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Mr. Cousins: Does the hon. Gentleman accept two things? First, does he accept that limited liability partnerships have been introduced to protect people involved with audit firms? Secondly, does he accept that the motivation behind the exclusion clause in the 1985 Act was the fact that those who remove financial hazards create moral hazards?
Mr. Mitchell: The hon. Gentleman is right about the creation of a new form of company, but wrong in thinking that it works in these circumstances. If he will bear with me, I hope I will be able to carry him with me.
There are only four auditors left who can audit our largest companies. It is therefore important not only to make sure in so far as we can that those four remain, but, if possible, to encourage new entrants to make the necessary investments to take on the audits of larger companies.
The Government recognise that the problem is a real threat to the stability of the audit profession, and indeed to the UK corporate sector. Today, they have finally responded, very negatively, to the consultation on auditors. It is widely believed that DTI Ministers understand and accept that the liability must be capped, but are being restrained from taking the necessary action by their colleagues in the Treasury. In Committee the Conservatives will table a range of amendments for the Government to choose from, so that the Government can discharge their responsibilities to the UK corporate sector.
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Mr. Austin Mitchell : I do not want to restrain the hon. Gentleman's headlong rush into this folly, but does he accept that most actions against auditors are pursued by the insolvency arm of the big four, which is anxious to recoup fees and other money from the auditors of another arm? Where will this end? If we cap the liability of auditors, why cannot motor manufacturers or insurance companies, or any other section of society, say, "We want our liability capped?" Why should we give so much to a group that is making enormous profits from selling other services that often produce the problem?
Mr. Andrew Mitchell: The hon. Gentleman did not listen to what I said earlier, which explained precisely that point. I can think of no other group of men and women who cannot go to the market to receive insurance to cover those risks, apart from the big four audit companies. The reality of section 310 of the 1985 Act is this: if, God forfend, there is another collapse and one of the auditors goes down, there will then be only three. There will certainly be no new entrants to the market. There will be a systemic failure in the governance of our major companies, with all that that means for the corporate sector, for savers, for pensioners and for others who depend on it.
One of our amendments—I have made it clear to the House that we will submit various amendments—in the best tradition of the deregulatory agenda championed by the Conservative party, would amend or scrap section 310 of the 1985 Act. That would allow markets to reach a conclusion and would be a deregulatory and permissive measure, subject to negotiation between willing parties. There would almost certainly be a role for the CBI and the Financial Reporting Council in bringing together all the relevant parties, and there would also be full transparency in respect of any contractual arrangements.
There are of course other ways of limiting auditors' liabilities, but the important point is that they should no longer be unlimited. Leaving the matter to a later date, as the Government's response today envisages, increases the very real risk of one of the large firm's failing, and of consequent damage to confidence in the UK capital markets. That, in turn, would cause huge damage to savers.
We have a lot to examine in our two days in Committee and on Report. The Bill has already benefited from some improvement in the Lords, but we remain very concerned about the Government's failure to introduce the long-promised company law review, and about the way in which CICs have been tacked on to the Bill. Those issues are small parts of what should be two major and separate Bills, and we greatly regret the Government's failure to tackle the important issue of auditor liability.
We are committed to ensuring that the UK is the best place in the world to do business, which means achieving the correct regulatory balance. The continuing delay in the overhaul of company law will certainly not improve the UK's competitive position. As in so many other areas, this Government have lost an important opportunity and failed to measure up to the challenges before us.
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Mr. John Battle (Leeds, West) (Lab): I generally welcome the Bill and I note in passing the Opposition's willingness to see it progress to consideration in Committee, despite their having serious reservations about it. The first part deals with the organisation and regulation of auditors of companies, and the second and substantial part, which consists of clauses 24 to 61, is concerned with setting up a new form of company, known as a community interest company. CICs will build on Britain's experience of social enterprises, which provide new kinds of mutual companies that offer support, goods or services to particular groups in our communities.I welcome and look forward to the setting up of these CICs.
The Bill could provide a new instrument to help in the economic development of communities. In talking about community development, we often miss out the crucial word "economic". Such development is central, and vital in ensuring that our communities have a future. We can talk for ever about social work in the best of all senses, but without genuine micro-economic development our communities will have no future. So I welcome the introduction of another such instrument, and in that regard I do not take quite such a dim view as the Opposition.
I hope that CICs will not be overlooked, not least because in the other place, gladly, most Members seemed to be satisfied with the detailed provisions relating to them. I would not like this issue to die through lack of interest in the House or in Committee, or for the real potential of CICs not to be recognised outside this place. The Social Enterprise Coalition welcomes the introduction of CICs, as does the new West Yorkshire Social Enterprise School. In her introductory remarks, the Minister talked about the difficulties associated with forming companies before Gladstone's Act. I should point out that, even now, it is difficult to set up companies. It can take up to a year for even a well-developed proposal to be turned into a business proposition that gains acceptance. However, CICs would cut through that difficulty, and well-developed proposals could get through in days. Encouraging people to set up more businesses more quickly is to be warmly welcomed.
