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Lord McIntosh of Haringey moved Amendment No. 252:

The noble Lord said: This amendment was spoken to with Amendment No. 89. I beg to move.

On Question, amendment agreed to.

Clause 225, as amended, agreed to.

Clauses 226 to 229 agreed to.

5.15 p.m.

Lord McIntosh of Haringey moved Amendment No. 252VA:

    After Clause 229, insert the following new clause--


(" .--(1) In this Part "an open-ended investment company" means a collective investment scheme which satisfies both the property condition and the investment condition.
(2) The property condition is that the property belongs beneficially to, and is managed by or on behalf of, a body corporate ("BC") having as its purpose the investment of its funds with the aim of--
(a) spreading investment risk; and

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(b) giving its members the benefit of the results of the management of those funds by or on behalf of that body.
(3) The investment condition is that, in relation to BC, a reasonable investor would, if he were to participate in the scheme--
(a) expect that he would be able to realize, within a period appearing to him to be reasonable, his investment in the scheme (represented, at any given time, by the value of shares in, or securities of, BC held by him as a participant in the scheme); and
(b) be satisfied that his investment would be realized on a basis calculated wholly or mainly by reference to the value of property in respect of which the scheme makes arrangements.
(4) In determining whether the investment condition is satisfied, no account is to be taken of any actual or potential redemption or repurchase of shares or securities under--
(a) Chapter VII of Part V of the Companies Act 1985;
(b) Chapter VII of Part VI of the Companies (Northern Ireland) Order 1986;
(c) corresponding provisions in force in another EEA State; or
(d) provisions in force in a country or territory other than an EEA state which the Treasury have, by order, designated as corresponding provisions.
(5) The Treasury may by order amend the definition of "an open-ended investment company" for the purposes of this Part.").

The noble Lord said: The definition of an open-ended investment company, which I gather is called an "OEIC", has generated much discussion in the course of debates on this part of the Bill, and the Government have indicated at each stage that they are carefully considering the issue. I am pleased to say that, with the help of industry representatives, these deliberations have been successful and we now have a robust and well-targeted definition to put to the Committee. A draft reflecting the substantive changes brought about by the Government's amendment was shared with the main industry representative body, the Association of Unit Trusts and Investment Funds, which I understand is called AUTIF, and the FSA, both of which strongly welcomed it.

The difficulties in defining an OEIC have largely been in pitching the definition at the correct level to cover companies that need to be regulated as OEICs (and thus as collective investment schemes), without catching those that do not have the necessary characteristics. It is also important to get the definition right because it forms the foundation on which certain types of investment scheme can be formed and, together with the regulations to be made under Clause 256, which the Government have recently put out in draft form for consultation, will facilitate the development of innovative new investment products. In line with the wider aims of the Bill, this reflects the Government's desire to keep the UK at the leading edge of the highly competitive international collective investment schemes market and to continue to improve consumer choice in these products.

In his Budget speech last week, the Chancellor announced a wide-ranging review of UK institutional investment to be led by Paul Myners. The investment-raising opportunities for UK business are very much at the forefront of this. The possibilities opened up by the definition of an OEIC given by the Government's

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amendment reinforce this theme and form the foundation on which new ways of raising funds for UK business here and abroad can be developed.

The definition given by these amendments is framed by reference to two tests, both of which must be satisfied in order for a scheme to be an OEIC; namely, the property condition and the investment condition. I promise that one gets used to the word "OEIC" after a while.

The property condition carries forward tests in the existing clause. The investment condition, however, now has two limbs. The first relates to the rights of investors over the redemption of their shares or securities, the second to the expectations that a reasonable investor would have.

The important features that the amendments secure in the investment condition are, first, to tie into the definition the expectations of a reasonable investor in relation to the period within which he will be able to realise his investment, and, secondly, to stipulate that he would have to be satisfied that the amount so realised would be based on the value of the relevant scheme property. This brings in an element of judgment as to whether or not a company actually functions as an open-ended investment company.

The investment condition is concerned with actual or potential redemption of shares or securities. It is important here to exclude redemption outside the scope of an OEIC's activities as a collective investment scheme, so actual or potential redemptions under the Companies Act 1985 is excluded as are those under corresponding provisions in an EEA state. In order to be able to take into account redemption under provisions of non-EEA states, a new subsection (to be inserted by subsection (4)(d) of Amendment No. 252VA) gives the Treasury the power to designate, by order, such provisions. This will be subject to the negative resolution procedure. Subsection (5) gives the Treasury the power to amend the definition of an OEIC for Part XVII purposes. This may be used in the future to enable the definition to respond rapidly to commercial developments or to rectify weaknesses in the current definition if they become apparent. As an order under this power could widen the scope of the definition, and thereby have broader implications, for example, for orders made by the Treasury, under the powers in Clause 256, it will be subject to affirmative resolution. Amendment No. 278E provides that orders made by the Treasury under this amendment changing the definition of an OEIC will be subject to the affirmative resolution procedure.

