EXPLANATORY AND FINANCIAL MEMORANDUM

INTRODUCTION

1. This Explanatory and Financial Memorandum relates to the Open-Ended Investment Companies Bill. It has been prepared by the Department of Enterprise, Trade and Investment ("the Department") in order to assist the reader of the Bill and to help inform debate on it. The Memorandum does not form part of the Bill and has not been endorsed by the Assembly.
2. The Memorandum needs to be read in conjunction with the Bill. It is not, and is not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.

BACKGROUND AND POLICY OBJECTIVES

3. An open-ended investment company (OEIC) is a company whose business is investment in securities such as the shares of other companies. It issues shares to its investors and its capital may go up or down as shares are issued or cancelled. A fund manager, who must be authorised by the Financial Services Authority (FSA), manages its investments. The assets of, or investments owned, by an OEIC must be held by a depository, which must also be authorised by the FSA. The depository plays a key role, similar to that of a unit trust trustee, and must be legally independent of the directors of an OEIC.
4. The current legislation for OEICs in Northern Ireland - the Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations (Northern Ireland) 1997 (S.R. 1997 No. 251) - provides only for the operation of the UCITS type of OEIC. (UCITS is the Undertakings for Collective Investment in Transferable Securities Council Directive 85/661EEC). In recent years the investment fund management sector has argued that it would be desirable for Government to facilitate the formation of non-UCITS OEICs to ensure the continued success of the OEIC as a UK investment instrument. Non-UCITS OEICs offer a wider range of investment schemes including money market and property funds and funds of funds.
5. Legislation to extend the range of the authorised OEICs available in GB is contained in the Financial Services and Markets Act 2000 (c. 8) and the Open-Ended Investment Companies Regulations 2001 (S.I. 2001/1228). The Bill would ensure that local investment firms are provided with the opportunity to offer the same range of OEICs as their competitors in Great Britain, thus removing any potential disadvantage to Northern Ireland.

PROPOSALS IN THE BILL

6. The purpose of the Bill is to enable the Department to make regulations about OEICs. The regulations will contain detailed provisions about the formation, operation, dissolutions and winding up of such companies. The proposed Northern Ireland legislation would comprise a short Bill that will provide the framework for the extended range of authorised non-UCITS OEICs together with Regulations, which would be made under powers conferred by the Bill. These regulations will set out detailed provisions for the setting up, regulation, and dissolution of an OEIC.
7. Regulations under the Bill may widen the role of the Financial Services Authority ("the Authority") to act as a single point of contact on OEICs. This would mean that as well as regulating OEICs for Northern Ireland, the Authority would also be responsible for registering OEICs and maintaining the register. The registration function is currently exercised by the Registrar of Companies.

CONSULTATION

8. The consultation process was undertaken over the period November 2001 to February 2002. A wide range of organisations were consulted including financial institutions, banks, collect investment managers and investment fund managers. Voluntary and community organisations representing section 75 groups were also consulted.
9. Over four hundred consultation documents were issued and sixteen responses were received. All respondents endorsed the general principles behind the Bill. Respondents welcomed the fact that the legislation would extend the choice of vehicles for business and bring Northern Ireland into line with the remainder of the UK.

OPTIONS CONSIDERED

10. The two options identified and considered were (i) to continue to rely on present Northern Ireland OEIC legislation; or (ii) to introduce new legislation to make available the extended range of OEICs in Northern Ireland.
11. The assessment process concluded that option (ii) would make NI comparable with GB, affording NI investment companies and investors the same opportunities as their GB counterparts. The registration and regulation functions would also be based in one body simplifying the regulatory framework.

OVERVIEW

12. The Bill has 5 clauses.

COMMENTARY ON CLAUSES

Clause 1: Open-ended investment companies

This clause creates the broad framework within which the Department may make regulations relating to the establishment, carrying on, and regulation, of OEICs. It provides a wide-ranging and non-exhaustive list of matters, for which the regulations may provide. These include imposing criminal liability, conferring functions on the Authority (including rule-making powers and power to waive or modify rules) and power to modify or exclude any statute or rule of law. In particular, the regulations may revoke the existing regulations governing OEICs.

Clause 2: Meaning of expressions used in section 1

This clause provides for the definition of certain terms used in clause 1.

Clause 3: Amendment of Article 665 of the Companies (Northern Ireland) Order 1986

This clause amends the Companies (Northern Ireland) Order 1986 ("the Order") so that the prohibition on the formation of companies with more than 20 members other than under that Order will not apply to OEICs incorporated by virtue of the Regulations made under clause 1.

Clause 4: Commencement

This clause provides for the Department to make an order bringing the Bill into operation.

Clause 5: Short title

This clause gives the short title by which the Act will be known.

FINANCIAL EFFECTS OF THE BILL

13. There are no additional Northern Ireland exchequer or staffing costs arising from these proposals. Before outlining the likely additional costs it is important to note that the decision to form and register an OEIC will continue to be a voluntary one, based on commercial consideration.
14. Start up costs are estimated at £1200 with annual recurring costs of £1200.

HUMAN RIGHTS ISSUES

15. No human rights implications have been identified.

EQUALITY IMPACT ASSESSMENT

16. Those most affected by this proposal will be investment companies, banks and those generally operating in the fund management sector, should they decide to take up this increased range of investment opportunities. Given the particular focus of these proposals it is not considered that they will have an adverse impact on any of the section 75 groups. The widely circulated consultation document, explaining the proposals, noted this and no information to the contrary was received.

SUMMARY OF THE REGULATORY APPRAISAL

17. A Regulatory Impact Assessment (copies are available from Companies Registry) concluded that while it is difficult to quantify and value the costs and benefits associated with registering an OEIC, it is likely that the benefits will outweigh any disadvantages. The decision to form an OEIC is a voluntary one that will be taken having regard to commercial considerations.

SECRETARY OF STATE'S CONSENT

18. Regulations under the Bill may make provision for the creation of criminal offences, which is a reserved matter under paragraph 9(b) of Schedule 3 to the Northern Ireland Act 1998. It was therefore necessary to obtain the Secretary of State's consent under section 8 of the Northern Ireland Act 1998 to the consideration of the Bill by the Assembly.

LEGISLATIVE COMPETENCE

19. At Introduction the Minister of Enterprise, Trade and Investment had made the following statement under section 9 of the Northern Ireland Act 1998:

"In my view the Open-Ended Investment Companies Bill would be within the legislative competence of the Northern Ireland Assembly."