Small Business, Enterprise and Employment Bill

Debate between Lord Hodgson of Astley Abbotts and Baroness Neville-Rolfe

Tuesday 17th March 2015 Lords Chamber

[Baroness Neville-Rolfe]

My Lords, I am grateful to the noble Lord, Lord Mendelsohn, for his very kind remarks and for giving me the opportunity to return briefly to the matter of pubs. As he said, I sent a letter to the noble Lord, Lord Stevenson, yesterday and I have, for the convenience of the House, placed a copy in the Library.

Noble Lords expressed concern on Report about protections that would be available to a tied tenant whose pub is sold. Let me clarify the position: when a tied pub, owned by a company covered by the statutory code, is sold to another code company, the rights of the tenant under the code will be unaltered and will continue seamlessly. A tenant in this situation will retain the right to exercise the market rent only option after sale if any of the MRO triggers are activated. Where a tied pub is sold by a code company to a company outside the scope of the statutory code—for example, to a family brewer—the tenant will retain all the protections of the code except for MRO until the end of the lease or until completion of the next rent review, whichever comes first. In this scenario, if the purchasing company offers the tenant an agreement on different terms from their existing agreement, the tenant will have the right to a rent review.

If the tenant considers that the rent review breaches the code then he or she will be able to refer the matter to the adjudicator for arbitration. The adjudicator will not have powers to investigate non-code companies because the investigation powers are designed to address suspected systemic abuses of the code across many tenants. It would not be right to include in scope companies which are covered by the code only by virtue of the historic ownership of some of their pubs and in respect only of those particular pubs.

I turn briefly to the matter of investment. I have been clear that the Government want to see investment in tied pubs. That is key to the success of the industry, both for pub companies and for tenants. Pubs are at the heart of our communities and our heritage. They are important to the old and the young. We want pubs to thrive. I therefore announced on Report that the Government would set out in secondary legislation how tenants and pub companies can agree a waiver of two MRO triggers in exchange for significant future investment in a pub. I would like to make it clear that the waiver will apply only to the renewal and scheduled rent review triggers for MRO. All other code protections will remain in place during the waiver period. This means that the two exceptional triggers for MRO will remain; namely, a significant price increase and an economic event which impacts on the tenant’s ability to trade. The Government will set out safeguards in the code to ensure the tenant is protected from attempts to abuse a waiver. Any attempt to avoid these safeguards could be referred to the adjudicator for arbitration and redress.

[Lord Hodgson of Astley Abbotts (Con)]

I am grateful to my noble friend. I hoped to get through this afternoon without having to discuss pubs yet again. When a pub is sold by one of the companies covered by the code to a company that is not covered by it—a family brewer was the example she used—who enforces the rights of the tenant against the pub company that is outside the code? At that point, as my noble friend said, it is not part of the code so how does the adjudicator make that work?

Small Business, Enterprise and Employment Bill

Debate between Lord Hodgson of Astley Abbotts and Baroness Neville-Rolfe

Monday 9th March 2015 Lords Chamber

[Baroness Wheatcroft]

I thank my noble friend Lord Hodgson and I support him in his amendment because it finds the balance between being overly prescriptive and legislating to give some comfort to pub owners, thus persuading them that it is safe for them to invest. I cannot support the noble Lord, Lord Mendelsohn, in his amendment. It seems to be far too prescriptive for the Bill, as others have said, and somewhat contradictory. The Bill already states that a trigger event for an MRO will be something that was unforeseen. An investment agreement, by its very nature, will have to be something that is negotiated.

Surely there are pub owners and pub landlords who are capable of negotiating an investment agreement that suits both sides. I do not subscribe to the view that all pub owners are out to do the dirty on their tenants or that all tenants are weaklings. Indeed, the Pub Landlord, that character who is so well known to television viewers, is standing up to Nigel Farage in South Thanet, although it has to be said that that particular pub landlord has not been seen there very often.

We need to offer landlords some protection so that, if owners invest in their pubs, they will not immediately be forced into an MRO. The trigger, as cited in the amendment tabled by the noble Lord, Lord Mendelsohn, would have that option. What sensible landlord is going to put money into his pub if the recipient could instantly trigger an MRO? There needs to be some scope for negotiation. My noble friend the Minister has shown that she is open to negotiation and consultation, and the amendment tabled by my noble friend Lord Hodgson would be the best way forward. However, perhaps the Minister could reassure us that she sees the need for investment to be encouraged and that she will find a way of giving pub owners and landlords the protection they need in order to invest in their estate.

[Baroness Neville-Rolfe]

My Lords, I am grateful to the noble Lord, Lord Mendelsohn, and my noble friend Lord Hodgson for their amendments and for providing us with an opportunity to debate further the very important question of continued investment by pub-owning companies in tied pubs. That is especially the case because, as my noble friend Lord Hodgson has just said, pubs are having to reinvent themselves in the 21st century. As we have heard, these two amendments approach the issue in rather different ways, and I understand the motivations behind both. I can reassure the noble Lord and my noble friend that the Government absolutely want to see investment in tied pubs. That is key to the success of the industry, both for pub companies and for tenants. We want to see pubs thriving and the new arrangements to work.

I think we all accept that the possibility of pubs exercising the market rent only option will create some uncertainty for pub companies, and it is possible that there might be more uncertainty than they can live with if they are thinking of making a substantial investment in a pub. It is equally clear that there is some nervousness around asking tenants to defer some of their MRO rights in return for investment and that serious consideration needs to be given to how this would work in practice and the safeguards that need to be in place. As I said earlier in our debate, we have been considering how best to address this and strike the right balance. I can reassure my noble friend Lord Hodgson that the Bill as drafted does not prevent pub companies issuing the tenant with a new lease alongside an offer of investment, and no amendment to the Bill is necessary to enable companies to do so.

As my noble friend pointed out, a new agreement may attract costs for tenants, including legal costs and stamp duty.

The situation means that the MRO triggers on rent review or renewal would not be available to the tenant for a period of five years, as that is the maximum interval that the code will currently allow between rent assessments. It would, however, provide the pub company with some certainty. We recognise that there will be occasions where a larger investment—

[Lord Hodgson of Astley Abbotts]

I am not quite clear whether my noble friend said that there was or was not a problem with stamp duty. My understanding is that there are repeat stamp duty obligations; in other words, you write off the stamp duty of the lease that is running and have to start again every time you have a new agreement, and for five years that is another £5,000, plus whatever you have written off before, plus the legal costs. I am not clear whether she said that was a problem. If this is too difficult and technical, I am happy for her to write to me.

[Baroness Neville-Rolfe]

My noble friend is right: a new agreement would appear to attract costs for tenants, which would include legal costs and stamp duty.

As I was saying, we recognise that there will be occasions where a larger investment requires a longer return-on-investment period. After careful consideration and discussion with stakeholders, the Government have decided to address this issue, but to do so via secondary legislation, using the powers in Clause 42. I can reassure the noble Lord and my noble friend that the Government are committed to using these powers to set out in the code different rent assessment periods for different amounts of substantial capital investment offered. We will consult on what constitutes substantial capital investment and what the waiver period should be for different amounts. But we are clear that this could extend the rent assessment interval beyond the usual five years where it is appropriate to do so. This would mean that MRO cannot be exercised during the waiver period unless one of the triggers of a change of circumstances beyond the tenant’s control, or a significant price increase, is met.