There are a number of opposition amendments in this group. It may be for the convenience of the Committee if Members opposite speak to them now. I can then respond, rather than trying to anticipate what they might say. I beg to move.

Lord Elton: It would have been fascinating to hear what the noble Lord said in response to everything Members might have said but did not; however, we are to be denied that pleasure.

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Can the Minister say whether this amendment has been seen by the Delegated Powers and Deregulation Committee for its comments on the delegated powers therein? If so, which report can we find it in?

Lord McIntosh of Haringey: I have written to the noble Lord, Lord Alexander, as chairman of the Delegated Powers and Deregulation Committee, who expressed concern that we were sending him amendments in dribs and drabs for his comment. It is with his agreement and that of the committee that we shall be sending all the amendments together before Report stage so that they can be considered by the committee at one go, at its convenience, in time for the House to consider them on Report. We do not believe that this specific amendment has been put forward already. Therefore, although I have taken care to ensure that these are affirmative resolution procedures--I am sure that is what everyone wants--the amendment will be included in the more substantial batch which will go to the Delegated Powers and Deregulation Committee shortly.

Lord Elton: I am grateful to the Minister and am reassured by the level at which he is putting in these powers. Can I also be reassured that if, by any chance, the committee were to be critical of one or other of the amendments--there are many--we would be in order to table amendments supportive of that, even though it would not have been possible to give notice, as is normal, in Committee that we were planning so to do because we would not know what the criticisms were?

Lord McIntosh of Haringey: There is nothing in procedure or in propriety which would stop the noble Lord from doing that.

Lord Kingsland: By Amendment No. 252VA the Government are altering the definition of "open-ended investment companies". These are the only bodies corporate which constitute collective investment schemes and so are subject to the extra marketing restrictions on authorised persons contained in Clause 231; to the requirement for the manager to be authorised under the Bill; and to United Kingdom offshore funds tax legislation which treats capital gains as if they were income.

The substantive part of the amendment seeks to change the definition of when the company is to be regarded as open-ended. The Government have accepted that, unless there is an express right to redeem, redemptions made should not make the investment company open-ended unless the redemptions are at the option of the investor. As the Minister is aware, the Government consistently refused our amendments to this effect in another place, even though this was exactly what the UCITS directive provided.

We, the Opposition, welcome the new clause, subject to one important caveat, which I shall explain in a moment. The clause appears to provide a much more flexible and forward-looking definition of open-ended investment schemes. It should allow the

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establishment in the United Kingdom of a greater variety of products, thereby enhancing the competitive position of the United Kingdom as a place in which to operate such schemes.

The ability to develop new products is, as Members of the Committee are well aware, of vital importance to the United Kingdom investment funds industry if it is to respond to the changing needs of investors and maximise its potential for international growth. We would welcome the Minister's confirmation that these provisions are intended to encourage innovation and development, already well established in other jurisdictions, of authorised investment companies where redemption periods may vary. Indeed, an "investment company with variable capital" may well be a more accurate description of such companies than is contained in the present title.

There are concerns that the wording in subsection (3)(a) could, notwithstanding the exemptions in subsection (4), have the effect of bringing within the definition a closed-ended company with a finite life. The example might be of a company set up for a fixed period of 10 years, at which point it would be liquidated. An investor who invested in such a company in year nine would have a reasonable expectation that he would be able to realise his investment within a year, which would be a period appearing reasonable to him.

That could have unexpected consequences for tax status, for example. Would that company be regarded as open-ended under the proposed definition? We would welcome clarification on that point before Report stage. One way of avoiding this possibly unintended effect may be to refer in subsection (3)(a), to the realisation of the investment being, "at the request of the investor", rather than as a result of a corporate decision which was known in advance. We would also welcome confirmation that the new definition will allow scope for a wider range of authorised funds which are intended for domestic consumption and which do not seek to benefit from the UCITS passport.

With that caveat in mind, it will not be necessary for us to move Amendments Nos. 252XA, 252A, 252AA, 252AB and 252AC. Amendment No. 252AD concerns the definition of "operator". The current definition, which is the same as that in the Financial Services Act, covers unit trust schemes with a separate trustee and open-ended investment companies; but it does not cover other types of collective investment scheme. The identification of who is the operator is important for the purposes of the definition of a collective investment scheme in Clause 229, and for determining whether someone is carrying on a regulated activity which includes establishing and operating a collective investment scheme in accordance with paragraph (8) of Schedule 2.

Finally, I turn to Amendment No. 254YK. As the Committee is aware, Clause 264 of the Bill contemplates individually recognised overseas schemes becoming recognised schemes. The provisions of the clause are unclear as to whether such schemes

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must have a trustee or depository. The amendment is intended to make it clear that, if the scheme takes the form of an open-ended investment company, it must have a depository; and if the scheme takes some other form, it must have a trustee or depository. That would be consistent with good market practice and would be for the protection of consumers.

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