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Lord Saatchi: My Lords, I am grateful to noble Lords who have taken part in the short debate on this important scheme which we fully support. As I said, we see some anomalies. I can understand the merit of the amendment in the name of my noble friend Lord Hunt. He has highlighted a key point about the vagueness of the concept of a breach of a notional contract. I was encouraged by the Government's response.

However, having heard my noble friend Lord Hunt and other noble Lords describe the many merits of their amendment, I am even more confident about the merits of our amendments. The noble Lord, Lord Borrie, said that he wants more informality. That is fine. But we want more balance--if that means more formality, we say, "So be it"--so that the ombudsman will not be able to uphold complaints where a firm has observed all the FSA's rules and will be able to make claims against an unreasonable and improper complainant. I should like to test the opinion of the House.

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10.45 p.m.

On Question, Whether the said amendment (No. 161YA) shall be agreed to?

Their Lordships divided: Contents, 17; Not-Contents, 86.

Division No. 2


Astor of Hever, L.
Blatch, B.
Boardman, L.
Burnham, L.
Dundee, E.
Henley, L. [Teller]
Home, E.
Kingsland, L.
Lindsay, E.
Mackay of Ardbrecknish, L.
Montrose, D.
Moynihan, L.
Northbrook, L. [Teller]
Northesk, E.
Norton of Louth, L.
Saatchi, L.
Skelmersdale, L.


Acton, L.
Alli, L.
Amos, B.
Archer of Sandwell, L.
Bach, L.
Bassam of Brighton, L.
Berkeley, L.
Blackstone, B.
Borrie, L.
Brett, L.
Brooke of Alverthorpe, L.
Brookman, L.
Burlison, L.
Carter, L. [Teller]
Chandos, V.
Christopher, L.
Cocks of Hartcliffe, L.
Cohen of Pimlico, B.
Craig of Radley, L.
Crawley, B.
Davies of Oldham, L.
Donaldson of Lymington, L.
Dormand of Easington, L.
Dubs, L.
Elder, L.
Evans of Parkside, L.
Farrington of Ribbleton, B. [Teller]
Faulkner of Worcester, L.
Filkin, L.
Gale, B.
Gavron, L.
Gilbert, L.
Goldsmith, L.
Gordon of Strathblane, L.
Goudie, B.
Gould of Potternewton, B.
Grenfell, L.
Hardy of Wath, L.
Harris of Haringey, L.
Harrison, L.
Hilton of Eggardon, B.
Hollis of Heigham, B.
Howells of St Davids, B.
Howie of Troon, L.
Hoyle, L.
Hughes of Woodside, L.
Hunt of Kings Heath, L.
Irvine of Lairg, L. (Lord Chancellor)
Jay of Paddington, B. (Lord Privy Seal)
Lea of Crondall, L.
Lipsey, L.
Macdonald of Tradeston, L.
McIntosh of Haringey, L.
McIntosh of Hudnall, B.
MacKenzie of Culkein, L.
Mackenzie of Framwellgate, L.
Massey of Darwen, B.
Morris of Castle Morris, L.
Newby, L.
Pitkeathley, B.
Plant of Highfield, L.
Prys-Davies, L.
Ramsay of Cartvale, B.
Rea, L.
Rendell of Babergh, B.
Richard, L.
Sainsbury of Turville, L.
Sawyer, L.
Scotland of Asthal, B.
Sewel, L.
Sharman, L.
Sheppard of Liverpool, L.
Simon, V.
Smith of Gilmorehill, B.
Smith of Leigh, L.
Stone of Blackheath, L.
Symons of Vernham Dean, B.
Taverne, L.
Thornton, B.
Tomlinson, L.
Warner, L.
Warwick of Undercliffe, B.
Wedderburn of Charlton, L.
Whitaker, B.
Whitty, L.
Williams of Mostyn, L.

Resolved in the negative, and amendment disagreed to accordingly.

9 May 2000 : Column 1493

10.56 p.m.

[Amendment No. 161ZA not moved.]

9 May 2000 : Column 1494

Clause 225 [Awards]:

[Amendments Nos. 161A and 161B not moved.]

Clause 226 [Costs]:

[Amendments Nos. 161C and 162 not moved.]

