Members present:
Mr P Doherty (Chairperson)
Mr Armstrong
Mr Clyde
Mr McClarty
Dr McDonnell
Ms Morrice
Dr O'Hagan
Mr Wells

Witnesses:
Mr J Johnston ) Companies Registry
Miss J Bryans )

The Chairperson:
Good morning and welcome to the Committee.

Mr Johnston:
I am Jackie Johnston, head of policy and legislation in the Department of Enterprise, Trade and Investment's Companies Registry, and I am accompanied by my colleague Joan Bryans. We are grateful for the opportunity to make some points about the background to the consultation that proposes to introduce legislation in the Assembly on open-ended investment companies (OEICs). The proposed legislation is timetabled to have its First Stage in early June. I should warn the Committee that what follows is necessarily rather technical, given the nature of the subject matter, so I apologise for the jargon in advance.

I will give a broad description of OEICs. They are members of what are referred to as collective investment schemes, which also include unit trusts. Such schemes may appeal to many types of investors, because they offer people with limited time or investment skills, or people with modest means, access to an attractive variety of investment returns, including those from equities. Such attractive returns are otherwise available only to people who are better off and better advised, or to more sophisticated investors, who can buy professional advice or make investment decisions for themselves.

With regard to the structure of a collective investment scheme, it might be useful if I first deal with a straightforward point about terminology in the consultation document. There are two varieties of authorised collective investment schemes. The first is a unit trust, and the second is an authorised OEIC. One of the essential differences is that a unit trust is a trust and an OEIC is a company. An OEIC is, therefore, a company whose business is managing an investment fund. Investors take a stake in the fund by buying the shares of the OEIC. It is an open-ended fund, which means that the fund gets bigger and more shares are created as more people invest. The fund shrinks and shares are cancelled as people withdraw their money. The price of the shares is based on the value of the investments that the company has invested in.

Having provided a broad description of an OEIC, I will explain the background to the proposals related to OEICs in the consultation document. The regulation of financial services and markets - which includes OEICs - is generally a reserved matter, with one or two exceptions. Regulation in this field has recently been updated at Westminster through the Financial Services and Markets Act 2000. In Great Britain, the Act transferred responsibility for registering OEICs from the Department of Trade and Industry to the UK Financial Services Authority.

Northern Ireland was omitted from that transfer of responsibility because there was uncertainty about how the regulation of OEICs in Northern Ireland should be handled. The reason was that OEICs are currently incorporated at the Northern Ireland Companies Registry, and the registry's functions were transferred to the Northern Ireland Administration under the Northern Ireland Act 1998. The Northern Ireland Companies Registry in Belfast became a transferred matter, but the regulation of OEICs, which falls within the responsibility of the registry, was done on a UK-wide basis. The Treasury took the view that the Northern Ireland OEIC anomaly could be resolved at a later date. Resulting from that, we have a situation whereby OEICs in Northern Ireland register at Companies Registry in Belfast but are regulated by the Financial Services Authority.

A further complication is that the Financial Services and Markets Act 2000 extended the range of OEICs and made their regulation akin to that of unit trusts in Great Britain, but not in Northern Ireland. If you recall, unit trusts are in the category of collective investment schemes. The consultation document proposes to introduce legislation in the Assembly to resolve those anomalous issues in the interests of maintaining clear lines of responsibility for financial services regulation in Northern Ireland.

The proposed legislation has three main elements. First, it will extend the range of the authorised OEIC vehicle in Northern Ireland to that currently available in Great Britain. Secondly, the proposed legislation delivers a fundamental improvement in the existing regulatory position through the introduction of a single regulator - the Financial Services Authority - which will regulate OEICs throughout the UK. Thirdly, the proposed legislation delivers a fundamental improvement to the existing position in that it further simplifies matters by setting out that the provisions for OEICs are broadly the same as those for unit trusts, as contained in the Financial Services and Markets Act 2000. Therefore, there should be no significant divergences in the regulations that cover the two types of scheme, as both are regarded as collective investment schemes.