In our discussions with stakeholders, we have heard varying calls for the length of waiver period that would be required to enable a pub company to see a return on its investment. These calls have varied between the five years suggested by the amendment moved by the noble Lord, Lord Mendelsohn, and 10 years. Clearly, individual circumstances will differ and we need to understand the details through consultation before we set this out in secondary legislation. The code will set out the safeguards that must be met to ensure that the tenant is protected from attempts to abuse a waiver. Again, it is vital that we consult on these to get them right.

I was glad that the noble Lord, Lord Mendelsohn, welcomed the idea of providing for investment. He set out a number of understandable concerns and potential safeguards where I think there is a lot of agreement but where we will need to work out the detail; for example, ensuring that the investment is substantial, that the tenant must take independent advice before agreeing to the deal, and that it is a genuine investment and not running repairs. He also mentioned that the pub company should not be able to require that a waiver agreement involves opting out of the Landlord and Tenant Act. I can reassure him that, using existing powers, we could restrict a pub company from requiring an opt-out of the Landlord and Tenant Act protections as a condition of investment.

My noble friend Lord Hodgson set out two areas of protection in his amendment: “significant investment” and “specified period”. Again, I think we all agree that these are important, and the secondary legislation I am proposing will set them out in detail. To meet the concerns of my noble friend Lord Younger, it will indeed be by affirmative resolution, which will enable us to have a debate.

There are other potential safeguards which will really benefit from consultation. The noble Lord, Lord Mendelsohn, asked whether the tenant can buy out of their agreement at a later date or source the finance from elsewhere. We will want to consider safeguards around ensuring that a pub company delivers the investment it promises, including when the deferral period should start. The adjudicator will have the power to intervene and arbitrate disputes where the landlord has breached the relevant provisions of the code. Remedies under the Arbitration Act are wide-ranging and the adjudicator can order redress which includes the payment of money in appropriate circumstances. I agree with the noble Lord, Lord Mendelsohn, that we need to take account of the fact that different sums of investment are significant for different types of pub—I think that he talked about urban and rural pubs, but it is probably even more complex than that. This is again a matter for secondary legislation and consultation.

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[Baroness Neville-Rolfe]

My Lords, I thank my noble friend Lord Hodgson for championing the industry. I agree about the importance of investment. There has been some investment in the industry, and I hope there will be more if we get these important reforms right. I also agree about the importance of franchising as a new potential avenue of prosperity for the sector. I thank the noble Lord, Lord Mendelsohn, for his amendment, which I will come to.

Amendment 33Y seeks to provide that the market rent-only option does not apply to franchise agreements. My noble friend defines them as,

“agreements whereby no rent is paid by the”,

tenant,

“and their share of the profit is unaffected by the price paid for tied products”.

The Government recognise that there are turnover-based pub agreements on the market where the tenant’s interests are arguably more aligned with the pub company because both rely on a fixed proportion of turnover. The tenant does not face the combination of wet and dry rent, as with traditional agreements. The benefits of a franchise are that you are buying a proven business concept that has been tested by the franchiser. That should mean that your risk as a franchisee is reduced. Alongside the turnover share element, this would seem an important part of what constitutes a genuine franchise.

However, pub franchises also retain some characteristics of a traditional tied agreement that mean the tenant is still at risk. For example, the tenant is locked into the agreement for at least five years with no means to change the terms. The pub company remains in a stronger negotiating position, as we understand that the relative turnover share figure is fixed and generally non-negotiable, and a franchisee is unable to shop around for a better deal on some or all of his products and services.

However, after much consideration, I am pleased to confirm to my noble friend that the Government have listened to concerns expressed and agree that genuine franchises should be exempted from the MRO provisions. Given the differences between traditional tied pubs and genuine franchise agreements, we consider this a reasonable exemption, but we are clear that the remaining code protections should still apply.

We will exempt only genuine franchise agreements, and I shall make a few comments about our thoughts here. My noble friend put forward in his amendment two sensible criteria that are fundamental to defining a genuine franchise, but there are likely to be others. Therefore, it would be wise to consult further before we specify exactly what we mean by a pub franchise, and to take this forward in secondary legislation. It is our intention to provide for the exemption using the existing Clause 71.

In relation to Harry Ramsden’s, the code will regulate the alcohol tie in pubs. Harry Ramsden’s fish and chip shop clearly is not a pub, and Clause 71 enables the Government to exempt Harry Ramsden’s from the regime. Similar examples will be considered on a case-by-case basis. We will look at the points made today about Harry Ramsden’s and Starbucks in developing the code.

My noble friend Lord Hodgson was concerned about potential unintended consequences and asked for more to be done in the Bill. This is a difficult one. The best way to reduce the risks of unintended consequences is to allow for flexibility through secondary legislation because it is then possible to tweak arrangements should unintended consequences arise. If we fix these matters in primary legislation, any unintended consequences would be much harder to remedy.

On Amendment 33AZ from the noble Lord, Lord Mendelsohn, I am pleased to reassure him that the regulations we will make under Clause 71 will be subject to affirmative procedure, so we will be able to have a proper debate. However, we believe that subordinate legislation is the right way ahead. I am making it clear in Hansard that that is the Government’s intention, and my Bill team will be working away on franchise and other aspects of the subordinate legislation as soon as the Bill receives Royal Assent.

I hope that my noble friend will feel reassured by my response and will agree to withdraw the amendment.

[Lord Hodgson of Astley Abbotts]

My Lords, I thought for one wonderful moment that my noble friend was going to agree to put something in the Bill, but it will be secondary legislation again, with all the disadvantages and uncertainties that that implies.

Of course the noble Lord, Lord Mendelsohn, has a family familiarity with franchising, in the sense that his uncle was the moving spirit of the British Franchise Association, which of course would help set the standards that would decide what a pub franchise looks like, because it has a lot of experience in that area—so this will come back to haunt him yet.

My concern about the Minister’s reply is that we find ourselves unable to move the structure of the pub trade forward. We need to find new and better models. There will always be concerns that any new corporate structure we invent carries the risk of it being used for a loophole. That is not the case, because the amendment brings every single aspect of the franchise within the Pubs Code and the Pubs Code Adjudicator’s power except the single issue that you cannot ask for a market rent option because you are not paying any rent.

I accept my noble friend’s assurances that the Government intend to make sure that this is properly dealt with in consultation, but they are making a mistake because there is a danger of slip ’twixt cup and lip. My concern is that the trade finds itself locked into a structure with which neither side is entirely satisfied, and that we may therefore perpetuate enmity, suspicion and difficulty. I had hoped to find a way out of that by getting something in the Bill. I am sorry that the Government will not do that, but I see no point in taking it any further on this occasion. I therefore beg leave to withdraw the amendment.

