Community Interest Company Regulations 2005

My Lords, I am sure that the whole House is grateful to the noble Lord, Lord McKenzie of Luton, for his careful explanation of these detailed, technical regulations. I believe that this is the first time we have had the pleasure of taking part in a debate together since his recent elevation, on which I congratulate him. For those of us who were involved in the passage of the parent Bill and approved the general principle of CICs, the arrival of these regulations is to be welcomed. I have read the record of the proceedings on these regulations in the other place and I shall endeavour not to repeat the points and questions raised there. I was glad to note from those proceedings, and to hear from the Minister, that a regulator of CICs has been appointed, that guidance forms and model articles of association are being prepared and that no fewer than 340 expressions of interest in becoming a CIC have been received. During the Committee stage of the Bill here we were   concerned that the financial costs of the CIC regulatory regime had been undercooked. The noble Lord, Lord Evans of Temple Guiting, will recall that. It would be helpful if the Minister could confirm to the House whether, in the light of experience so far gained, those original cost estimates are being met. In order   not to lead him into temptation unnecessarily, I should tell him that paragraph 245 of the original Explanatory Notes to the Bill gives a total estimate of set-up costs in the range of £250,000 to £500,000. His colleague in the other place, Mr Alun Michael, said   that set-up costs were now £515,000. So we are already some way above the top end of the range. Paragraph 244 of the Explanatory Notes states:"““We estimate the regulatory annual running costs at approximately £310,000””." Mr Michael said in the other place that the annual running costs are now £420,000. I can understand the difference between £500,000 and £515,000—after all, that is only 3 per cent. However, by my calculations the difference between £310,000 to £420,000 constitutes an increase of 35 per cent. It was, therefore, slightly strange that Mr Michael said:"““On the cost of the regulator the estimates in the regulatory impact assessment remain broadly correct””.—[Official Report, Commons Second Standing Committee on Delegated Legislation, 21/6/05; col. 16.]" This Government can play a bit fast and loose with their accounting, but I do not think that an increase of 35 per cent could be described as broadly correct on any normal understanding of that word. Therefore, some clarification of what has been going on with the costs would be helpful. I turn to two broad points. At Second Reading of   the Companies Bill many noble Lords, myself included, wondered whether, desirable though the CIC model might be, it would not have been better to introduce it subsequent to, not in advance of, the long awaited Charities Bill. Clearly, there would be many points of overlap between the two pieces of legislation. Now the Charities Bill is progressing through your Lordships’ House under the stewardship of the noble Baroness. Clause 32 of that Bill, and the associated Schedule 6, establish a new corporate format—a charitable incorporated organisation. That appears to duplicate the CIC concept. Will the noble Lord tell the House how CICs differ from CIOs other than that one is regulated by the Charity Commission and the other by the DTI, and that one may be a charity and the other may not? Are we not in danger of establishing expensive duplicative regulation? This takes me to my second broad point—why cannot a CIC be a charity? We discussed this at some length in Committee on the Bill. For reasons that were not entirely clear, beyond a possible departmental turf war between the Home Office and the DTI, the noble Lord, Lord Sainsbury—who handled the Bill expertly for the Government—would not change his view. Now I read in paragraph 2, ““Interpretation””, that ““asset-locked body”” means:"““a community interest company, charity or Scottish charity””." Do the Government now admit that there is no fundamental reason why a CIC should not be a charity? I have some more detailed questions. I note that Regulation 3 deals with the issue of political activities not being treated as being carried on for the benefit of the community. I do not seek to raise the difficult issue of the definition of political activity, which occupied much of the committee’s time in the other place, but I am interested in what process the regulator will adopt to ensure compliance with the provision. It is easy to envisage circumstances in which a CIC is formed on a perfectly reasonable basis but over the years becomes more extreme in its approach. How will the regulator check that, and what sanctions does he have to improve performance? I note under Regulation 32 that he has the power to ““remove a manager””, but can he impose conditions on the CIC itself? In an extreme case, can a CIC be ““de-CIC-ed””, and if it can be, what happens to its assets? Does some sort of cy-pres rule apply? Secondly, will the Minister explain the purpose of Regulation 5, ““Section of the community””? I am not clear from the drafting whether it is permissive or restrictive in its intent or of the role it plays in Part 2 of the regulations. Thirdly, Regulation 13 specifies actions that require the regulator’s approval. I see no time limit within which the regulator must opine. There could be a concern that on a tricky point the regulator could take a long time to reach a decision, and that could seriously damage the operations of the CIC in question. In Part 6, Regulation 17, ““Declaration of dividends””, I note in paragraph (1)(b) that the payment of a dividend requires the approval of ““an ordinary or special resolution””. The latter is an unusual provision. Dividend payments normally require only an ordinary resolution—a simple majority; not a special resolution—and a 75 per cent vote in favour. Is some special provision expected for dividend payments by CICs? If so, will the Minister explain it and the thinking behind it? Under Regulation 17, will the Minister give an example of a case falling in Regulation 17(4)(b) that is not caught by the provisions of Regulation 17(4)(a)? I am sure that his officials regard that as a full toss of the leg stump and will be able to provide him with an easy answer, but if they cannot I will be perfectly happy if he can write to me with an example at a later date. I understand that it is quite a detailed question to raise in this way. In raising these questions with the Government, it would be churlish if I did not congratulate them on the   ingenious nature of Regulation 20 and the provision to allow a catch-up on unused dividend capacity. Equally, the Government have struck the right balance in Regulation 22 as to the interest rate cap of 4 per cent over the Bank of England base rate and the maximum level of dividend—35 per cent of distributable reserves—which the Minister referred to in his opening remarks. I am slightly more uneasy about the share dividend cap being set at 5 per cent over the Bank of England base rate. The difference between an equity risk and a debt risk—the latter may well be secured on the assets of the CIC—should surely be reflected in a spread greater than 1 per cent. I appreciate that CICs are a special case, but the Minister might care to explain why the latter figure was chosen. For my part, a spread of 5 per cent between debt and equity might be more appropriate. So, for debt it is currently 4.75 per cent, plus 5 per cent, which is the 9.75 per cent figure that Mr   Michael referred to for debt, with perhaps another 5 per cent for dividends on the equity, giving a maximum of 14.75 per cent. Could the Minister clear up confusion in my mind regarding par value and paid-up value—subscribed capital—in relation to the operation of the cap? I was fully clear that the Government were not linking the   cap to the par value of the share; indeed paragraph   22(5) seems to make that clear. The Minister used similar words in his opening remarks. However, the Minister in the other place—Mr Alun Michael—said:"““Since the base rate is currently 4.75 per cent, the maximum dividend for a £1 share is 9.75p in a year””.—[Official Report, Commons Second Standing Committee on Delegated Legislation, 21/6/05; col. 6.]" I follow the arithmetic, but his choice of words indicates that he was talking about par value. Clarification would be welcome. Finally, I turn to the position of Scotland, which was also discussed in Committee in the other place, but without much light being shed. Will the Minister take us through the position? In particular, will CICs be able to register at Scottish Companies House in Edinburgh? Are English CICs able to operate north of the Border? As I said, we welcome the principles behind the CICs, so are pleased to see the regulations. Nevertheless, we are always anxious to eliminate duplication in regulations and minimise any regulatory burden. I look forward to hearing the Minister’s response.