Considered in Committee
This is a short but technical Bill to amend the law of England and Wales relating to capital and income in trust. Capital, for these purposes, is trust property that constitutes a pool or fund of assets, and is to be distinguished from the income earned on those assets. For those who remember their Bar or solicitor exams, the distinction has traditionally been illustrated by the homely metaphor of a tree and its fruit. The tree is the capital—for example, an office block or shares in a listed company—and the fruit is the income—for example, the rent received from renting out the offices or the dividend paid on the shares.
Before turning to the substance of the Bill, I would like to say that I am very pleased to be presenting it today, although with considerable trepidation. I know that it should be my noble friend Lord McNally, who is otherwise engaged in the Chamber; he is the Minister in the Ministry of Justice who is responsible for the Law Commission and he has been a great supporter of the Bill. He is disappointed not to be able to be here, but I can assure the Committee that he will be available at later stages of the Bill.
I also know that several noble Lords present today have had the advantage of attending a briefing on the Bill by Professor Elizabeth Cooke, who is the Law Commissioner responsible for the Bill, and Stephen Roberts, who is head of litigation and legal policy at the Charity Commission. I regret that I was unable to attend that session but have had the advantage of a private tutorial from Professor Cooke and Mr Roberts to prepare me for our debate today. Otherwise I would have had to rely on my lecture notes, if they still existed, from Bar exams some 35 years ago.
The Government are very grateful to the Law Commission and the Charity Commission for all the help they have given in the preparation of the Bill for introduction and their continuing support for the Bill as it goes through Parliament.
The Bill will implement, with minor modifications, the legislative reforms recommended by the Law Commission in its 2009 report Capital and Income in Trusts: Classification and Apportionment. These reforms owe their genesis to concerns expressed by various noble Lords, including the noble Lord, Lord Phillips of Sudbury, during debates on the Bill that became the Trustee Act 2000. This led to the publication of a Law Commission consultation paper in 2004 and the Commission’s report in 2009. The Ministry of Justice then carried out a public consultation in 2010 on the draft Bill published by the Law Commission in its report and published a response in 2011 explaining how it intended to finalise the Bill. This extended process of detailed and responsive consultation has, I believe, created a measure with a large degree of consensus, which is suitable for this special Law Commission procedure in your Lordships’ House.
The overall aim of the Bill is to simplify three distinct but linked areas of trust law in England and Wales relating to capital and income. These areas are apportioning receipts between income and capital beneficiaries; classifying receipts by trustees as income or capital; and investing by charity trustees who, in deciding what investments to make, have to distinguish between investments that will produce income on the one hand and investments that will produce capital on the other.
I will start with the first point addressed in the Bill, the rules of apportionment in Clause 1. They deal with apportioning trust receipts between income and capital beneficiaries. For example, a trust—let us call it the AB trust—may be established by a person making a gift of investments on trust for person A for life, with remainder to person B. This means that the trustees will pay the income arising on the investments to A until A dies, and then transfer the investments to B. Because of the different entitlements to income and capital, the trustees must distinguish between investment receipts according to their legal classification as income receipts due to A, or capital receipts which must be held ultimately for B and can be invested to produce income for A during his or her life.
As noble Lords will remember, in the 19th century various cases came before the courts in which the judges had to decide how to split receipts in this way. Sensible though the decisions were in their time and circumstances, the application of some of them as general rules of trust practice is now problematic.
Clause 1 therefore disapplies for new trusts the first and second parts of the rule in Howe v Earl of Dartmouth, the rule in Re Earl of Chesterfield’s Trusts and the rule in Allhusen v Whittell. This means that in the absence of express provision in a new trust, these rules will not apply and the relevant receipt will belong in its entirety to the income or capital beneficiary, depending on its classification as one or the other. This will bring new trusts into line with modern trust drafting practice, which almost always excludes these rules in the document setting out the terms of the trust. This will simplify the administration of trusts without any loss in fairness. Clause 1 also disapplies for new trusts the statutory rule requiring the apportionment of income over time imposed by the Apportionment Act 1870.
The reforms effected by Clause 1 will mean that complex and time-consuming calculations, generally affecting relatively small sums of money, will be avoided.
The changes in Clause 1 are restricted to new trusts so that there is no interference with the intention of settlors, who may have wished the existing law to apply.