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[Lord Hodgson of Astley Abbotts]

My Lords, it will not surprise the noble Lord, Lord Whitty, that I urge the Government not to accept the amendment. The issue of the change in the MRO and its introduction is about tenants: that is to say, self-employed business men and women and the imbalance of bargaining power between the individual tenant and the brewery, in particular because of the issue of the rent charged and the charge for products and services supplied. That is the heart of the problem.

Managed pubs—the other big category—are run by people who are employed by the brewery, who run it like a branch office. The noble Lord, Lord Snape, referred earlier to how Wetherspoon runs its pubs. It has managers in every pub who are employees. They are paid a salary and a bonus, with all the other aspects that go with corporate existence. To include those in a Pubs Code would be wrong, first because there is no rent to pay and no question of any aspect of the Pubs Code applying to pubs like that. These are completely different vehicles and corporate structures, and the application of the Pubs Code can have focus and effect only where you are dealing with independent businessmen, whether they are tied, franchised, or whatever.

[Baroness Neville-Rolfe]

My Lords, I thank the noble Lord, Lord Whitty, for his amendment, and for his engagement on these provisions in advance of Report. As the noble Lord explained, these amendments would change the definition of a pub-owning business for the purposes of the Pubs Code to one with 500 or more pubs of any kind rather than 500 or more tied pubs.

The noble Lord asked about franchises. They will indeed be included for the purposes of the 500, as I think my noble friend Lord Hodgson helpfully explained when we were discussing it earlier. The definition focuses on the alcohol tie, because that is where we have evidence of problems, as colourfully explained in four Business Select Committee reports, all of which focused on the tie.

I understand the noble Lord’s view that companies with more than 500 pubs of any kind are companies of sufficient size that they can cope with complying with the code. However, the amendments would lead to some striking anomalies. A pub-owning company with 499 pubs, all of which are tied, would not be covered by the code, but a pub-owning company with 500 managed or free-of-tie pubs and just one tied pub would be covered for that one tied pub.

Small Business, Enterprise and Employment Bill

Debate between Lord Hodgson of Astley Abbotts and Baroness Neville-Rolfe

Wednesday 28th January 2015 Grand Committee

[Baroness Neville-Rolfe]

The noble Lord makes a good point. The Secretary of State and Jo Swinson have been intimately involved in all this. I have now taken over the yoke in this House. The next thing I was going to say is that I held an open-door session yesterday. Noble Lords were invited. I was surprised that more noble Lords were not able to come, but that might have been a timing issue. I am keen to get to know all the views of the Committee on this important issue. I joined the House of Lords because it is an important revising Chamber. We have to look at these things and get them right. Our door will be open between now and Report.

Clearly this group of amendments is very large, but I have already said that I would like to listen to what is being said by noble Lords on their amendments before I respond and comment on what we should do with our amendments. We are being very constructive; we are trying to seek a balance and to do the right thing. If we could get on and get into the detail we may find that we can narrow down some of our differences.

[Lord Hodgson of Astley Abbotts]

My Lords, when I was interrupted a minute or two ago I was explaining that I had some amendments here and that we had some doubts still, despite my noble friend’s assurances about the workability of what is now proposed. I should say to the noble Lord, Lord Whitty, who I think asked the question, that I do not propose to move my amendments today; I propose to have them discussed. I suspect that that is what he expected me to say, but then I suspect that he was not putting his question to me.

At this point I remind the Committee, as I did the House at Second Reading, that until a year ago I was a non-executive director of one of the six companies covered by the proposed code. The group of which I was a non-executive director had five breweries, two large ones and three small, stretching from Cumbria to Ringwood in the New Forest. It owns some 2,000 pubs, of which about 500 were managed, and the balance were tenanted in various forms.

This is a bit of housekeeping. The Captain of the Gentlemen-at-Arms has told me that it has been suggested that I did not declare this interest at Second Reading. For the record, I draw the attention of the Committee, and indeed the House, to col. 1289 of Hansard on 2 December, the date of the Second Reading of this Bill, in which I declared in terms the interest that I just declared. It was further suggested by someone that I did not declare my interest at the beginning of my speech. That is perfectly true; I did not. I think that the Companion does not require you to make your declaration at the beginning of the speech. The beginning of my speech was not about pubs; it was about pre-pack administrations and about the Government’s procurement policies as they affect small companies, in which I had no interest to declare. When we came to the pubs, I made the declaration that I have described, so I hope that we can draw a line under that question.

I thank my noble friend and her team of officials for the time they have given to discussing some of the operational problems that it is feared may occur. I thank the Government, having listened to some of the arguments that my noble friend has just briefly outlined for the Committee, which include a complete rewriting of Clause 42, which, as we realise, is the essential heart of the new regime. The amendments, as we have heard, were tabled last Thursday night, and it is fair to say that, given only three complete working days since, all parties are struggling to understand the full implications of what is now proposed. My noble friend Lord Cope of Berkeley had a sensible suggestion to achieve some permanence that we can then discuss and amend on Report if necessary. I do not suppose that CAMRA will agree with much of what I say but it may be persuaded by some of the arguments, and I suspect it would agree that we are struggling slightly with the flow of information that has come so late in the day.

I have tabled a number of amendments to Clause 42, which form part of a strategic whole. Before discussing the amendments in detail, I shall take a few minutes to discuss the shape of the pub industry and how those amendments would be to its long-term advantage. I begin by making three things clear. First, these amendments do not—I repeat, not—seek to overturn the House of Commons decision to introduce a market rent only option, the MRO. I think that that is probably a mistake; time will tell, but it may accelerate pub closures. However, the Government have decided to accept the decision, so I want to move on from that point.

Secondly, the amendments are designed to help to keep pubs open. The sector is under pressure from a wide range of adverse tides. There seems to be a view that somehow pubcos want pubs to close. A landlord needs a tenant as much as a tenant needs a landlord. That is particularly true of the company with which I was involved, which brewed its own beer in integrated premises, and it is through its own pub estate that a large proportion, 25% to 35%, of the product is sold. A closed pub is of no use in this regard, and closure even for a short period can be disastrous. If I may use the noble Lord, Lord Stevenson, as an example, if he is in the habit of having a pint on the way home from work and his normal hostelry is the Crown but it closes for refurbishment, he will not cease having his pint but will go to the King’s Head, elsewhere in the high street. It may be that as a result of the Crown having closed for a bit, his permanent patronage will be shifted to the King’s Head. In the company in which I was involved, when we undertook refurbishment we wanted it to be as quick and painless as possible to avoid upsetting our regular clientele.

Thirdly, these amendments are designed to iron out some of the idiosyncrasies and unevenness that, if not changed, will seriously affect future investment in the sector and its longer-term health. I am afraid that it is not realistic to believe that individual free house operators will have access to the sums of capital that large companies have at their disposal.

