Considered in Grand Committee
We are today debating the draft Community Interest Company (Amendment) Regulations. The community interest company form was created by the Companies (Audit, Investigations and Community Enterprise) Act 2004 and the Community Interest Company Regulations 2005. In passing that legislation, we were creating a new type of company tailored for social enterprises that wanted to use the familiar company form but with the assurance that assets would primarily be used for the benefit of the community.
That legislation came into force in July 2005 and, since then, over 3,000 social entrepreneurs or social enterprises have chosen to register as community interest companies. The original legislation also created the office of the regulator of community interest companies as an independent officeholder with responsibility to oversee the sector and maintain public confidence in this new company form.
Before introducing the community interest company, we consulted widely on both the principle of this new form and how it should work in practice. One of the principles was that the community interest company would offer more flexibility and choice to the social enterprise sector. It was intended to complement the existing and well established forms, such as charities or industrial and provident societies, which are also commonly used in the sector.
Although the community interest company has not been in existence long, there have been a number of related legislative changes over that time. We have also learnt from the experience of the companies and their advisers, as well as the regulator, how some aspects of the regulations work in practice. The draft amendment regulations will therefore update the regulatory framework for community interest companies to take account of these developments.
As I have said, the original intention was that the community interest company would sit alongside other legal forms in the sector, and we consider that enterprises should have the option to move between the various legal forms available where this is appropriate. So, the 2004 Act permitted community interest companies to convert to become English or Welsh charities or vice versa. The original legislation also anticipated that we would use regulations to permit conversions both from Scottish charities and to the community benefit form of industrial and provident society, once provisions relating to those two forms were in place. The office of the Scottish charity regulator has since been established and a statutory asset lock is now available to community benefit societies. With those provisions now in place, the draft regulations now permit Scottish charities to convert to community interest companies and permit community interest companies to convert to the asset-locked form of community benefit society.
The draft amendment regulations make a number of other changes in the light of experience or to seek to improve the original drafting. These include, for example, clarification of the community interest test to provide more certainty to the regulator in her decision-making. There are also a number of amendments to the provisions which a community interest company is required to include in its articles. The effect of these changes is essentially to allow the companies themselves to determine their approach on certain matters, such as the appointment and removal of directors and casting votes, rather than requiring them by statute to follow a prescribed course.
Finally, the draft regulations implement consequential amendments to the regulations arising from the Companies Act 2006. In particular, the 2006 Act introduces changes to the information contained within a company’s memorandum and articles which need to be reflected in the regulations governing community interest companies. In summary, therefore, the draft regulations aim to update the community interest regulations for the benefit of existing and prospective community interest companies. I beg to move.
I thank the Minister for explaining the regulations, which I do not believe are particularly controversial. However, perhaps I could ask a few questions. As set out in the Explanatory Memorandum, according to the Department for Business, Innovation and Skills:
“To minimise the impact … on firms employing up to 20 people, the approach taken is to maintain a light touch regulatory framework for CICs”.
Can the Minister kindly explain how the office of the regulator of community interest companies achieves that? Is it, for instance, subject to regulatory budgets and sunset clauses? How does it interact with the Better Regulation Executive?
Secondly, how many people does the office of the regulator of community interest companies employ and how much does it cost to run each year? How is its performance assessed? Lastly—a relatively minor question—I believe that the order will remove the right of a community interest company chairman to cast a deciding vote in a boardroom ballot. There was an apparently valid reason for the chairman having a casting vote. Can the Minister, therefore, explain what happens if the board is split equally on an issue?
I am happy to support these regulations. I have one question about paragraph 8 on page 2 of the Explanatory Memorandum, which states:
“In two instances, where there were mixed views raising significant concerns, these provisions have been removed”.
Is the Minister in a position to say what those provisions were?
If the board is split equally, any proposal put to the board falls, so there is no deadlock. Those are the usual rules of debate: if there is no majority and there is no casting vote, the proposal falls.
Some proposals were dropped in the light of the responses. I was asked what those proposals were and what the concerns about them were. One proposal was to permit the regulator to take into account the impact of a prospective community interest company’s activities on the wider community and public interests. Several respondents felt that this would fundamentally alter the role of the regulator, involving her in potentially contentious and subjective decisions. It was also noted that on many issues there would be differing opinions on what constituted community benefit.
Of the two other proposals, the first was to commit public or regulatory bodies—for example, local authorities that may have set up a community interest company—to make representations to the regulator for a share of any residual assets in the event of a winding up. The final one was to deal with the consistency of the regulator, requiring the regulator’s consent to a transfer of assets for less than full value to an asset-locked body, but not requiring consent when the company makes a transfer for the benefit of the community. In both cases, while there was support for the aims of the proposals, practical issues were raised, which we felt needed further consideration with stakeholders.
The noble Lord, Lord De Mauley, asked how many people were employed by the regulator, the answer to which is eight. The cost in the current financial year is £515,000. We will write to confirm details of the regulatory framework. There may have been a question about performance, as well. I believe that I have covered all the questions and commend the order to the Committee.