The Department believes that, taken together, the proposals will result in a distinct improvement in the regulation, and range, of OEICs available in Northern Ireland. The proposed Northern Ireland legislation will extend to fund providers in Northern Ireland the efficiency advantage that is currently available to their competitors in Great Britain. Customers - ordinary investors - will also have the advantage of greater choice with no detriment to investor protection.

The result of the current registration arrangements in Northern Ireland is a cumbersome and unnecessary split of responsibility. The new provisions will represent a significant rationalisation of the arrangements. As you are aware, the document has been out for consultation, and the consultation ended earlier this month. We sent out 488 documents. We received 11 replies, most of which made no comment. One or two of the replies were generally favourable and contained a couple of suggestions for further improvements to our proposals.

I am grateful to the Committee for taking the time to listen to this technical explanation. Miss Bryans and I are happy to answer any questions that Committee members might have.

Mr Wells:
I should have declared at the start that I hold investments in what are affectionately known as "OEICs". I have four OEICs, which I can assure you are not worth a great deal of money. However, I should declare that before I ask any questions. The investments are held in a company called Fidelity Investment Services Ltd, which changed its unit trusts to OEICs about 18 months ago.

Anyone in Northern Ireland can already invest directly in OEICs by investing in a mainland UK company. I was not aware that there was any interest in the creation of OEICs in Northern Ireland. Is there any demand for these regulations?

Mr Johnston:
To date there has not been any interest. No OEICs are registered in Northern Ireland, and there is no indication of any further demand. We simply have a black hole left because of the way in which the Financial Services and Markets Act 2000 was applied throughout the UK. The proposals are designed to close the gap in regulation.

Mr Wells:
Do any Northern Ireland-based companies, such as the Northern Bank Ltd or the Ulster Bank Ltd, run unit trusts that could be converted to OEICs?

Mr Johnston:
Yes.

Mr Wells:
Is it correct to say that those banks could not do that at the moment?

Mr Johnston:
Those banks could convert unit trusts to the restricted form of OEIC, but they could not convert them to the wider range which the Financial Services and Markets Act 2000 allows throughout the rest of the UK.

Mr Wells:
I am unhappy with my investments. That has nothing to do with the company - the stock markets are plunging, and I am feeling very poor at the moment. However, at present, if an investor in Northern Ireland were unhappy about the management of an OEIC by a London-based company, he or she, as a citizen of the United Kingdom, could go to the Financial Services Authority.

Mr Johnston:
That is correct.

Mr Wells:
How then would these regulations improve the regulatory environment for someone in Northern Ireland, when they already have access to the Financial Services Authority in London?

Mr Johnston:
At the moment there is a split responsibility. If you want to set up an OEIC in Northern Ireland, you come to Companies Registry to register it, but the regulation is carried out by the Financial Services Authority. The proposed changes will streamline that regulation for the provider rather than the investor.

Mr Wells:
So the investor will not benefit directly from the changes in regulation?

Mr Johnston:
No, investors will not benefit unless the local investment companies decide to start offering OEICs here.

Mr Wells:
Is it correct to say that if no investment companies in Northern Ireland were to go down that route, the legislation would possibly never be used?

Mr Johnston:
That is correct.

Mr Wells:
Is the legislation being put in place just in case?

Mr Johnston:
Yes. It will also close the gap in regulation.

Mr Wells:
Will companies incur any additional expense because of the regulations?

Mr Johnston:
No.

Mr Wells:
What mechanism do you intend to use to take the legislation through the Assembly?

Mr Johnston:
A primary Bill, followed by secondary regulations.

Mr Wells:
Is it correct to say the cost of that will be borne by the Department rather than the industry?

Mr Johnston:
Yes.

Mr McClarty:
Unlike Jim Wells, I have not brought my investment portfolio with me this morning. Can you explain, in layman's terms, how Northern Ireland has been disadvantaged by the lack of ability to set up OEICs?

Mr Johnston:
Throughout the European Union, OEICs are regulated by a Directive which restricts the way in which they can operate. If you were to create an OEIC in Northern Ireland, you would be restricted by that Directive. The Treasury has introduced a wider range of OEICs, currently giving OEICs in Great Britain the ability to invest in wider funds within the UK. An investment company wishing to set up an OEIC in Northern Ireland would currently have to operate under the Council Directive of 20 December 1985 on the co-ordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (No. 85/611/EEC) - the UCITS Directive as it is known - whereas competitors in Great Britain would have a wider and more liberal range of OEIC vehicles available. An investment company here wishing to take that route would be at a disadvantage.