I turn to the industry. As I have said, the Bill affects only six companies, unless the Government accept Amendment 69A, tabled by the noble Lord, Lord Berkeley. It is not surprising that the issue of hybridity has raised its head and has had to be addressed in Clause 70(3). The six companies fall into two categories: two of them brew beer as well as owning pubs, which they sell in part through their own estate. They also sell in supermarkets, through independent pubs, free houses, off-licences and so on. I will refer to these as the integrated model. The other companies are pubcos. They do not brew beer; they very often buy their beer in from breweries operated by their rivals. They are clearly more focused on the rental levels available in their pubs.

As I explained at Second Reading, this rather counterintuitive structure of pure pubcos came about because of a parliamentary decision on the beer orders in the 1980s, which prevented breweries from owning more than 2,000 pubs. The disinvestment programmes forced on them resulted in what have become known as pubcos. They resulted from a parliamentary decision, which many argue had a completely unexpected and unintended consequence. We need to make sure that we do not set out today on a journey that has similar unintended consequences. By the way, some argue that the way in which this weakened the brewers weakened the whole of British beer on the pub market and led to the rise of foreign lagers, which are sold in every pub in the country. If your Lordships go into a pub you will be faced with Stella Artois, which is originally Belgian, Fosters and Castlemaine from Australia, Grolsch from Holland, Kronenbourg and, more recently, Peroni. Most, although not Peroni, are brewed here under licence but not owned in Britain at all.

Those two types of companies have differently aligned interests and objectives, but I would like the Committee to remember a further differentiation between managed and tied pubs. Managed pubs, as the title implies, are run by employees of the company who are paid a salary with a bonus and other fringe benefits. They are quite different from tied tenants, who are essentially self-employed small businessmen. All the issues about beer pricing and other conditions of the tie are of no interest to the manager, who is in effect running a branch office. I am very grateful to my noble friend for having made it clear in moving her amendment that managed houses have no place in the provisions of Part 4.

As I said at Second Reading, people feel strongly about pubs; even if they do not want to go to them, they like them to be there. Their disappearance is resented for removing an essential part of what people see as a community. Just how strongly people feel about pubs, though, even I underestimated. It is not often, working away as a humble Back-Bencher in the decent obscurity of your Lordships’ House, that a single sentence in a 13-minute speech can get one simultaneously on to the front pages of the Daily Mail and the Daily Telegraph and described as an Islamophobe to boot. For the record, let me set my sentence in context.

I said that the pub trade in all its forms—tied, untied and free—faces very adverse tides, which are resulting in pub closures. The adverse tides, in which I fear that the tie plays only a marginal part, include cheap alcohol in the supermarket, with an average price of £1.13 per pint compared to about £3 in the pub, so that people drink at home; the rise in the consumption of other beverages not normally associated with the pub, such as wine; the rise in regulation including drink-driving, the smoking ban and new licensing laws; rises in costs, including council tax; and deep-seated socioeconomic changes, including the deindustrialisation of parts of Britain—I used the example of the carpet trade in Kidderminster at Second Reading—and the arrival of people whose faith forbids the drinking of alcohol. That last point is not in any way and was never meant to be a criticism, as I am a great believer in religious tolerance in every direction. However, it means that such people are, quite understandably, unlikely to be persistent frequenters of premises which, under Clause 65(3), are defined as ones in which,

“one of the main activities carried on at the premises is the retail sale of alcohol to members of the public for consumption on the premises”.

As a result of these trends, in which sectors of the pub trade are closures now taking place? From the publicity being given, it would appear that the conclusion is that nearly all the closures are taking place in the tied sector. The truth, I am afraid, is rather different. Mr Doug Jack, an analyst at Numis, the City investment house, says in a paper that the closure rate in the free-of-tie sector is more than double the closure rate in the tied, tenanted, leased sector. There is a multitude of reasons for this, all connected to the fact that tied pubs also tie the pub company into the pub’s success or failure. As part of the rent is paid through the beer, the pub company is motivated to drive up beer volumes, which is why pub companies invest substantial amounts in capital expenditure, tenant support and rent concessions when good licensees are struggling.

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[Baroness Neville-Rolfe]

My Lords, I thank all noble Lords who have spoken in a helpful discussion. When we saw the grouping we knew that it would be a marathon. I hope that noble Lords will forgive me if I make a lengthy 10,000 metre reply, so that the various questions that have been raised are answered.

I shall respond first to the noble Lord, Lord Berkeley, on timing, and secondly, to the noble Lord, Lord Mendelsohn, on his suggestion. I want to reassure the noble Lord that Clause 41 places a clear duty on the Secretary of State to introduce the Pubs Code within 12 months of Royal Assent. As government Amendment 89A sets out, this must include the MRO provision. The Government are completely committed to getting on with things and to swift implementation. I am also completely committed to open discussion in this House between now and Report. I will try to answer the points in this debate, but if I fail I would urge noble Lords to talk to me before Report, and I am sure that there will be further collective discussions.

I enjoyed the intervention of the noble Lord, Lord Mendelsohn, because he put today’s discussion into the context of small business policy where there is much consensus. I sense that he is trying to make progress. I agree that we should try to get the framework right today, if noble Lords agree, once they have listened to me, by agreeing the government amendments. Then we should discuss the issues and possible changes ahead of Report, including whether we have the right balance between the core Bill and the subordinate legislation, as he mentioned. We have thought about that quite a lot. I do not want to lose this important Bill, which would be a very serious unintended consequence, and timing is tight.

Before turning to the individual amendments, I thank my noble friend Lord Hodgson, who took the Floor for a long time, for bringing his knowledge of the industry to this important debate. He spoke of the impact of social change on pubs, which is an opportunity and a concern, and described a nuclear option, which is exactly what we want to avoid.

I now turn to Amendments 69ZC, 74ZB, 87A, 87B, 87C, 89ZA and 102B. I start by thanking the noble Lord, Lord Whitty, for his comments. We have certainly tried to listen to the other place and come up with provisions that achieve the objectives agreed, and to ensure that there is no avoidance in the system of the kind he described. These amendments set out the detailed definition of the market rent only option in the Bill. One effect is that the MRO will come into force on Royal Assent, before the Pubs Code Adjudicator existed. Market rent only and the protections it brings can work properly only if it is introduced with the code and with the adjudicator.

Clause 42, introduced in the other place, says:

“The Pubs Code shall include a Market Rent Only Option”,

so it would still require secondary legislation. The code must be introduced within a year, and under our Amendment 89A it must include MRO.

Secondly, and importantly, the amendment would not allow us to consult on the MRO process. As I have already said, given that it was introduced into the Bill only at a relatively late stage, it is incomplete in its design and it is important that we have some public consultation to ensure that the process works as intended. Following consultation, we will introduce the code by secondary legislation through the affirmative procedure.

Much of the detail of the triggers for MRO is more appropriate for secondary legislation. Clause 42 as drafted provides no detail on the terms of the new commercial tenancy and what an MRO-compliant tenancy would be. We wish to consult to get a stronger sense of what this constitutes and, similarly, what constitutes a “significant” increase in price and,

“an event outside of the tenant’s control … that impacts significantly on the tenant’s ability to trade”.

Companies and tenants affected by market rent only need the opportunity to comment on the process, not just the authors of Clause 42. The Government are committed to ensuring that MRO is robust and workable.

