Lord Hodgson of Astley Abbotts: Of course it closes the distance between us, but what it does not do is make clear why we need paragraphs (a) to (c) of

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proposed new Section 292C. In my view those paragraphs cover all these things, so in my view adding more to them means that you are trying to force a regulatory system on to a new type of investment that does not fit with it at all well. On Monday next we shall be talking about the financial promotions regime and all that goes with it. Once an adviser says to the trustees, “How does this compare with regulated financial markets?”, they will say, “We need to be exceptionally careful”. You will find that the costs that apply to the regulated financial markets will be applied to social investments, most of which are quite small. We are still finding our way through, but there will be a very high fixed cost that will make it almost impossible for people to bring these ideas forward. If it is accepted, when trustees look at this amendment they will say, “Is it the same as an undertaking in the regulated financial markets?”. They will be scared off by their advisers. I hope very much that my noble friend will not accept the first part of the amendment.

I turn to the second part of the amendment, which states,

“consider whether there is a conflict between the investment vehicles”.

Every single investment decision has an option. There is never one thing you can buy. Are you going to buy BP or Shell? You have to think about how to deal with that. The way it is dealt with is by diversification—not putting all your eggs in one basket—and by a readiness to accept risk. That is the way to do it and it is the way that trustees should do it. They should not be forced through further hoops or jump over hurdles because of additional things being added to the Bill at this stage.

At the very least, the chilling effect of Amendment 20, if it were accepted, would be stupendous. I will give the Committee an example: when we were doing the review, we came across a case of a £100,000 investment going to a charity that was going to relieve third-world poverty. The charitable investment was to be made to enable local people to produce goods that could be sold. If it worked, the charity would get some money back because it would have proceeds from the sales. By the time the charity had gone through all the due diligence recommended by the serried ranks of investment advice, it was £40,000. The trustees said, “What on earth are we doing this for? Why do we not just give the money?”. And, as I shall say more vehemently still on Monday, we have got to a situation where I can give the noble Lord £100,000 for his charity but I cannot invest it because I might get some money back. That simply cannot be sensible. That I could get 5% or 10% back—a small return—must be encouraged, as opposed to giving it for ever.

I hope very much that my noble friend will not accept these amendments, not because I do not think that they are important points; indeed they are. There will be scandals and difficulties in this emerging market but we must trust trustees. They have the framework and they must take the decisions. That is what they do and should be encouraged to do. We should not be trying to guide them and say, “Don’t worry about this and look after that”. They must be given the self-confidence to take the decisions on their own account.

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Lord Cromwell: Perhaps I may have one more try at this. I hear what the noble Lord says but I have to say to him that I think that trustees should be careful. Batting this aside and saying, “Oh, there will be scandals and mis-selling” is not the approach that perhaps he meant. I could offer one further comment that may be helpful. The FCA currently offers guidance to investors on proportional investing—that is, the sort of recommended amount that it would say you should put into a particular type of investment, be it a private equity fund, a structured product or whatever. Perhaps here there is something about which the Minister could talk to the FCA. A social investment could be a very exciting but possibly, in risk management terms, relatively modest part of an investment portfolio. I still stick to my dictum that trustees are required to be careful. On the prospect of the noble Lord giving me £100,000, I would be very happy to discuss it with him afterwards.

Lord Watson of Invergowrie: My Lords, I was slightly taken aback by the response of the noble Lord, Lord Hodgson of Astley Abbotts, to Amendment 20. We believe that these amendments would enhance the Bill. In respect of the noble and learned Lord, Lord Hope of Craighead, who is a signatory to Amendment 20, perhaps I may further record my congratulations on his election as Convenor of the Cross-Bench Peers. New Section 292C(2) to (4) covers the scope of the duty applying to trustees. This will apply in relation to social investments made after this part of the Bill comes into force, whether or not these were made by the exercise of the new statutory power. The duty in the Bill will require charity trustees that have existing powers to make social investments to adapt their current processes in so far as they do not currently comply with the duties set out in the aforementioned sections.

The Bill is not clear as to how the duty in new Section 292C would apply where the trustees delegate their power. We believe that Amendment 19 offers clarification on this point. The section does not take into account that larger charities are more likely to want to set a social investment policy at board level and delegate to staff the responsibility for putting the policy into practice when implementing individual transactions.