Clause 2 amends the law relating to the classification for trust law purposes of specified tax-exempt distributions by companies on demerger for all trusts. This is relevant because trustees holding shares in a company which demerges may receive a dividend in the form of a distribution of shares which represent an equivalent stake of ownership in the demerged company. The clause provides that, unless the trust specifies to the contrary, all the distributions falling within Clause 2 will be treated by the trustees for the purposes of the trust as capital. At present, rather confusingly, this is only the case on indirect demergers.
The distributions to which Clause 2 applies are those that are tax-exempt under Sections 1076, 1077 and 1078 of the Corporation Tax Act 2010 and, in the future, those that are tax-exempt and are specified by an order made by statutory instrument by the Lord Chancellor. No such order is envisaged at present.
In practical terms, Clause 2 will move the classification of dividends received by trustee shareholders on direct demergers from income to capital, and will secure that classification for dividends on indirect demergers, which currently rests on a decision of the High Court. As a result of the Bill, all distributions received by trustees on tax-exempt corporate demergers will be classified as capital for trust law purposes. This will remove not only the potential injustice to capital beneficiaries of seeing significant proportions of the capital holding of the trust assets converted to income by reasons beyond the control of the trustees, but also the pressure on trustees to sell investments in companies proposing demerger purely to avoid the outcome of the present inconsistent classification.
Demergers may be structured by companies in a variety of ways. In some cases of demerger, where Clause 2 applies to classify the distribution as capital, the company may have held off paying the usual dividends pending the demerger. The income beneficiary may then be unfairly disadvantaged because dividends that would have been income in the normal course of events have not been paid and the receipt on the demerger is classified as wholly capital. To prevent Clause 2 perpetuating this problem, Clause 3 gives the trustees power to compensate the income beneficiary from the trust capital. We do not expect that this power will be exercised often but we believe it is necessary in the interests of fairness.
That brings us to Clause 4, which relates to investment by charities with a permanent endowment on a total return basis. Before describing the working of the clause, I will briefly explain the meaning of these two concepts.
First, there is permanent endowment. A charity has a permanent endowment if its constitution places restrictions on the expenditure of property held for the purposes of the charity. Typically, a permanent endowment will be a capital sum donated for charitable purposes on terms that the income it generates may be used for those purposes, but the capital itself must remain untouched to create more income for the future.
Secondly, there is total return basis. Total return investment involves the charity trustees selecting investments on the basis of risk and return, and then spending an appropriate proportion of the total return, irrespective of the form individual returns take, as capital or income. As a result, the trustees are not constrained in their investment choices by the need to generate income returns and can select appropriate investments in the same way as the trustees of charities that do not have permanent endowment.
It may be helpful to illustrate this by way of an example. Let us assume that there is a charity set up to help homeless people, with a permanent endowment of £100,000. At present, the trustees must decide how much expenditure they think is appropriate and then set up an investment strategy to try to achieve it. For example, they might invest in a portfolio of fixed-income investments and shares that they anticipate will produce £2,000 a year. Whatever income that portfolio actually produces is expendable on the charity’s objects; the capital cannot be spent. That is the case even if the portfolio performs below expectations or some returns unexpectedly take the form of capital. In those circumstances, trustees today either face an income shortfall which could jeopardise their planned operations or have to undertake a process to enable them to spend some of their permanent endowment.
Under total return investment, the charity trustees do not have to anticipate expenditure when making investments. Instead, like trustees who do not hold permanent endowment, they can invest in a portfolio which balances risk and return, ignoring the form of returns. The trustees are then able to allocate a fair proportion of the eventual total return to expenditure, whether the investment receipts in question would be classified for trust law purposes as capital or income.
Total return investment is not a new concept. Charity trustees can already apply to the Charity Commission for authority to adopt it and a small number have done so. Clause 4 provides a new framework for obtaining that authorisation. Instead of making an application, charity trustees with a permanent endowment will be able to opt in to this type of investment on the terms prescribed by regulations to be made by the Charity Commission by resolution, if the trustees consider it is in the best interests of the charity to do so. This new administrative approach will reduce the costs of embarking on total return investment for both charities and the Charity Commission.
The change will enable charity trustees responsible for a permanent endowment to bring themselves broadly into the same position in relation to investment decisions as charity trustees without a permanent endowment. This will allow them to invest in the same way as other trustees in accordance with their duties under the Trustee Act 2000 and the trust instrument.