Clause 232 [Open-ended investment companies]:

Lord Kingsland moved Amendment No. 162A:

    Page 122, line 28, at end insert--

("(4A) In determining whether the investment condition is satisfied, participation in the scheme shall be deemed to take place either at the time shares in, or securities of, BC first become available for purchase or subscription by investors or on any occasion thereafter on which the arrangements constituting BC are changed to a material extent.").

The noble Lord said: My Lords, Clause 232 sets out the new definition of open-ended investment companies. Amendment No. 162A is intended to raise a number of issues relating to the definition that we would like to have clarified.

As I said to your Lordships in Committee, broadly we welcome the definition but we believe that it has a potential flaw. The flaw is that the question of whether or not an entity is an open-ended investment company depends on the expectations of a reasonable investor participating in the collective investment scheme in relation to his ability to realise his investment.

The expectations of a reasonable investor may well differ depending on when the investment is treated as taking place. As a result, the categorisation of a collective investment scheme will depend not on the nature of the scheme itself but on what an investor's expectations may be at a particular moment in time.

I can illustrate that by reference to an example. The example assumes that subsection (4) of Clause 232 is not a desistance. An investment company is launched in year one and states that in year five it will redeem at net asset value the shares of any investor who wishes to have the shares redeemed. After year five there will be no further opportunity for investors to have their shares redeemed. I would suggest that at year one the company would not be an open-ended investment company because a reasonable investor in year one would not expect to be able to realise his investment within a reasonable period--five years being too long a period for these purposes. However, in year four a reasonable investor may expect that he would be able to realise his investment within a reasonable time--one year possibly being a reasonable period for these purposes.

Does that mean that at that point the company converts from being a closed-ended to an open-ended investment company? After year five, the opportunity for investors to have their shares redeemed would have passed. Investors would no longer have an expectation of realising their investment within a reasonable period. Does the company then become a closed-ended investment company again? I should be interested to hear the Minister's response.

In Committee the noble Lord said:

    "The investment condition operates in relation to the company itself. It does not concern a particular point in time at the end of the company's life. Focusing on that particular point in time does

9 May 2000 : Column 1495

    not give an impression of the nature of the company; it is the nature of the company that counts as far as concerns the definition in the new clause".--[Official Report, 9/3/2000; col. 944.]

That is a helpful statement but I believe that my example will have demonstrated that, inevitably, the question of whether a company is an open-ended investment company will be asked at points in time. At those points in time, the expectations of the reasonable investor must be considered and those expectations will change, leading to the consequences I have tried to illustrate.

Our suggested Amendment No. 162A deals with the issue by asking the question at the launch of the company, when shares in the company become available to purchase for the first time, and on each occasion thereafter when the constitutional arrangements of the company--typically, its articles of association--are changed to a material extent.

Minor variations to the articles of association--for example, to comply with listing rules--would be unlikely to result in a significant change to the constitution of the company. Therefore, we propose that those are ignored. The amendment is only a suggestion to meet the concerns that I have outlined.

When replying, I should be grateful if the Minister will deal with the following additional questions. First, when considering the reasonable investor and his expectations about realising his investment, is it necessary to consider the entirety of the investor's investment? In other words, if the investor has a reasonable expectation that he will be able to realise only half of his investment but not the whole of his investment within a reasonable time, would that satisfy the investment condition in subsection (3)?

Secondly, will the Minister please clarify what is meant by,

    "calculated wholly or mainly by reference to the value of property",

in Clause 232(3)(b)? If the realisation price was equal to a Stock Exchange quoted price for the shares, I assume that that would not be calculated wholly or mainly by reference to the value of property in respect of which the scheme makes arrangements. Does the reference to "property" mean the actual property of the scheme or property of the same kind? Perhaps the word "the" should be inserted before "property" to make that point clear.

Again, what is the position if part of an investor's investment is realised on a basis,

    "calculated wholly or mainly by reference to the value of property",

and part is calculated on a different basis?

One final point I should like to make is that the FSA will be able to give guidance under Clause 153 in relation to the interpretation of Clause 232, assuming that the FSA's power to give guidance with respect to the operation of the Act covers guidance on the interpretation of the definitions in the Act. However, any FSA guidance on the meaning of Clause 232 can

9 May 2000 : Column 1496

only ever be the authority's view of what the clause means. Only a court will be able to determine what meaning should be given to the clause. I beg to move.

11 p.m.