Amendment 20 adds two further requirements that charity trustees must consider before exercising the power to make a social investment. I can only echo the comments made by the noble Lord, Lord Cromwell: surely it is important that care is taken and that trustees are absolutely clear that they are doing what is in their charity’s best interests. This amendment would require trustees to reflect on what type of investment they are making and the associated level of regulation, risk, concentration versus diversification and the type of qualified advice that was taken, all of which seems to be sound common sense. I cannot ascribe to the chilling effect that the noble Lord, Lord Hodgson of Astley Abbotts, suggested.

7.15 pm

Lord Hodgson of Astley Abbotts: Does the noble Lord accept that charity trustees now understand that if they are making financial investments they must get

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advice? Do we need to write into the Bill that charity trustees ought to get appropriate advice before making financial investments? It is understood that they must do that—everyone understands that. All that is happening here is that social investment will have exactly the same requirements. At the moment, everyone understands that if you are going to make financial investments you will take advice. You will now take advice over social investments too. It does not need special categorisation. If it were categorised especially, people would start to say, “That is more difficult. We should not do it”.

Lord Watson of Invergowrie: Of course I accept that advice would be taken; advice has been taken with normal investments up to this point. However, we are going into new areas here and, at least at the start, there needs to be caution and careful consideration by charity trustees. I do not think that because something is in the Bill it will have a chilling effect. If, as the noble Lord, Lord Hodgson, says, it is being done anyway, I do not see a problem. However, some charities might not be as circumspect as others and I would like to see that measure in the Bill as a back-up.

The amendment would require trustees, in deciding whether a social investment would be in the interests of the charity, to consider how far they think a social investment would further one or more of the charity’s purposes and to consider the financial return. The trustees would have to be comfortable with the social investment.

As I say, I was rather taken aback by the noble Lord’s response. I defer to his vast experience in this field, and in many other aspects of the Bill I have agreed with most of what he has said; that is why I was rather surprised. However, it is perhaps important to ask the Minister what consultations he has had or intends to have—I hope he has had them—with the charity sector on this point. Equally, we should consider the point made by the noble Lord, Lord Cromwell, about meeting with the FCA in future.

We have now completed three days in Committee on the Bill and, unless I have missed them, there have not been any concessions by the Minister, which is quite unusual. The wording of the Bill is not beyond improvement and I invite the Minister to bear that in mind—hopefully, in relation to these amendments—when we return on Monday. The point of the Committee is to seek to improve the Bill. We are not dealing with different political agendas on the vast majority of the amendments, and I hope that the Minister will take these comments in the spirit that I have made them.

Lord Bridges of Headley: I thank the noble Baroness, Lady Barker, and the noble Lords, Lord Cromwell and Lord Watson, for their contributions. As to what the noble Lord, Lord Watson, has just said, I have said that I will consider a number of amendments. Obviously I am always looking for ways in which we can improve the Bill. Before I turn to the amendments, I too would like to put on the record my congratulations to the noble and learned Lord, Lord Hope, on his election as Convenor of the Cross Benches.

I thank the noble Baroness, Lady Barker, for drawing attention in Amendment 19 to the important role of a charity’s beneficiaries, as well as its wider stakeholders,

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in the process of good governance. Trustees would be well advised to maintain close contact with their stakeholders and to make sure that they understand the full range of views that such a broad group is likely to represent.

As to social investment, there is a clear duty on trustees to consider all the circumstances relating to the proposed transaction before deciding whether to take advice and from whom. The scope is deliberately wide and inclusive, such that if it is determined that beneficiaries or other stakeholders should be asked for advice, there is no impediment to this course of action. However, the breadth encompassed by the duty does not benefit from an enumeration of the range of possible advisers to whom trustees might turn. It might also lead to practical difficulties relating to identifying the relevant stakeholders, as well as ambiguity as to what is represented here by the term “reasonable”, a point made by my noble friend Lord Hodgson. I hope that the noble Baroness will be content that the aspiration and intent are there in the Bill and will feel able to withdraw the amendment based on this existing breadth.

With regard to Amendment 20, I thank the noble Lord, Lord Cromwell, for his extremely thoughtful and thorough speech, which I will read with care in Hansard. My understanding is that the amendment’s intention is to strengthen the duties of trustees relating to the financial characteristics of social investments, and in particular that they should make a comparison with any similar investments that are subject to a stronger regulatory regime and satisfy themselves that the proposed social investment is suitable. The intention, I understand, is to prevent any potential regulatory arbitrage whereby minimal mission benefits might be used as a pretext for making, in effect, financial investments that would not pass muster if they were pure financial investments.

