1.40 p.m.
rose to move, That the order laid before the House on 19th March be approved [15th Report from the Joint Committee].
The noble Lord said: My Lords, perhaps I should apologise to your Lordships for coming on again so quickly with another speech. However, noble Lords will be delighted to hear that this one is a good deal shorter than my two previous speeches.
I should explain that the second of the orders we are debating today, the charities order, revokes an earlier order made only last year, simply because the new trustee investments order before us today will cover all trustees, including charitable trustees. We shall thus have one order covering all trusts rather than two pieces of subordinate legislation.
The Trustee Investments Act 1961 extended the powers of trustees to make investments. The Act requires trustees who want to invest in shares to separate the trust fund into two parts, one of which must be invested in what the Act calls "narrower" investments and the other in "wider" investments. The first schedule, which has been amended over the years, sets out which forms of investment fall into the two groups. Broadly, "narrower" investments are fixed interest securities issued by public sector institutions and "wider" investments are a restricted range of shares listed on the stock exchange of countries in the European Economic Area.
The original Act required that the two parts that I mentioned should be equal in value when a trust fund was first invested. The order would change the ratio of 50:50 to 75:25, with trustees being allowed to use the larger part to buy "wider" range investments. My honourable friend the Economic Secretary to the Treasury announced the Government's decision in a Parliamentary Answer on 21st November last year.
I should draw your Lordships' attention to two points. First, trustees are bound by the Act only if their particular trust deed does not itself define their powers of investment; or, of course, if the deed specifies that the trustees are to invest as the Act requires. Trusts which are formed without deeds, usually in the case of intestacies, must be invested as the Act requires. As your Lordships may know, almost all new trusts have their own powers which are often far wider than those contained in the Act. Secondly, the original division of a trust fund is a once-for-all event. So, over time, a fund may come to hold a much higher proportion of its assets in the form of shares than when it was first invested.
The 50:50 ratio has come under increasing criticism. The main concern has been that inflation has tended to erode the real value of the "narrower" range of funds. It has been argued that the interests of trust beneficiaries would have been better served if more of the assets were in the form of equity investments rather than gilts.
The Deregulation Task Force on Charities and Voluntary Organisations recommended in 1994 that the Trustee Investments Act should be reformed to widen significantly the scope of trustees' investment powers. Using powers under the Charities Act of last year, my right honourable friend the Home Secretary changed the ratio for charitable trusts from 50:50 to 75:25 by an order which came into force in April last year. At much the same time, the Treasury published a consultation document proposing that that should be extended to non-charitable trusts. The Act does not allow the Treasury to go further than 75:25 by means of an order.
As the Government have already announced, we plan to consult widely on a more radical reform of the Act. I expect the consultation document to be published as planned by the beginning of next month. However, the Government decided that it would be wrong to allow the plans to produce a Green Paper to delay the useful, although limited, change before us today.
The proposal is widely supported by interested parties, and I hope that the order implementing it will similarly commend itself to your Lordships. I commend the orders to the House, and I beg to move.
Moved, That the order laid before the House on 19th March be approved [ 15th Report from the Joint Committee].—( Lord Mackay of Ardbrecknish.)
My Lords, I am grateful to the Minister for introducing these orders to your Lordships' House. I was intrigued that he argued that there needed to be change because of the impact of high levels of inflation on those trusts which have a relatively low ratio of investment in equity. I wondered whether he was sending us a signal about the Government's expectations about the inflationary impact of their policies.
It is also worth emphasising the point made by the Minister; namely, that the regulations will apply to small trusts, although there may be many of them, which do not define investment regulations within their own deed of trust. It is understandable that the Government should lay down a basic investment rule for those trusts which do not define the possible bounds of their investments. But if the Government believe that those ratios are appropriate, why are they not applied to all trusts? I appreciate that trustees must be approved. But if there is a rule of thumb which the Government feel is appropriate for trusts without an investment strategy embodied in their deed of trust, why does that not apply more widely? That raises a wider and even more important issue concerning the position of trusts which invest predominantly in the shares of one company. The Baring Foundation, for example, was just such a trust. Is it appropriate that trusts should be allowed to follow that form of investment strategy which has nothing to do with the defined objectives of the trust and everything to do with the control of the company whose shares are held? It is essentially an anti-competitive strategy, blocking the possibility of proper competitive scrutiny of the management and operation of the firm by blocking potential takeover. It may reasonably be supposed that it was exactly that block to competition and to scrutiny which contributed to management complacency, and management failure at Barings, and to the consequential losses to the Barings bondholders. Will the Minister tell the House whether he regards the investments strategies which concentrate on the shares of just one company as appropriate? Are they not highly risky? Are they not, as I explained, anti-competitive? Should not the investment strategy of all trusts be suitably diverse and suitably balanced?My Lords, the noble Lord raises a much wider point, which we would be unable to deal with in the kind of secondary legislation that is before us today. The original Act gives the Government only fairly limited powers to make changes.
The noble Lord made the quite correct point that most of the trusts affected by what we are doing today will be fairly small trusts. Most trusts have in their trust deed their own rules for the balance of investments. What we do today will only affect those trusts where that formula is not on their deeds. The more general point raised by the noble Lord, who reminded us of the position of Barings and the Barings trust, where all the money was invested in the same company, takes the discussion a good deal wider. I note his points about anti-competitiveness and so on, but perhaps I may say to him that we are about to issue a consultative document and we intend to have a fairly lengthy consultation period. Indeed, it will be lengthier than we might perhaps have liked because the Summer Recess will intervene. That will make it a fairly long consultation period and everyone will have ample opportunity to give their views. We are looking at more radical reform and perhaps the noble Lord, when he sees the consultation document, might like to respond to it along the lines of his worries. But these are complex issues and I should prefer to ask your Lordships to wait to see the detailed case set out in the consultation document that we intend to issue at the beginning of May. The basic principle of trust law in England and Wales—that trustees must take the same care as an ordinary, prudent man would take, if he were minded to make an investment for the benefit of other people for whom he felt morally obliged to provide—forms the basis on which, we believe, trusts ought to work. We plan to build on that. If the noble Lord is content, perhaps I can invite him to await the consultation document and then he can respond and make the points that he made to me as part and parcel of the consideration that we will then give to what we do in this field in the future. On Question, Motion agreed to.