Turning to Amendments 75 to 78, 82A and 83 to 88, I am not convinced that these amendments are necessary. To respond first to the point made by the noble Lord, Lord Borwick, the market rent only clause introduced into the Bill in the other place outlines some of the process involved in obtaining a market rent only assessment and taking up the offer, but it does not set out a complete process of the kind he is seeking. The Government will consult on the detail of the process and set this out in secondary legislation. I have explained that there is a drop-dead date for the whole process.

Our intention is to follow the outline process in the Mulholland clause. So after the tenant requests a market rent only option, the first step will be for the pub-owning company to offer a market rent, which the tenant will accept or which will provide the basis for negotiation between the two sides. If the tenant and pub-owning company cannot agree a market rent only agreement within a certain period of time, the tenant and pub-owning company will jointly appoint and jointly pay for an independent assessor to determine the market rent for the pub.

Our amendments allow the code to stipulate that the existing agreement between the pub-owning company and tenant will prevail until the market rent only procedure concludes. To answer my noble friend Lord Hodgson, there is a power in government Amendment 89B to set out in the code that existing contractual arrangements remain in force until such time as the procedure comes to an end and the new market rent only contract starts.

If in the end the tenant opts for a market rent only agreement, this will constitute a new agreement between the tenant and pub-owning company. The terms of the agreement will need to be clear to the tenant before he accepts the offer. To be clear, at this point the pub-owning company can remove from the MRO agreement any special commercial or financial advantages—SCORFA—that the tenant was entitled to under the tied agreement. As I said earlier, we intend to consult publicly to ensure that the process works as intended.

On my noble friend Lord Hodgson’s Amendment 88 in particular, the only requirements for a lease to be MRO-compliant are set out in Clause 43(4). Other than this, it is up to the pub company to decide what the MRO lease or licence looks like. The pub company will be free to offer a new lease or tenancy without it being considered to be discriminatory.

Turning to Amendments 79, 81 and 89, in addition to consulting on the detailed process for MRO, we will consult on the detailed definitions of the trigger points for an MRO assessment. These will be set out in the statutory code, which is subject to affirmative resolution. Under our amendments the tenant would be entitled to the MRO option: at rent review; if the tenant renews their lease; when there is a significant price increase for tied products which was not reasonably foreseeable; and if an event occurs that is beyond the tenant’s control and meets the descriptors set out in the Pubs Code. The headlines would rightly be in the Bill but we need to set out the details in secondary legislation.

I confirm that the MRO trigger at the point of renewal applies to tenancy agreements that are protected by the Landlord and Tenant Act or which have a specific right of renewal clause in their tenancy agreement. Those tenants who are contracted out of the Landlord and Tenant Act will have the protection of the parallel rent assessment in any negotiations on a new lease at their existing pub. The trigger if there is a significant price increase which was not reasonably foreseeable at the beginning of the tenancy or at the point of a rent assessment would not include circumstances when a pre-agreed discount period ends.

By contrast, Amendments 79 and 89, tabled by my noble friend Lord Hodgson—

[Lord Hodgson of Astley Abbotts]

Can we therefore take it that the trigger points will not include the sale of a pub, provided the tenant’s position is protected, or a pubco going into administration?

[Baroness Neville-Rolfe]

My Lords, that is the proposal set out in the Government’s amendments.

--- Later in debate ---

[Lord Hodgson of Astley Abbotts]

Again, I apologise for interrupting my noble friend, and I am grateful for the detailed response that she is giving. The example that she is giving about investment does not deal with the fact that beer is being sold. The beer companies want to sell their beer—25% to 30% of their beer is sold through their tied houses, their estate. If the legislation does not allow that, it knocks away a reason for investing. It is not sufficient to get a return on the capital—that is, the rent—it is also selling a product that they produce elsewhere in the group. That is, provided—to meet the point of the noble Lord, Lord Snape—that the tenant is free to buy it anywhere if he can buy it cheaper.

[Baroness Neville-Rolfe]

I thank the noble Lord for raising that point. There is a link to the stocking requirement, which I shall come on to talk about, as he suggests. I am not suggesting that investment is the easiest thing to deal with, because we all want investment in this important industry.

Perhaps I can mention a couple of final points before I move on from investment. One is my noble friend Lord Younger’s point about cash flow, which is a good point. If a tied tenant expresses an interest in choosing MRO, the pub company can make the argument about the benefits of the tie—for example, in managing tenant cash flow. That freedom will still exist. At that point, the tenant can choose to remain in a tied agreement. I am grateful to the noble Lord, Lord Mendelsohn, for entering the fray on this issue and suggesting a way forward on the question of securing pub company investment in pubs. I am happy to look at that further.

Further, enabling tenants to forgo the MRO in exchange for a promise of investment may risk intimidation of a pub in difficulty. That will probably not occur often, but it was a concern that we considered in trying to balance these things.

I turn to Amendment 89AA. I believe that it is designed to help to define a significant price increase in relation to a price increase that would trigger an MRO. It is important to get that definition right. It needs to be fair to pub companies and tenants alike. That is why the Government propose to consult on the definition and set the detail out in secondary legislation. I confirm that reference to wholesale price lists will be used in our consultation proposals for that definition.

Amendments 89AB and 89AC amend the MRO trigger for circumstances outside the tenant’s control that affect trade. The noble Lords opposite wish to confirm that all four of the conditions set out in subsection (9) of the proposed new clause in government Amendment 89A must be met for this trigger to be engaged. I can confirm that the current drafting of the clause delivers this effect.

Amendment 89AD relates to the same change of circumstances trigger and proposes to replace,

“an impact on the level of trade”,

with,

“an impact on the level of profitability”,

as the measure for that trigger. We consider that a focus on the tenant’s ability to trade addresses the key issues that affect the fair balance of risk and reward between pub company and tenant. The government amendments ensure that where changes in local economic circumstances affect tenant income, the protection of the MRO trigger will apply. To focus instead on profit would bring in issues such as rates, energy prices, wages and salaries. These issues could further impact on the income of the tenant but there is likely to be minimal impact. The amendments also introduce more complexity in terms of definition and measurement of a significant impact.

I believe that through Amendment 89AE, the noble Lords opposite are seeking to confirm that on the sale of a pub the other triggers for MRO would still apply. Where the new owner of the pub is covered by the code, then this is the case. Where the pub company purchasing the pub is below the threshold, the tenant will not have the MRO option but will have the protection of the voluntary industry code. This is consistent with the Government’s acceptance of the will of the other place to remove family brewers from the scope of our measures.

Amendment 89AF would introduce a power for the Secretary of State to provide an MRO trigger on transfer of title or administration in two specific circumstances. The first is if avoidance of MRO was the “sole or significant” reason for transfer of title or administration. The second is where,

“fewer than 500 pubs … are part of a group or have similar ownership to other companies”,

which own more than 500. I will deal later with the detail of the Government’s reasons for removing the transfer of title and administration trigger, but first I will focus on the specifics of the Opposition’s amendment.