The detailed terms on which total return investment can be pursued will be determined by the regulations to be made by the Charity Commission. The regulations will be finalised only after the Charity Commission has carried out a consultation, which it intends to do after the Bill has been enacted.
The commission has, however, made available its current draft of the proposed regulations, which is based on the terms on which authorisation is currently granted. This draft requires trustees to allocate the total return from their investments between a trust for application, which is to be spent on the charity’s objects, and a trust for investment, which is held to generate future total return. The regulations do not prescribe an amount or proportion of the total return that the charity must allocate to the trust for application as doing so would bear the risk of setting the level too low or too high depending on the prevailing economic conditions.
Instead, charity trustees with a permanent endowment must exercise their duty to balance present and future interests—or, as the draft regulations put it, to exercise their powers in relation to a relevant fund,
“in such a way as not to prejudice the ability of the charity to meet the present and future needs which are designated by its trusts”.
Placing reliance on the trustees in this way is the same as the approach of the law to the trustees of private trusts for interests in succession, such as the AB trust that I mentioned in an example earlier, who are required to balance present and future interests.
It is, however, not for me to anticipate the final form of the Charity Commission’s regulations. It is the regulator of charities and it will decide what is most appropriate and no doubt revise the terms from time to time in the light of experience. For our present purposes the new Sections 104A and 104B of the Charities Act 2011 will provide an appropriate and efficient framework within which total return investment can be responsibly adopted by charity trustees with a permanent endowment.
That concludes my brief description of the substantive provisions of the Bill. We believe that it will simplify and modernise the law of trusts in modest but important respects. It is certainly not the easiest of Bills to understand but it will bring considerable benefits to private and charitable results which will help a good number of people, including the more disadvantaged in society.
The Bill illustrates the importance of having a body such as the Law Commission, which can prepare expert recommendations for the reform of law in areas which would otherwise remain rooted deep in the past, increasing the burden of the law on all who come into contact with it, and the advantages of the procedure that we have in your Lordships’ House that allows appropriate Law Commission Bills to be scrutinised, as far as possible, off the Floor of the House. This is the fourth Bill to have gone through that procedure and I therefore commend it to the Committee.
My Lords, I endorse the commendation of my noble friend Lord Henley for the work of the Law Commission. It is one of the unsung heroes of the forest of the law and, within it, it is a true forester.
It is particularly warming to know that the report upon which this Bill is based is but three years’ old, which, in terms of this kind of legal reformation, is but a twinkling of an eye. Indeed, the Minister said that the reform vis-à-vis the fruits of demergers was partly in the Bill to rectify the fact that as the law presently stands only indirect mergers are, so to speak, saved, and now direct mergers will be in the more flexible regime.
It is perhaps amusing to remind the Committee that the ruling to which the Minister referred which enabled indirect mergers to result in the apportionments that the court decided was given in the case of Bouch and Sproule, which was no less than 125 years ago. So spreading the benignity of Bouch and Sproule has taken rather than longer than some of us would have wished.
I also cannot resist a nostalgic view of this debate. The Minister talked of his time at the Bar. My earliest days in the law were spent studying trust accounts in 1958. The very cases to which he referred—Howe v Earl of Dartmouth, Allhusen v Whittell and Re the Earl of Chesterfield’s Trusts—are names that adorn the wall of my lavatory. Incidentally, I think Howe was a predecessor of our dear friend, the noble Earl, Lord Howe. They are some of the most complex, arcane, time-wasting and lawyer-infested rules that still apply in our world. Therefore, this is a happy day and I have little to say apart from expressing happiness, except for two points.
The first relates to the drafting of Clause 3. As the Minister clearly described, this provision gives trustees the power to compensate income beneficiaries when there is a direct demerger. I am well briefed on this point by the Law Society, which has a committee to look at such things that is comprised of horny-handed practitioners. They and I feel that subsections (1), (2) and (3) could be more clearly drafted. The particular point that exercises us is that exactly what the trustees are empowered to do is not as clear as it could be. That is, what is the nature and extent of their discretion? Is it an absolute or a qualified discretion? The language of the three subsections states, for example, “the trustees are satisfied”, “the trustees may” and “the trustees consider”.
