Seventh Standing Committee on Delegated Legislation
Tuesday 20 March 2001
[Mr. Jonathan Sayeed in the Chair]
Draft Open-Ended Investment Companies Regulations 2001
The Economic Secretary to the Treasury (Miss Melanie Johnson): I beg to move,
That the Committee has considered the draft Open-Ended Investment Companies Regulations 2001.
The regulations set out the legal framework for the establishment, carrying on and regulation of open-ended investment companies, or OEICs as they are more commonly known. By way of background, I should explain that an OEIC is a type of company whose business is investment in securities, such as the shares of other companies. It issues shares to its investors and its capital may go up or down as shares are issued or cancelled. Its investments are managed by a fund manager, who must be authorised by the Financial Services Authority.
The assets of an OEICthe investments that it ownsmust be held by a depositary, which must also be authorised by the FSA. The depositary plays a key role, similar to that of the unit trust trustee, and must be legally independent of the directors of the OEIC. That independence requirement is an important feature of investor protection. That is part of a robust framework of protection for investors within which OEICs already operate. The investment assets of the OEIC must be well distributed to spread investment risk, and the OEIC itself and the key players must be authorised.
Those principles were established in the existing regulations governing OEICsthe Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations 1996. The regulations before the Committee today largely replicate the existing regulations, but they also rationalise and modernise the regulatory structure for OEICs. The regulations represent an important liberalisation. They will pave the way toward extending the range of authorised OEICs available for sale in the UK. It will be for the FSA to determine the categories of funds that may be established as OEICs. For the moment, only those that invest in transferable securitiesthat is, stocks and sharescan be marketed to the general public. However, the providers of funds want to take advantage of the economic and marketing benefits of OEICs for a wider variety of fundsfor example money market funds that can be used as a convenient and stable way of parking investment assets.
The Government believe that fund providers should be able to offer as wide a variety of fund types as is prudent. Many in the investment funds industry eagerly await this extension in the range of OEICs available. This is a win-win situation. By opening up the scope for fund providers to offer a wide variety of funds in OEIC form, the regulations will give fund providers an efficiency advantage. Moreover, customers will have the advantage of more choice, with no detriment to investor protection.
A further significant change introduced by the regulations is an extension in the role of the FSA to act as a single point of contact on OEICs. As well as regulating OEICs, it will be responsible for registering OEICs and maintaining the register of OEICs. Under existing regulations, the registration of OEICs is undertaken at Companies House. That is a cumbersome and unnecessary split of responsibilities. The new provisions represent a significant rationalisation, which has been welcomed by the investment funds industry.
The regulations simplify matters by ensuring that the provisions for OEICs are broadly the same as those for unit trusts as set out in the Act. So there should be no significant divergence in the regimes governing authorised unit trusts and OEICsa divergence that could cause confusion and potential costs. In addition, a consistent approach by the FSA will benefit those providers who choose to offer both unit trusts and OEICs. To minimise disruption for providers, companies constituted under existing regulations will be treated as formed under these regulations. There has been extensive consultation in recent years on the regulation of OEICs and we are grateful for the detailed work that respondents have undertaken on these complex regulations.
The OEIC is a modern, flexible and transparent investment product. It has proved popular in the relatively brief period for which it has been available. The regulations will result in greater potential flexibility and choice for investors because of the range of OEICs available. They set a firm foundation from which OEICs can go from strength to strength. In my view, the regulations are compatible with the convention rights within the meaning of the Human Rights Act 1998. I commend the regulations to the Committee.
Mr. Howard Flight (Arundel and South Downs): I welcome you to the Chair, Mr. Sayeed.
The industry is generally quite satisfied with the regulations. There seems to have been pretty full consultation between the Treasury and, in particular, the Association of Unit Trusts and Investment Funds and other parts of the industry. The final text, as the Minister commented, broadly mirrors existing regulations and the provisions of the Financial Services and Markets Act 2000.
I have a few small points and questions that are worth placing on the record, but nothing of great length. First, there is relief that these long-awaited regulations are in place and will allow the formulation of a wider range of open-ended investment companies. Many businesses have delayed launching their OEICs while only the initial restricted range of securities funds was permitted. The new, extended range offers much wider opportunities for the industry.
The original objective of OEICs was to provide a UK-based investment fund vehicle that could be marketed in euroland, but has unfortunately not yet been achieved, because they do not compete effectively with Dublin or Luxembourg undertakings of collective investment trusts, where interest can still be paid gross. If the Treasury hopes that OEICs will become a major UK vehicle that is sold in Europe, there will be sadness and disappointment. However, they have already been successful in the UK: about a third of the retail funds in existence, about £260 billion, are now OEICs.
We particularly welcome the news that the FSA will start to accept applications for authorisation ahead of N2, whenever that happens. Those early application arrangements will enable firms that want to launch new OEICs, or convert their existing unit trusts, to proceed on the basis of much greater certainty during the coming months. We look forward to that, and I should be grateful if the Minister would comment on when the FSA might start that process.
There are issues about stamp duty and stamp duty reserve tax. In essence, the exemption from those on the conversion of a unit trust to an OEIC will continue for the time being. That was organised back in May 1999, when the original cut-off date was June 1999. It is, however, important that that exemption should, in principle, stay open for as long as it is needed, because regulation 1(2) sets three separate dates for the coming into force of different parts of the regulations, depending on the commencement dates of the relevant parent sections of the Financial Services and Markets Act 2000. Again, I ask the Minister for some comfort on that point. It would be helpful to have confirmation that any new stamp duty regulations will not start the clock ticking for the final phase of the exemption until all parts of the Treasury's OEICs regulations have come into force and the FSA's collective investment scheme sourcebook is also fully operational.
The categories of funds that will be permitted for OEICs are set out in the CIS sourcebook. They include money funds, funds of funds, futures and options funds, geared funds, options funds and property funds, but I am disappointed that, for some reason, feeder funds have not been included. Unit trust feeder funds are currently permitted, but only in the context of personal pensions. The Treasury and FSA do not seem to be proposing to allow an OEIC feeder-fund category. I may have misunderstood that point, so it would be helpful to have clarification, or, if I am right, an explanation of why feeder funds have not been included.
The Treasury has given personal pension unit trusts, including feeder funds, a temporary reprieve by including them in the regulations for individual pension accounts, which is helpful in the short term. However, it has announced that it will review the provisions with a view to removing them, and the feeder fund category for unit trusts, in 2003. A review is welcome, but the announcement that the feeder fund category is to be removed creates unnecessary problems. It would be helpful to hear a reassurance that an alternative vehicle will be available, and we believe that the Treasury should discuss the implications of that with the industry as soon as possible.
My final point concerns terminology. There is no legal issue, but the new regulations, with one exception, have dropped the term ``investment company with variable capital''. The exception is regulation 55(1)(d), which requires every OEIC to state on company documents that it is an investment company with variable capital. The requirement stems from the second European Union company law directive, which allows derogation from the capital maintenance requirements for companies with variable capital, provided that they make their status clear on their documents. The change in terminology initially caused some confusion, although the regulations probably ended up clearer on the whole. The FSA's collective investment scheme sourcebookthe successor to the old unit trust regulationswill continue to refer to investment companies with variable capital. It is not a hugely material point, but it would be nice if it were standardised in the drafting, Treasury and FSA approach.
With the particular exception of the feeder fund issue, the regulations have been well received and cover everything that is necessary.