We think it is extremely unlikely that the serious step of administration would be used to avoid MRO. No company considers insolvency lightly. Where a company is in financial difficulty, it will seek professional advice from an insolvency practitioner. It may be advised to restructure the business, which could involve selling off some parts of it. However, entering administration to avoid MRO would not achieve the objectives of administration, which is to rescue the business. For this reason, an insolvency practitioner would not recommend administration. It is also hard to imagine that pub companies would sell off high numbers of pubs purely to take themselves outside the scope of MRO and the code. Most of the pub companies in scope have over 1,000 pubs, so that would be a drastic step. I reassure noble Lords that where a tied pub is sold to another company covered by the code, MRO protections would continue to apply.

The amendment tabled would also provide a power to bring companies with fewer than 500 pubs into the scope of the code where they were part of a group or had similar ownership to other companies that cumulatively own more than 500 pubs. We share the noble Lords’ concern about the potential for gaming—for example, through the break-up of a pub company to avoid the threshold—but I confirm again that the Government have provided this protection in Clause 69(2). I am afraid that we are not clear whether there are companies with fewer than 500 pubs that have similar ownership to companies with more than 500. Nor, if there were, is there evidence that they should be brought into scope with reference to a concept of similar ownership.

Amendment 80, tabled by my noble friend Lord Hodgson, seeks to remove two of the trigger points in the MRO clause so that tenants will not have the right to MRO if their pub is sold or the pub-owning company goes into administration. The Government’s amendments should address my noble friend’s concern. In the case of the transfer of title trigger, the Government consider that other, more proportionate protections exist for tenants when their pub is sold to another owner, as any new owner would be bound by the tenant’s existing contractual rights. If the sale makes little difference to the pub, there is no problem. If it makes a significant difference to the trading position, another MRO trigger is already available—the trigger for circumstances outside the tenant’s control. The inclusion of the transfer of title trigger would have the unintended consequence of making the sale of pubs as going concerns less appealing to potential buyers, leading to fewer pubs and fewer pub tenancies. For these reasons, the Government wish to remove this trigger from the Bill.

The Government’s amended clauses also remove the trigger when a pub-owning company goes into administration. During administration, the company in administration may continue to operate. Tenants will continue to have their existing obligations towards the company in administration, and the company will continue to have its existing obligations to the tenants, acting through the administrator. If any of the other triggers for MRO are met during this period, such as if the company brings in a significant price increase, the tenant will still have the right to MRO. The primary aim of administration is to rescue the company, and this preserves jobs as well as value. Giving all the pub-owning company’s tenants the right to MRO at this critical point would be likely to reduce the value of the pub company’s estate. Pub-owning companies below the threshold are unlikely to buy the company’s pubs if the tenant could opt for the MRO option during the course of the sale. This would reduce the chances of rescuing the pub-owning company and could ultimately push the company into liquidation. Clearly, this would not be in the interests of the tied tenants, employees and suppliers of the former business and the creditors.

I want to clear up something which was raised by the noble Lord, Lord Snape. He expressed concern that the Government are trying to deny existing tenants the right to MRO. This is not the case. We have merely sought to remove two of the triggers to avoid unintended consequences that are detrimental to tenants. I should be happy to discuss this further with the noble Lord, as we are in the same place on objectives.

--- Later in debate ---

[Baroness Neville-Rolfe]

My Lords, I hope that I can reassure my noble friend that the Pubs Code will be the subject of further formal consultation following Royal Assent. Furthermore, it will be a statutory instrument made under the affirmative procedure, and any future changes to the code will also be subject to that procedure. On Amendment 92, I reassure my noble friend that any change to the threshold for pub companies to be covered by the code must also be made by affirmative resolution, and must follow a review and full consultation.

On Amendment 96A, Clause 63 provides that the adjudicator can be abolished if, following a review, the Secretary of State is satisfied that the role of the adjudicator is no longer deemed necessary. It is only in the event of the Pubs Code having already been revoked and not replaced by the affirmative resolution procedure, as I have said, that the adjudicator would be abolished by the negative procedure. In those circumstances, the removal of the adjudicator is of course consequential on the abolition of the code, which would have been debated in both Houses. The adjudicator’s role is to enforce the Pubs Code; if Parliament has debated and agreed the decision to revoke the code, it seems entirely reasonable to abolish the adjudicator by negative procedure. I hope that this reassures my noble friend that he can withdraw his amendment.

[Lord Hodgson of Astley Abbotts]

I thank the Minister. I accept her explanation of all three amendments, and I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Snape]

My Lords, I enter the debate with some trepidation after the way that it was introduced. I, too, will be very brief. I am grateful to the noble Lord, Lord Hodgson, for making my speech for me. He underlined the dangers of the amendment. Tenancies at will are where part of the problem lies. I go back to my daughter and son-in-law’s experience. They think that it must be wonderful to have a tenancy on a country pub with ivy round the door, great customers and all the rest of it. Of course, they will be treated very well by the pubcos. They will be looked after; their delivery will come on the proper day; lots of things will be done on their behalf. After a year, once they sign up, they will find out the reality of the situation. It is at that stage that many problems arise, despite the blandishments of the noble Lord, Lord Hodgson, so I hope that despite his honeyed words, the Minister will resist the temptation. I say to him: nice try but it will not wash, I am afraid.

[Baroness Neville-Rolfe]

My Lords, I thank my noble friend Lord Hodgson for his amendment on tenancies at will. I was very glad also to hear from the noble Lord, Lord Snape, given his great experience in the industry.

I agree with my noble friend that tenancy at will agreements are important in enabling pub companies to cover short-term gaps, to keep pubs trading in between tenants. They also allow the company time to complete due diligence on a new longer-term tenant. Temporary agreements can be useful to a prospective tenant as a trial run, prior to committing to a longer-term agreement. I have known ex-senior civil servants who have taken on pubs and found them quite a challenge.

In the other place, my honourable friend Jo Swinson committed to consider calls to exempt genuinely short-term agreements from the Pubs Code. These calls came from pub companies and some tenant groups. I can announce today that the Government will use the power in Clause 68 to exclude from the code tenancies at will and temporary agreements that do not extend beyond a certain limited period. This is to ensure that agreements that are meant to be temporary do not run on for long periods of time as a way of avoiding the code. This does not require an amendment to the Bill but, as part of the consultation on secondary legislation, we will consult on the length of agreements that should be exempted.

We have heard different views from stakeholders as to the length—including 12 months, as proposed by my noble friend—but we have also heard calls for six and nine months. Therefore, we will consult more widely on the length of any exemption period before bringing forward regulations. I hope my noble friend will feel able to withdraw his amendment.

[Lord Hodgson of Astley Abbotts]

I am very grateful to my noble friend for that commitment. I am not stuck on 12 months. All I think we should be trying to provide is a means for people to test out the possibility of becoming a tenant and, therefore, a reasonable period of time. It could be six or nine months; I am quite content about that. The important thing is we should have a regulatory-light opportunity for people to try it out and then if they decide that they want to make it their career, they get the full protections anticipated under the code. In those circumstances, I am happy to withdraw the amendment.

