to this type of instrument to what are known as “sophisticated investors”. Will the Minister ensure that there are some safeguards for investors who may be tempted to waive many of their rights and classify themselves as sophisticated investors, but who may get burned if they are not careful?
I am sorry to fire those questions thick and fast at the Minister, and I should be grateful if he helped us with them.
4.41 pm
Greg Clark: I will certainly endeavour to satisfy the hon. Gentleman in replying to his questions. On the estimated impact of funds under management in the UK, he will be familiar with the impact assessment, and because the figures obviously refer to funds that are currently distributed throughout Europe, an estimate is required. That was made from the published European statistics in consultation with the Investment Management Association, which can produce surveys of the total size of the industry. We have looked particularly at the declining proportion of the UK’s share of that industry and this is one of several steps we have taken.
The Committee will be familiar with our strategy for asset management, which includes some changes in taxation, of which this is one, and a clearer regulatory structure. We believe that reversing that—it was part of the consultation that the impact assessment informed—points to the ability of UK-domiciled fund managers to have a greater share of that market. It is difficult to say for sure what the impact will be, but, in response to one of the hon. Gentleman’s later questions, a review in later years—certainly after five years and before if necessary—will of course be shared with the House through a written ministerial statement, which will allow us to see what the impact has been. The unanimous response to the consultation was that this is a step in the right direction, even if it is difficult to quantify the precise impact.
On the consequences for tax revenues, again, as the Committee and the hon. Gentleman would expect, we have taken a cautious view and assumed that there will be a negligible impact on overall revenues. There are two reasons for that. First, on the design of the policy, no net increase or decrease in the amount of tax revenue collected is intended. It is a question of bringing us into line with practice elsewhere. Investors should pay tax once. The vehicle is not subject to taxation but individual investors will be. That clarifies a point that is understood in other jurisdictions, but not so much here.
On the possible additional revenue, obviously a greater competitive contribution for the UK fund management industry would bring revenue to the Exchequer, but we have made no assumptions in the public finances regarding that approach. Our policy is to pursue iron discipline on
such matters, and we certainly do not bank revenue that is not dependable. I hope the hon. Gentleman approves of that approach.On protection for investors, the hon. Gentleman mentioned a theoretical risk that is noted. We would mostly expect some contents of the funds in the broader fund to be equities, which have limited liability associated with them anyway, so there is no risk to investors. But in the case of some derivatives that might be included, even though we are clear in the UK that that would not have consequences for retail investors, it is theoretically possible that the same protections may not be offered in some jurisdictions around the world. Therefore, we think it is wise to limit access to those vehicles to
institutional investors or to sophisticated investors. That is the purpose of including that limit. The Financial Conduct Authority’s contribution will be to police the boundary to ensure they are not being sold to investors that it is not appropriate to sell them to.I hope that covers the questions that arise. As the hon. Gentleman said, the set of changes is relatively technical, but in point of fact, the underlying logic is clear: it is about being able to have clear tax arrangements that mirror the arrangements people are well used to in other countries, thereby removing a current disadvantage to the UK industry.