The CIC will be used primarily by non-profit enterprises that provide benefits to the community. Such enterprises will have to define what those benefits are. Traditionally, social enterprises provide community services such as child care, housing, services for the elderly, leisure services and community transport. As we know, existing social enterprises, like traditional private businesses, are usually companies limited by guarantee and share ownership. However, the new vehicle of the CIC will enable those working specifically for the benefit of the community to do so within the relative freedom of a non-charitable organisation; they will not be limited by the restrictions of charity law. Those of us who have been involved in charity law know how constricting such restrictions can occasionally prove. At the same time, a clear assurance of non-profit distribution status will be offered.
I should point out to the Minister that we need to spell out to people—be it in Committee or at a later stage—what non-profit distribution status will actually mean, so that they can be encouraged to join in. In order to set
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up a CIC, a proposed company will have to satisfy a new community interest test. It will have to show that it will pursue purposes beneficial to the community and will not serve a restricted group of interests, so the key test will be the provision of services to the community. That could prove incredibly innovative. New kinds of services and blends of services and goods could be provided. The primary interest will not be the promoting of a trendy name for a company and the floating of a new brand in order to see how it goes; nor will it simply be a question of keeping a good idea for a business ticking over, or of providing employment for those who work for the company. The focus will be not just on jobs for paid employees, but on how the business will benefit the community.
CICs could prove a very innovative generator of micro-businesses. I accept that they will not wipe out the residue of unemployment, but they could spark some new ideas and ways of providing goods and services in our neighbourhood communities. They will be wider in scope, but simpler and clearer, than the traditional charitable test of public benefit.
Some immediate benefits arise from CICs. When a proposal is put together, it will be easier for other investors, supporters and public bodies to back it. In other words, it will be easier to attract funds in the first place. At the moment, there is some haziness so far as charities considering their trading options are concerned. It should also be easier to engage individual people, who will be able to become economic participants in companies in their neighbourhoods. They will be able to buy shares in a community enterprise, which is to be welcomed. Such companies will be able to act like proper companies—pay their directors, change the nature of their activities—but they will also have to meet the reporting and accounting requirements associated with being a company. That is also to be welcomed.
In the other place, the Minister emphasised that
"CICs should resemble other companies as far as possible in terms of the way in which company law applies to them.".—[Official Report, House of Lords, 25 March 2004; Vol. 659, c. GC354.]
So they will still be under company law, but we need to spell out not just the legal details of how to set up a CIC; we also need to give general advice on the benefits of a CIC to a neighbourhood. For example, what would be the gain in terms of regenerating our urban neighbourhoods in particular? What are the benefits associated with blending together workers and volunteers to provide goods and services locally? The new corporate vehicle that the CIC could become should make it simpler and easier to set up a local business whose profits and assets are used for the benefit of a given neighbourhood and community. That is why the special feature of the CIC's statutory lock—as we now refer to it in technical terms—on profits and assets is important. It sends a clear signal to ordinary people who might want to buy a share that their investment is safe. They are investing in their neighbourhood not to walk away as millionaires at the end of it, but to contribute to building up the community. That is where the lock on profits and financial assets as well as the cap on dividends is such a positive attribute of the CIC.
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Basically, CICs will ordinarily be prohibited from distributing any of their profits to their members and I understand that, when the CIC is wound up, its residual assets will not be distributed to its members, but will remain in the community. If I understand it rightly, the assets will be passed on either to other CICs or to other charities in the neighbourhood, so the assets will remain in the locality. That is rather different from other co-operative ventures—the provident societies and other kinds of mutuals—to which the hon. Member for Sutton Coldfield (Mr. Mitchell) referred. Locking the assets into the community provides a different feature—an insistence that the assets are reinvested locally, even if the company goes under.
There was a debate in the other place about the implications of charity law and charities, but we do not need to get bogged down by it. We need clarity and to be able to give good advice about what non-profit distribution status actually entails. Already some charities providing services that budget from month to month or hand to mouth are looking into the trading possibilities. They need to be clear about what the new option actually means. I know that there are further proposals to reform charity law, but we do not need to wait for them. I believe that we can get this vehicle up and running in the meantime.
A letter from the charity commissioners supporting the Government's approach was quoted in the other place and is worth repeating. The letter said:
"It is not always clear-cut when a particular form of object is charitable or not. That is, perhaps, particularly so in the area of social enterprise where many CICs are likely to operate, and where ideas as to what should, and should not, be regarded as charitable are evolving. Our understanding is that there is a demand for a form of company where the promoters can be certain that, notwithstanding the public interest element, the company will not fall within the framework of charity regulation."