Small Business, Enterprise and Employment Bill

Debate between Lord Hodgson of Astley Abbotts and Baroness Neville-Rolfe

Wednesday 14th January 2015 Grand Committee

[Lord Hodgson of Astley Abbotts]

My Lords, I share the wish of the noble Lord, Lord Young, to encourage vocational education. It is exceptionally important as a means of improving youth employment. However, I am slightly concerned about the route for apprenticeships, He knows far more about this than I do, but when I take part in the Lord Speaker’s outreach programmes and we talk about apprenticeships to sixth formers, too often they feel—and I think they are probably right—that the apprenticeship is a time-based qualification, not a performance-based qualification. That is to say that you have to spend a certain amount of time doing a job before you can get a qualification.

That puts off sixth-formers, who think that even if they are good they cannot move through the apprenticeship scheme at the speed at which they acquire the skills. That is something I have often referred to. I would be nervous about trying to put too much weight on apprenticeships. I am keen on youth employment, but apprenticeships are potentially too narrow, particularly given the comments made to me by sixth-formers, which may or may not be entirely accurate.

[Baroness Neville-Rolfe]

My Lords, I thank the noble Lord for his amendments. I am delighted to see him joining us in the Committee and giving us this opportunity to debate apprenticeships, about which both he and I feel a great passion. I will try not to let that get in the way of objectivity. Apprenticeships are also at the heart of the Government’s drive to equip people with the skills that employers need to grow and compete. It is great to have so much support for apprenticeships in the Committee today. It was interesting to hear about the experience of the noble Lord, Lord Cotter. We need as big a body of support for apprenticeships as we can get, and one needs to encourage people one knows in business and where there are public procurement opportunities to think about apprentices more.

We have already delivered 2 million apprenticeship starts in this Parliament, and there are 20,000 apprentice vacancies around England at any one time. However, I share the noble Lord’s concern about getting enough young apprenticeships. That is one of the reasons why the Government are trialling a new approach to apprenticeships in 2014-15 and 2015-16. He and I have talked about that, and I am involved in work with the electronics industry and the professional services to try to bring forward new thoughts and new numbers. The Government have made the apprenticeship grant available for employers—£1,500 targeted on smaller businesses taking on young apprentices. That ticks two boxes at once.

I also agree with the comments that the noble Lord, Lord Young, made on Crossrail. The work that it has done on apprenticeships has been a model. Like him, I have been under Fenchurch Street station and have seen what it is doing there. It has also been very good about trying to employ smaller suppliers both directly and through subcontractors—and small suppliers outside London.

We want it to become the norm for young people to choose between an apprenticeship and university as alternative routes to a career—an experience that I am familiar with in Germany—and this Government’s reforms lay the groundwork for that. I pay tribute to all that my noble friend Lord Young of Graffham has done.

On Amendment 35L, I have sympathy for the noble Lord’s intentions that a contracting authority should require an appropriate number of apprenticeship opportunities. However, as I am sure he is aware, not every procurement will be an opportunity. Contracting authorities are entitled to deliver legitimate policies through their high-value procurements but, under EU law, these must be linked to the subject matter of the contract and the procurement must meet principles such as equal treatment, fairness and transparency. It would, therefore, not be possible to require that every procurement delivered an apprenticeship.

There would also be a danger that requiring the provision of apprenticeships by contracting authorities could pass on costs to bidders and actually deter smaller businesses. If so, this would undermine the purpose of Clause 38, which is to open up procurement opportunities to smaller businesses and remove barriers to their participation. If contacting authorities must require an appropriate number of apprenticeships, assuming that that could be determined—it sounds quite difficult—would that stop smaller suppliers bidding, as they might not have resources available to allow them to meet the expectations and duties of the contracting authority in this regard? I know that that is not a perverse effect that anyone wants but it is one reason why the Government are concerned about that amendment.

On Amendment 35M, I agree with the noble Lord, Lord Stoneham, that there is a huge scope for local enterprise partnerships and schools to work with SMEs to deliver more training and apprenticeships when these organisations bid for public contracts. The new Contracts Finder—to look at this amendment in the light of the previous one—will be helpful in spreading knowledge of opportunities, with details of contracts on the website. However, as with Amendment 35L, we must be careful that any provision for delivering apprenticeships through procurement does not have the unintended consequence of adding to the cost of public procurement for contracting authorities and bidders. We encourage schools, LEPs and other public bodies to work with SMEs on apprenticeships, but we are not convinced that they should be under a legal duty to do so.

Finally, Amendments 35N and 35W relate to assessing and reporting on the extent to which apprenticeships form part of public procurement. Again, I have sympathy with the noble Lord’s intention, but I fear that these amendments could again risk passing a burden down the supply chain to smaller businesses. Only by asking them to report on this could we determine the number of apprenticeships and recruitment practices involved. It is precisely that sort of red tape that we seek to cut in this Bill. While I agree that transparency, reporting and reviews are helpful in this sphere of apprenticeships, we need to be careful to balance that with the reporting burdens that it would place on small businesses. Again, I am sure that that is not the noble Lord’s intention, but it could be a perverse effect of legislating in the way proposed.

I hope that the noble Lord feels reassured, understands that we share a similar objective on apprenticeships, and will understand why we feel that we cannot accept the amendments. I ask him to withdraw Amendment 35L.

Consumer Rights Bill

Debate between Lord Hodgson of Astley Abbotts and Baroness Neville-Rolfe

Monday 24th November 2014 Lords Chamber

[Baroness Neville-Rolfe]

My Lords, I am delighted to see my noble friend Lord Hodgson back with us. We missed him on the day when the amendments were finally reached, but my noble friend Lady Noakes introduced his amendments with great clarity and verve. We had a good debate and we now have several different amendments, some of which we will be discussing in a minute. I am grateful for the efforts that my noble friends Lord Hodgson and Lord Eccles have made to explain their thinking to me in person. We have tried hard to meet their concerns. Having talked to my colleagues in the Government, I am now able to respond positively.

Although this amendment would require a review of the schedule, I believe that its driving force is to examine the effect of opt-out collective actions. I should say that the Government are happy with our proposals and believe that the existing opt-in regime is prohibitive, with only one collective case in 10 years involving 130 claimants. Therefore, the changes in the Bill are important. I do not share the pessimistic view about US-style claims, mainly because of the safeguards that we have written into the Bill, which we will no doubt come on to on the next amendment. However, I wanted to say that we have had a very good discussion, we have listened and we are happy to agree to a review after five years which covers the ground set out in the amendment. Following a further discussion that I had with my noble friend this morning, we will also commit to a ministerial Statement on the review here in Parliament. I am afraid that we cannot put the review in the Bill, as that would have ramifications for other possible reviews elsewhere in the Bill, but I can commit to a review, and I know that the Confederation of British Industry, which I met on Thursday because of its concerns about this part of the Bill, is content with that.