Ms Morrice:
I shall have to start from scratch, since I am very green regarding investments. However, I was interested when you said that the proposals would enable people like myself to get involved in such matters without highly paid consultants and financial advisers. I should appreciate knowing how that might be done. How can I understand the system? I should also like to know how this fits in with tax-exempt special savings accounts (TESSAs), individual savings accounts (ISAs) and credit unions, and who benefits.

Mr Johnston:
OEICs are essentially funds managed by City firms. You would access one through a company such as Merrill Lynch. Any of the large investment companies would offer you a range of products with a degree of protection, rather than your having to expose your own capital directly on the stock market. You invest in a collective scheme, and more money going into that scheme would, one hopes, generate more profits. For example, you, as a small investor, could become involved in an OEIC involved in property development, whereas, as a single investor, unless you had a large reserve of capital, your own funds would probably not allow you that scope. In a sense, it is no different from ISAs or, previously, personal equity plans (PEPs); it is just another way of managing funds. It does not expose you, as an individual investor, too much to the stock market, as professional advice is built into the particular fund portfolio.

Ms Morrice:
Is it about encouraging investment and making investment opportunities easier to access?

Mr Johnston:
Yes, for the small investor.

Ms Morrice:
What plans are in place to make information on this accessible and to increase understanding of it?

Mr Johnston:
The Financial Services Authority provides a full range of information and advice to the small investor. It has an excellent web site, with numerous booklets published on it, and it also maintains a register of OEICs. As a small investor, you can ask it for papers related to the OEIC, so it is fully transparent. Most of the national newspapers which commentate on such matters will provide league tables showing how the various OEICs are performing.

Ms Morrice:
Does the OEIC itself get the profits?

Mr Johnston:
Yes. Those are then distributed according to the value of shares held by individual investors in the OEIC.

Ms Morrice:
So the money is all reinvested, and the OEIC does not make money for itself?

Mr Johnston:
It makes money for itself; the essential difference between it and a unit trust is that a unit trust retains its own capital resource, whereas an OEIC is a company, and the entire resource is owned by all of the investors. For example, if the OEIC were to dissolve, you would benefit both from the return on investment and the current value of the OEIC at the time of dissolution.

Ms Morrice:
Thank you. I am getting there.

Mr Johnston:
Your second point concerned credit unions, which, under financial services regulation in Northern Ireland, are a transferred matter. They are the responsibility of the Department of Enterprise, Trade and Investment. The Financial Services Authority has no role in relation to credit unions in Northern Ireland. That is one of the exceptions under the transfer of power.

Ms Morrice:
Is a credit union very similar to an OEIC?

Mr Johnston:
No. A credit union would not expose its investors - its members - to the same extent as an OEIC would.

Ms Morrice:
So an OEIC is more risky.

Mr Johnston:
Yes. Like any stock-market investment, it is prone to variations in the market.

Ms Morrice:
It would be interesting to see the various risk levels relating to a credit union, a unit trust, an ISA and a TESSA, and where an OEIC fits into those risk levels.

Mr Johnston:
I am not aware of anyone in Government having produced advice along those lines. Obviously that sort of advice would be fairly risky, given that events could overtake it. I will approach the Financial Services Authority to find out if there are relevant publications that it could recommend, and, if so, I will send one to you.

Dr O'Hagan:
You said that the proposals were, in a sense, closing the gap. In essence, are they basically transferring responsibility from the Department of Trade and Industry to the Department of Enterprise, Trade and Investment?

Mr Johnston:
The Department of Trade and Industry, is transferring responsibility to the Financial Services Authority. Further policy on OEICs will be a matter for the Treasury.

The Chairperson:
Thank you for your presentation. It was very technical, but Ms Morrice got underneath all of that. In the course of our deliberations we may think of other questions, and, if so, we will write to you.

6 February 2002 (part ii) / Menu / 27 February 2002