I am in full agreement with the intention here: to ensure that where social investments are made, they are undertaken for the right reasons and with proper analysis of both the mission benefits and financial returns. It would clearly be of detriment to the nascent market in social investments if the social aspect were to be used as a fig leaf to pass off financial investments that would otherwise be unsuitable. So I thank the noble Lord for raising this issue. However, I do not believe that that would be the effect of the Bill.

Under the current law, when making a financial investment the trustees of a charitable trust must comply with three principal investment duties under the Trustee Act 2000: first, to consider the standard investment criteria—namely, the suitability of an investment and diversification of investments in a portfolio; secondly, to take advice unless it is reasonable not to do so; and, thirdly, to review the trust’s investments from time to time.

Sometimes, but not always, a social investment will be an “investment” under the Trustee Act 2000 and the three investment duties will apply to the social investment. The Law Commission reported:

“There was general agreement amongst consultees that the duty under the Trustee Act 2000 to consider the standard investment criteria (suitability and diversification of investments) created

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difficulties for trustees making social investments and should be removed, or at least tailored to suit social investment, but that the duties to review investments and to consider obtaining advice were appropriate”.

In relation to the first duty, the Law Commission said:

“A particular problem is the duty to consider diversification of investments, as part of the standard investment criteria. A social investment is unlikely to play a part in a diversified portfolio, because it is selected not with a view just to financial return but also for the mission benefit that it will produce. When compared with a mainstream financial investment, a social investment may carry a particularly high risk or it may be unjustifiably large within a charity’s investment portfolio (or conversely, unjustifiably small and disproportionate to the fixed transaction costs), and all the more so where the expected financial return is modest”.

The Law Commission concluded that the second and third duties were, with some modification, appropriate for social investment. The commission therefore recommended tailored duties which are set out in the Bill. It said:

“The new duties, being tailored to social investment, should apply in place of the duties imposed on trustees by the Trustee Act 2000”.

For completeness, I should say that in so far as there are any other duties on charity trustees in respect of financial investments, the Bill does not change them, so classifying a financial investment as a social investment would not change those duties. All the Bill does is exclude the Trustee Act investment duties if they would otherwise apply. It may be that the Trustee Act investment duties would not have applied to a social investment in any event. For example, if the charity takes the form of a company rather than a trust, the Trustee Act investment duties will not apply.

I return to the question of whether there would be any regulatory arbitrage; whether a social investment could be used as a fig leaf to pass off financial investments which would otherwise be unsuitable. The new duties are not less stringent for social investment; rather, they are tailored to social investment. The Bill has been drafted such that both sets of duties would generally produce the same result.

Tailoring the duties means that trustees do not have to try to shoe-horn a social investment into the Trustee Act regime for financial investments. The Law Commission reported that this approach,

“creates consistency between the duties that apply to financial investment under the Trustee Act 2000 and social investment, whilst properly catering for their differences”.

While in theory unscrupulous trustees might try to justify an inappropriate financial investment under the guise of a social investment, I do not think that

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they would succeed in this endeavour; the tailored duties should still produce a sensible result that showed the transaction to be inappropriate. Furthermore, the Charity Commission and the courts would be astute to shams; they would look at the substance of a transaction and if it is a financial investment, the trustees will be expected to comply with the financial investment duties. Taken as a whole, I believe that the Bill already contains sufficient safeguards in respect of financial regulation. In response to the good point made by the noble Lord, Lord Watson, about the FCA, I am happy to talk to the authority and to other financial advisers about this new power. I hope that the noble Lord, Lord Cromwell, feels comfortable about not pressing the amendment.

Baroness Barker: That was a useful go-round. This is a very complex subject and it is extremely helpful to get the Minister’s words on the record, not least because I am sure there will be court cases and legal challenges to the investment decisions that trustees make. Some of those investments will turn out to be losers, so it is important that we have on record as much as possible the steps that we believe it is right to expect trustees to take. As the noble Lord, Lord Hodgson of Astley Abbotts, said, this is different from straightforward financial investment. We cannot take a direct read-across from the work of organisations such as the FCA and put it into this Bill. None the less, it is important. I am glad to have established in the form of a statement from the Minister that one would reasonably expect trustees to have consulted with stakeholders and beneficiaries before putting some of their assets into this form of investment. I take his words at this stage and beg leave to withdraw the amendment.

Amendment 19 withdrawn.

Amendments 20 and 20A not moved.

Viscount Younger of Leckie (Con): My Lords, I think this may be a convenient moment for the Committee to adjourn. The Committee is due to return to reconsider this Bill on Monday 6 July.

The Deputy Chairman of Committees (Lord Haskel) (Lab): My Lords, the Committee stands adjourned.

Committee adjourned at 7.28 pm.