Lord McIntosh of Haringey: My Lords, I am grateful to the noble Lord, Lord Kingsland, for his recognition of the Government's achievement in Committee in framing a generally acceptable definition of an open-ended investment company, although he rather spoiled it by the criticisms that he made thereafter of what I thought had gained fairly general agreement, not only in this House but in the long and fruitful consultation with industry representatives. We thought then, and think now, that we have a robust, targeted and flexible definition of an OEIC.

I stress the flexibility because the definition has to serve a number of purposes. It describes the number of companies that can be incorporated and carry on collective investment; it determines the companies to which regulations are made by the Treasury and rules made by the authority in relation to OEICs supply; and more importantly it determines the companies constituted outside the UK that are caught by the rules and regulations relating to OEICs and to collective investment schemes generally.

Largely because of that final purpose--companies constituted outside the UK--the amendment proposed carries significant risks. It reduces the flexibility of the definition by putting a qualification on the investment condition leg. As the House will recall, the definition of an OEIC in Clause 232 is framed by reference to two conditions: property and investment.

The noble Lord, Lord Kingsland, asked about the property condition. As his amendment refers to the investment condition only, I hope that he will forgive me if I deal with the matter in writing.

The investment conditions contain a requirement that a reasonable investor would, if he were to participate in the scheme, expect that he would be able to realise, within a time appearing to him to be reasonable, his investment in the scheme. That allows his expectation in relation to participation at any time in the life of the scheme to be considered.

The amendment proposes that the clause should specify the points of time by reference to which a potential participant's view of his ability to realise his investment in the scheme can be considered. Participations would be limited to the times when the shares in, or the securities of the companies first become available for purchase or subscription, or when, thereafter, the arrangements constituting the company are changed to a material extent.

As I said in Committee, the definition deliberately does not specify a time at which the open-endedness of a company must be considered. It is important that the nature of the company can be judged at any time.

The amendment would exclude from the definition, for example, a company that offered investors no right to redeem their investments for the first, say, six

9 May 2000 : Column 1497

months after its shares became available for subscription. At that point, a reasonable investor would be likely to consider that, were he to participate in the scheme, he would not be able to realise his investment within a reasonable time. However, the same scheme could offer continuous redemption from the six-month point onwards without any change, material or otherwise, to the arrangements constituting it. But it would still not meet the definition of an OEIC.

Of course, it is essential that shares are capable of coming within the definition of an OEIC so that the rules and regulations covering collective investment schemes, for example in relation to the promotion of schemes, apply to it. Whereas Treasury regulations and FSA rules will determine the nature of OEICs that can be established in the UK, the definition has to apply to overseas established schemes as well, over whose constitution the UK authorities have no control. It is imperative that the OEIC definition is broad enough to cover a variety of such schemes that are capable of offering collective investments.

This is a new type of scheme that has been growing rather rapidly. The nature of OEICs that are being set up varies. If we were to start to lay down restrictions of the sort that are proposed by this amendment, we would run a serious risk of strangling the baby not quite at birth but in early infancy. We want OEICs to exist. They are valuable investment schemes. It is important that they should be allowed to exist and to be regulated. It would be a great shame if a restriction of this kind, which seems to be largely formalistic, were to endanger the possibility of new forms of OEICs that conform with the general definition that we agreed in Committee.

The noble Lord, Lord Kingsland, asked for an example of company changes over the years. Over time, it is perfectly possible for a company to change from closed-ended to open-ended investment. It is right that from time to time the assessment should be made. In that sense the definition is designed to be "ambulatory"--I believe I understand what that means. A hypothetical reasonable investor looks at the type of company in which he is considering investing and forms a view as to the nature of the company in the example given. The fixed term company will probably fall to be considered as a closed-ended company throughout its life, even though in its final year a view may be taken that redemption of the investment could be achieved within a reasonable period.

We cannot allow a loophole of the kind that would be provided by this amendment. More generally, the Committee will recall the government amendment in Committee which introduced a power for the Treasury to amend the OEIC definition should that become necessary. For that reason, restricting the definition, which this amendment would do, would run counter to the approach the Government are seeking to adopt here. We are deliberately looking for a broad and flexible definition, one that captures the essence of the beast while still allowing changes to be made if experience shows that they are needed. As I said in Committee, any order making such a change would be

9 May 2000 : Column 1498

subject to the affirmative resolution procedure. I hope that, on the basis of the arguments I have put to the Committee, the noble Lord will not press his amendment.

Finally, government Amendment No. 219 is a consequential amendment arising from the changes made in Committee to the definition of an open-ended investment company.

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