Open-Ended Investment Companies (Amendment) Regulations 2011

Lord Newby Excerpts

Monday 12th December 2011 Grand Committee

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, these regulations amend the Open-Ended Investment Companies Regulations 2001 to introduce a protected cell regime for open-ended investment companies, or OEICs. They will ensure the segregation of liabilities of different sub-funds held under the same OEIC umbrella company so that investors in one sub-fund will not be liable to creditors in the event of another sub-fund failing.

I would like first to give a little background on why this legislation is needed. Open-ended investment companies are one of two major forms of pooled investment fund. UK regulations for OEICs were first approved by Parliament in 1996 to help UK fund managers compete more effectively in the European market. Collectively, there is around £580 billion in UK-domiciled funds and the work needed to administer those funds brings jobs to a number of parts of the UK, including outside the UK’s traditional fund management centres of London and Edinburgh.

Large fund managers generally operate a small number of OEIC umbrella companies with a large number of sub-funds within each umbrella, allowing them to operate a large range of funds more efficiently. The sub-funds, or cells, do not have a separate legal personality but are separately managed, charged, accounted for and assessed for tax. Under current UK law, there is no segregation of liabilities between sub-funds, so creditors of one sub-fund could have a claim on the assets of another sub-fund. While using multiple separate OEICs instead of sub-funds within a single OEIC would protect investors from this risk, it would make operations less efficient and add significant cost to end-users. In practice, the likelihood of creditors having a claim is small, both because OEICs must comply with borrowing limits imposed by the FSA and because feedback from the industry suggests that most credit agreements stipulate segregated liability. However, because this risk has never crystallised, it is not certain how these stipulations would be treated by the courts.

This legislation increases consumer protection and, by doing so, improves the competitiveness of the UK as a domicile for funds. Investors increasingly require segregated liability to address the small risk present in umbrella structures. Managers seeking to domicile their funds in the UK need to be able to offer this based on a statutory provision. This legislation does just that. It removes the risk of contagion by providing an effective ring-fencing of a sub-fund’s assets from the other sub-funds and the umbrella itself. The Government are introducing the regime to ensure that the UK can continue to compete with other jurisdictions that already operate protected cell regimes. Failure to introduce the legislation would risk funds being unwilling to domicile here.

In deciding how to implement this legislation, the Government have been mindful that, despite the undoubted benefits, there are some potential costs to operators in converting from their existing arrangements. We have, therefore, provided for a general two-year transition period, which may, at the FSA’s discretion, be extended for a further year. During this period, existing OEICs cannot enter into any new contract that is not subject to a protected cell regime unless that contract is subject to an existing master agreement which governs the terms of all contracts entered into under it. This should allow firms ample time to convert the necessary contracts, many of which will have come up for renewal in any case. For operators establishing new OEICs, the costs introduced by this legislation are negligible, so they are required to comply immediately with the new regime.

The Government’s Plan For Growth, published alongside the March Budget, also announced a moratorium on new domestic regulation for microbusinesses—firms employing nine staff or fewer—for a period of three years. The protected cells legislation complies with this announcement. Microbusinesses will be fully exempt from the legislation’s requirements for a period of three years. However, early indications are that they may seek to comply with the legislation earlier, given the benefits it brings.

The UK fund management industry has been calling strongly for a statutory protected cells regime and has warmly welcomed news of its introduction. The industry has worked closely with the Government to get the regulations right and they will bring considerable benefits to investors in UK funds and increase the competitiveness of UK industry. I hope that noble Lords will give their support to the regulations today. I beg to move.

[Lord Newby]

My Lords, this is a fascinating example of the industry asking for regulation that the FSA seems to have been slow to introduce. This is an almost unique experience for the sector, which is normally grumbling that there is too much regulation.

I am intrigued that it is being introduced here purely under domestic legislation rather than within the ambit of any EU cover, and I wonder whether there is any prospect of OEICs, in this regard, being the subject of any of the many EU directives that are currently on their way down the track or being discussed. I note that, at the moment, the jurisdictions that already have this additional regulation are a mixed bag and include Jersey, Ireland and Luxembourg. I find it slightly surprising that it has taken some time for both the UK industry and the Government to get round to implementing this legislation, given that its benefit is that it will improve the competitive position of OEICs in the UK. It seems extremely sensible. I want to confirm what I think the Minister said: that there is no suggestion that this is being introduced because there has been any difficulty with any existing OEICs. Is it purely as a pro-competitive rather than as an anti-competitive measure?

[Lord Tunnicliffe]

My Lords, I make it clear from the outset that we support this order. I am looking forward to the Minister’s answer to the noble Lord’s questions about how the regulations fit in with the EU—questions which are particularly apposite at this moment. I will content myself with a few comments on the impact assessment and two or three questions.

The impact assessment is absolutely fascinating. From my reading of it—and I am happy to be corrected here—the net benefit of the regulations will be between £18 million and £360 million, which is a pretty wide range that will involve lots of sums to prove that. The only point that I feel I can take from the impact assessment is that, in all credible scenarios, the introduction of a protected cell regime will be favourable, and I think that we can all be satisfied with that.

I have just a few questions. First, new Regulation 11A(4) provides for an exception, which is referred to in the Explanatory Note. However, for myself I cannot quite see what sorts of transactions or assets the exception refers to. Like all exceptions, one is always slightly worried that the exception ends up negating the intent of the order. I am sure that it does not, but I pose that question for assurance.

Secondly, as I understand it—once again, I could be wrong—there will be a period in which PCR products and non-PCR products will be on sale at the same time. I may have misunderstood that, but if I am right in that assumption, what actions are the Government taking to ensure that there is no confusion in the marketplace during that period of overlap? I will be happy if there is no period of overlap, but if there is one then it is important that we do not introduce confusion through these very sensible regulations.

Finally, I like reading impact assessments, which is a little burden that I have to carry. The wonderful thing about impact assessments is that I always sense that they are written by rather more junior people— I was going to say with rather less care, but care is perhaps the wrong term—as you get that little hint from things. On page 10, the impact assessment states:

“The UK fund regime has been viewed as less favourable by managers and investors for a number of reasons, with the lack of a PCR being one of them”.

Perhaps the Minister could enlighten us as to what other reasons exist and what, if anything, he is doing about them.