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Baroness Buscombe: I should like to speak briefly in support of this amendment. It is a good thing to require the members to carry professional indemnity. I hope that the knock-on effect will be a reduction in fees on the part of professional firms which now claim that the extent of their fees is in relation to the high cost of indemnifying their partners because there is no limited liability.
7.45 p.m.
Lord McIntosh of Haringey: I am interested to find both opposition parties in favour of giving more power to government. Adam Smith would turn in his grave, if not Friedrich von Heich.
Unfortunately, the amendment would go a lot further than giving power to government. It would place responsibilities on government which would be impossible to achieve. The amendment would provide that the regulations should not just say that insurance shall be provided; that is one thing. By the way, this is all kinds of indemnity insurances, not just professional indemnity insurance. It would also say that the regulations should set the appropriate levels for the insurance and define the risk which should be covered. It asks not only that the Government should intervene but also that the Government should go into the insurance business by defining risks and setting appropriate levels for insurance. After all, what may be appropriate for one business is not necessarily appropriate for another.
In any case, who is to say that insurers will find that all the risks are insurable. For example, a small architectural practice winning a major contract for a bridge or building would find it impossible to obtain insurance for that. It may be impossible to obtain insurance for new areas of professional activity.
If we are talking of professional indemnity--that is what the noble Baroness, Lady Buscombe, is talking about, even if the amendment is not--surely it is right for the professional body to insist on the professional indemnity insurance rather than the Government to ensure it through legislation. There are no other examples of business entities being required to provide indemnity insurance.
For professions where professional indemnity is required, cover is required no matter what entity the professional operates through, and there is no reason to think that it will be different for LLPs. We have been told by consultees that the experience of the construction industry is that there is no reduction in insurance cover when firms change from a partnership to a company. Insurance policies are carefully worded. It is not necessarily the case that the insurer would pay out in every situation, particularly where the situation was simply business failure. To include a provision of this kind would give a false sense of security to those
who deal with LLPs, quite apart from my major objection of turning the Government into an insurance company.
Lord Goodhart: I am grateful to the Minister for his reply, even if it was somewhat unhelpful on this subject. There are of course precedents for insurance being required--not indemnity insurance but, for example, liability insurance against injury to employees is a government requirement. The reason we provided for this to be in regulations is that it gives a great deal of flexibility to government to make the decisions and say what level of insurance should be required. It seems to me that there may be a breach of the provision which a future government will be unable to do anything about. However, I do not intend to press the matter. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Buscombe moved Amendment No. 44:
- Page 6, line 43, at end insert--
The noble Baroness said: This is a probing amendment. Its purpose is to access the draft regulations to ensure that they distinguish between accounting practices for limited liability partnerships and those for mergers and acquisitions of a business.
As I stated at Second Reading, the merging and accounting provisions set out in paragraphs 10 and 12 of Section A of Schedule 4 to the Companies Act 1985 deal with equity shares being purchased for equity consideration. Such an exchange--share for share--cannot exist in a partnership and the Minister has already made clear that we will assume that no shareholders exist.
However, having said that, this amendment recognises that distinct merger and accounting methods do exist. Perhaps I may make a brief reference to the Minister's letter to me of 10th January wherein he makes it clear--we discussed this point--that it is the Government's intention to ensure that LLPs are able to make use of merger accounting provisions. Clearly, a completely different kind of scrutiny is required for merger and for acquisition accounting. Therefore, we feel it important that this should be made clear. I beg to move.
Lord McIntosh of Haringey: This Bill is certainly an educational process for me because I had no idea that there was any difference between merger and acquisition accounting. Indeed, I have had to learn about it from scratch. Therefore, anything I get wrong is entirely my fault and not that of my advisers. Because merger accounting is generally done by agreement, my understanding is that the result of the merger accounting process is that the profits are likely to be higher and that net assets are likely to be rather lower than under acquisition accounting.
In any case, even if I am not right about that, there is a difference in the reported value of the LLP and the way in which it would be presented in the best light according to which method of accounting is appropriate. Because the reported value of a business can be different according to which accounting measure is used, the choice of merger or acquisition accounting is a very hot topic. It is a matter that has to be defined in great detail in legislation.
Our draft regulations include conditions that would need to be complied with before merger accounting could be used. Perhaps I may point out to the noble Baroness, Lady Buscombe, that my letter to her did not say tout court that merger accounting could be available; it said that it could be available under certain conditions. The conditions are based on those that apply to companies with provision for appropriate adaptation when one of the parties is not a company. These conditions are supplemented by additional conditions in an accounting standard.
Given the significant difference in results and financial position of an LLP that could arise from giving it the choice of accounting methods, I am sure that Members of the Committee will agree that it would not help to make comparisons between the accounts of different LLPs. It would also enable LLPs to have the opportunity to select the method that portrayed them in the best light. We are convinced that there should be some regulation of the accounting method to be used by LLPs for business combinations. The most important argument here is that this choice is not available to companies; that it is not available for very good reason; and that there would need to be a very good reason why the LLPs concerned should be able to choose between the two accounting methods. I hope that the noble Baroness will not pursue the amendment.
Baroness Buscombe: I agree with the Minister in that I, too, have found this to be something of a learning curve. I should like to have the opportunity of reading his response in Hansard tomorrow and of revisiting this matter. However, in the light of what the noble Lord said, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 15 [Consequential amendments]:
Lord Lucas moved Amendment No. 45:
The noble Lord said: My interest here is to gain some elucidation from the Minister as to how the Government see these new animals being consolidated, or otherwise, in the accounts of other corporate bodies that hold a share--if one might use that general term--in these limited liability partnerships. Is it intended that they should always be accounted for as investments, or will there be occasions when the credits and debits (or, as we accountants call them, the figures on the side nearest
Lord McIntosh of Haringey: I hope that I have understood the amendment properly. However, having listened to the noble Lord, I am not sure that I have. The amendment is not about the accounts of the limited liability partnership; it is about the accounts of the member who is a body corporate. The first thing to be said is that we are dealing here with a special case. Not all LLPs will have bodies corporate as members. Indeed, I imagine that most of the professional LLPs will not have bodies corporate as members. Therefore, the amendment will not apply.
However, where there is a corporate body that is a member of an LLP, regulations will provide for the way in which the accounts of the LLP are consolidated in the accounts of the member who is a body corporate. At present, the accounting treatment to be used by the corporate member would vary according to its relationship and interest in the LLP. As a company, the treatment of its accounts is governed by the Companies Act. Therefore, as with companies, if the LLP is a subsidiary, the corporate member would usually consolidate the accounts of the LLP in its own group accounts, in accordance with the provisions of the Companies Act. If the relationship is less than a subsidiary--for example, if it is an associated company, an investment or a general investment--different accounting treatments would be appropriate.
However, whatever the relationship with the corporate member, the LLP would still have to prepare its own accounts for its members and for filing at Companies House. Therefore, I do not believe that there is any need to provide in regulations for the accounting treatment to be used by the corporate member. There is no proposal to change the provisions of the Companies Act. I suggest that we leave the law as it stands.
("(2) Regulations under this section shall in relation to the acquisition of, or merger with, a business by a limited liability partnership, make provision enabling the limited liability partnership to elect to account for that acquisition either using merger accounting or acquisition accounting methods, as its members see fit.").
Page 7, line 2, at end insert--
("( ) Regulations may provide for the manner in which the accounts of a limited liability partnership are to be consolidated in the accounts of a member who is a body corporate.").
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