Of course, Schedule 8 does not just introduce an opt-out collective actions regime. It reforms the entire private actions regime for the benefit of both businesses and consumers. I think we are all agreed that consumers come first here. Therefore, the Government believe that it would be appropriate for the review of the impact of Schedule 8 to examine the whole range of reforms. The review would take into account both opt-in and opt-out collective actions, the fast track regime, the number of cases under the CMA redress power, collective settlement cases and, of course, the provisions outlined by my noble friend in his amendment. In those circumstances, I hope that my noble friend will feel able to withdraw his amendment.

[Lord Hodgson of Astley Abbotts]

My Lords, I am extremely grateful to my noble friend for her response. Of course I would like the provision in the Bill, because that gives it real permanence, but I spot two-thirds, three-quarters or, perhaps, only 5% of a loaf, and I will certainly grab it. In the circumstances, I beg leave to withdraw my amendment.

Community Interest Company (Amendment) Regulations 2014

Debate between Lord Hodgson of Astley Abbotts and Baroness Neville-Rolfe

Monday 21st July 2014 Grand Committee

[Baroness Neville-Rolfe (Con)]

My Lords, the Government believe that it is important to encourage the growth of what, for brevity, I will call CICs limited by shares. We want to attract social entrepreneurs who seek a vehicle for social enterprise but also require some return on their investment. CICs limited by shares are the way to do that and are one of this country’s most successful forms of social enterprise. The existing regulations contain unnecessary restrictions that limit dividend payment. At the moment, a director with a single share with a par value of £1 will receive a maximum of only 20p dividend payment, regardless of the level of profit made, or if the actual value of the shares has risen to £100. It is our intention, with these amendment regulations, to make it easier for investors to share in the success of a CIC.

The purpose of these regulations is to remove the share dividend cap—a statutory restriction on the amount of dividend that the directors of a community interest company may pay investors. CICs were introduced by statute in 2005, creating a new type of company for social purpose. The CIC is increasingly the model of choice for many social entrepreneurs, and since the legislation came into force, more than 9,300 social entrepreneurs or social enterprises have chosen to register as community interest companies, and numbers continue to grow year on year.

The CIC is a unique form of company. A CIC must be set up to benefit a particular community, and cannot be used solely to make a profit. CICs carry out a wide range of activities, but they take in sectors such as health and social care, including NHS spin-out social enterprises, environmental business support, addressing cultural needs and running community cafes and centres. At the core of every CIC is its community benefit.

One of the key characteristics of a CIC is its asset lock. The asset lock applies to all CIC models and requires the company to use its assets to achieve its objectives in the interests of the community. Two forms of CIC predominate: there is the company limited by guarantee, where there is no private gain; and the company limited by shares, where there are limits on the amount of profit that can be distributed in share dividends to shareholders. These limits are one aspect of the asset lock.

In 2010, changes were made to the legislation to simplify the application of the asset lock with regard to share dividend caps. These measures simplified the process of applying and managing the caps, but in 2012 a review of these changes by the CIC Association, an independent support organisation for CICs, together with the regulator of community interest companies, revealed that further action was needed, as the caps remained a barrier to investment and to taking up the share model.

There are currently two separate caps on the amount of dividend that the directors of the CIC can declare. The first limit is the share dividend cap, which prevents directors from declaring more than 20% of the paid-up value of a share. The second limit is the aggregate dividend cap, which prevents directors from declaring more than 35% of the profits of a CIC as dividends in any financial year.

These regulations today remove the share dividend cap completely, while retaining the aggregate share dividend cap. This change will make it simpler for CICs to declare dividend, encouraging investment in, and ultimately the growth of, CICs.

The changes we are making today have been fully consulted on and are supported. Last year a consultation was carried out jointly by the CIC regulator with HM Treasury, which was consulting on tax relief for social investment, where CICs are one of the specified models for investment. The joint consultation was a good example of collaboration between departments, and in both cases resulted in introducing new measures that would benefit CICs. The consultation showed that CICs found the so-called double cap confusing, difficult to work with and, frankly, unnecessary.

There is also evidence that the existence of the double cap put off founders of CICs from using a share model at all, instead creating a company limited by guarantee. This choice naturally inhibits the ability of a CIC to seek investment and to bring in share capital.

I hope to reassure noble Lords that the asset lock, which is a key feature of the CIC model, will not be compromised by these measures for the following reasons. First, CICs will still be able to distribute only 35% of their profits in share dividends, and the peg to the paid-up value of the shares will be retained in relation to redeeming or buying back shares by the company.

Secondly, the cap on performance-related interest will remain, although the regulator intends to increase this from 10% to 20% to encourage investment further, which can be done under her own powers.

Thirdly, CICs will continue to be required to report annually to the regulator on their activities and on the distribution of dividends.

The measure in these regulations, together with the changes to the performance interest rate being made by the CIC regulator, will, we hope, encourage growth in CICs. This is particularly desirable in light of the announcement by HM Treasury to introduce social investment tax relief in December 2013. These changes combined are expected to have a very positive impact on existing CICs, as well as encouraging social entrepreneurs to use this company form in new ventures.

These regulations will make it simpler for CICs to operate, and make them more accessible and attractive to investors while retaining the important elements of the asset lock and serving the needs of the community for which the CIC was established. I commend them to the committee.

[Lord Hodgson of Astley Abbotts (Con)]

I begin by adding my congratulations to my noble friend on her new role, and congratulate her on having so far descended the crest unscathed. Her officials certainly gave her—or parliamentary procedure gave her—a good mixture to begin with, starting off with IP, proceeding to employment regulations and now to company law.

I declare my long interests in the charitable world. As my noble friend Lord Wallace of Saltaire knows, I conducted the Government’s review of the Charities Act, and I have an interest in how CICs and the charitable sector work together. I do not oppose these regulations, but I would like just to draw attention to a potential danger. Then I have one specific question to which I would appreciate clarity from my noble friend.

We have a broad spectrum of organisations. We start at one end with limited companies, commercial companies, with which we are all familiar, and at the other end we have charities, which are severely and properly legally restricted. Everything has to be done by them for the public benefit. To fail to do so is breaking the law and opens the trustees to the full force of that law. Between those two extremes—limited companies at one end and charities at the other—there is an increasing number of corporate forms, one of which is the CIC. There are also community benefit societies—bencoms, as they are called—we had better have some new regulations for them; industrial provident societies; social enterprises that are not CICs; companies limited by guarantee that are not CICs; mutuals; charitable incorporated organisations; and CICs themselves.

--- Later in debate ---

[Baroness Neville-Rolfe]

Perhaps this is the question that the noble Lord kindly repeated for me, twice. I fear that I still found—

[Lord Hodgson of Astley Abbotts]

Perhaps I may be of assistance to the Minister. There is a limit of 35% on the amount of total profits that can be distributed; therefore, how they are distributed among the shares does not matter. Presently, the individual share dividend cap is linked to par value. The par value of shares can vary enormously—you can have a pound par or a penny par. Therefore, 10% of that is an irrelevant figure. What is important is that they should not be able to pay out more than 35%. How it is paid out among the shares does not matter. The important thing is to make sure that not all the profits will be paid out. If the officials have not got that wrong, I will shut up.