It is the freedom there that is important, without getting bogged down in the constraints of charity law. That is what we should focus on and emphasise at this point. I particularly underline the word "evolving" in that letter. I have dealt with charity law for many years, so I know that it has been evolving and I hope that it will continue to evolve, as will the nature of businesses, social enterprises and community businesses. It is right and proper to move forward and not hold back in the vain hope that we can fix all the law so that businesses will fall into line to suit the needs of the people in the future. It will not happen that way round.
We therefore need rather more clarity about the status of a community interest company. It is not a charity, so a donation to a CIC will not attract tax relief, to give a practical example, whereas a donation to a charitable trust of which a CIC is a trustee will be eligible for relief. Those issues are important for people who deal with charitable status and they must have clarity at an early stage, so that they know whether to move into CICs or even whether to take an interest in them rather than be frightened off by them. If we do not provide more clarity about the relationship between CICs and the difference between them and charities, it might put people off.
Transferring existing companies into CICs or setting up CICs for charities requires particular clarity in respect of the financial benefits. We must be able to spell out what it means when a CIC is established for a
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charitable purpose without being a charity, as it states in the Bill, so that ordinary people who want to set up businesses are not frightened off by feeling that they are going into a morass of charity law or an enmeshing argument between business law and charity law. I want people to be enthusiastic, to see the benefits simple and clear and to move forward to have a go. We need the new legal entity to be as simple and as uncomplicated as possible so that it is clearly understood not only by people in communities that might get engaged in these companies, but—dare I add—by banks and other businesses that will deal with them and will also want to know that the rules of the game are clear. Let us remember that it is a new option for organisations seeking a flexible form that will not be restricted by traditional charitable status, so it should be of benefit to communities.
As said in the other place, we should not see the new CICs—I am already falling into the acronym for community interest companies—as a brand for all social or co-operative ventures or mutuals. It is another form within that family, which we should experiment with and support. The difference in the Bill between the non-profit distribution service and charitable status benefits needs spelling out rather more clearly.
I have already said that there was a debate in the other place about the difference between a community interest company and a charity, particularly the benefits or otherwise of charitable status. That relates to tax reliefs, mandatory reliefs and all the rest of it. The noble Lord Sainsbury spelled out that clause 23 is in the Bill to ensure a clear distinction between the new type of company and charities, but I have to say, in all honesty, that I do not fully understand the distinction. I doubt whether it has the practical clarity that he claimed for it. However, I understand and accept the intention to regard the CIC as a new instrument rather than simply a revision of charity law that will arrive later with the forthcoming Charities Bill. CICs should be regarded as an alternative or a new model that we should experiment with. They will be able to trade and behave in enterprising ways as other businesses do.
My main point is that while it is right to focus on the regulation and the legal framework of the CIC, that should not overshadow encouraging people to set them up. I am in favour of making use of this new instrument and encouraging more people to set up new businesses—not the opposite. I do not want people to be warned or frightened off. There is almost a tendency to discuss getting the disposal of a CIC's assets right before convincing anyone that they should try to set one up. I welcome the establishment of a regulator and the forthcoming detailed regulations, but at this stage we should be advertising the benefits to convince people to have a go.
My constituency of Leeds, West is a sort of pizza slice coming out from the city centre towards Bradford and the ring road. It is on the south-west of the city and, amazingly, if we examine the structure of cities in Britain, we find that small businesses often cluster in the south-west corners. The heavy industry tends to be, for some reason, on the eastern side of cities. In my neighbourhoods of Armley, Kirkstall, Wortley, Farnley, Burley and Bramley, there are more than 400 small businesses, most of which employ fewer than 10 people. I was surprised to discover how many small
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businesses and family firms—some going back more than 100 years—have been based there. One or two have moved out nationally, but there could be an entrepreneurial gene in the water in west Leeds, which we should encourage and build on. We want more businesses to come forward.
At the same time as small businesses are developing, the needs of the people are increasing, particularly in respect of care for the elderly, the sick and the young. We have good voluntary bodies working locally—whether it be Bramley elderly action, Armley helping hands, the Burley 2000 or the Farnley elderly group—but I see no reason at all why new mutual forms of business cannot be engaged in all that, particularly in view of the community focus. The introduction of Sure Start projects in Bramley and Burley is welcome, and a healthy living project supplements the work of the new primary care trust, but much more remains to be done, especially in the provision of caring services. Help is needed with shopping and gardening, and with the provision of nurseries and play services. I see no reason why that cannot be part of the structure of businesses formed through CICs.
The decline of local family shops has led to units in community shopping parades being boarded up, but people still need fresh food, healthy eating options and even farmers markets. Where there is little in the way of entertainment for local people, the provision of cinemas, theatres and music venues could be part of the new initiative.
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