It is perhaps unfair to ask the Minister to comment on these matters instantly, but after today I hope we will at least consider the potential improvement of three quite difficult subsections. We do not want to put trustees—who, let us not forget, are nearly all volunteer trustees—into a position whereby some aggressive beneficiary or potential beneficiary could try to sue them over the way in which they have exercised the power given to them by this clause.
My second point concerns the Charity Commission, which is extremely useful. At present, for many charities that have permanent endowment—which more have than some realise—it is a real palaver to apply to the commission for an order, and for that order to be considered, made and executed. A great deal of time, effort and expense is wasted because of that state of affairs. It is therefore extremely beneficial and has no down side at all that the Bill will allow the commission—if it so wishes, as I am sure it will—to make regulations that will enable all charities in the future to make provision vis-à-vis endowed property, without applying formally for an order from the commission.
With those few remarks, I thank the Government and all those involved for bringing forward an arcane but none the less very important and practical set of proposals that will make more of a difference than many realise.
My Lords, I am afraid that I am not a barrister or a solicitor and so the Earl of Chesterfield and Howe versus the Earl of Dartmouth do not adorn my lavatory walls—or, indeed, have not, until now, swung into my ken.
I welcome this small, technical but important legislation and I wish to address particularly the charitable aspects covered by Clause 4. I declare my interests, which are on the register in your Lordships’ House: I am president of the National Council for Voluntary Organisations; chairman of the Armed Forces Charity Advisory Committee; and I have been appointed by the Government to review the Charities Act 2006.
The existence of permanent endowment, as my noble friend clearly explained, has caused trustees of charities with permanent endowment a great deal of difficulty. If you force trustees to consider primarily the form in which they will get their return, you will get a series of artificial distinctions. By investing the capital gain—as opposed to dividend income or interest—you may end up with a seriously suboptimal result.
In recent years, a number of investment opportunities have arisen that are for capital gain only, particularly in the world of private equity. Where you are able to invest in smaller companies your return will almost certainly be in the growth of the value of the company. These companies cannot—and probably should not—pay dividends because they need to retain their profits to grow the business. It is therefore very important that this flexibility is built in to charitable investment.
As I understand it from my noble friend, this, of course, does not remove from trustees—I am sure that it does not—the need to balance future capital appreciation against the need to run the charity in the mean time, and, of course, the need to balance risk and return, which still applies as if these provisions had not been made. I welcome these proposals on the grounds that they are deregulatory and will free individual charities with permanent endowment and the Charity Commission from some administrative work.
As I understand it—and my noble friend Lord Phillips will correct me on this because he has forgotten more charity law than I will ever know—the right of the Charity Commission to make regulations on this matter has been in some dispute. Some lawyers have questioned whether it actually has these powers. The commission’s powers are, of course, open to challenge, as we saw with the public benefit test considerations last summer.
I have a further point of concern which the Committee may wish to explore. I have described the Bill as deregulatory, but in proposed new Section 104B (1), (2) and (3) there is a list of regulations. If, as I am sure my noble friend will tell me, the normal duties of trustees apply, do we really need to have this extensive list of regulations? Are we not able to trust the trustees? For example, proposed new Section 104B(2)(c) would require charity trustees to,
“notify the Commission of the passing, variation or revocation of such a resolution”.
That takes us back almost to where we started because, if resolutions are made in that way, they will have to be sent to the Charity Commission, the only difference being that the Charity Commission will not have to give its permission. I flag that up as a possibility we might wish to explore later.
I have given prior notice that I would like my noble friend to address the specific issue of the special position of English cathedrals under this legislation. The Church Commissioners and the Association of English Cathedrals are anxious to make a small amendment to Clause 4 which would enable cathedrals to resolve to invest their permanent endowment on a total return basis in accordance with the regulations which the Charity Commission is going to make. This comes about because ecclesiastical corporations are specifically excluded from the definition of a charity in Section 10 of the Charities Act 2011, which means that the powers of this Act do not apply to them, nor will the powers to be conferred by proposed new Sections 104A and 104B.
However, the relevant bodies corporate which are now established for each cathedral under the Cathedrals Measure 1999 exist for exclusively charitable purposes and are therefore charities for the purposes of the general law.
In recent years a number of cathedrals have expressed increasing interest in a total return investment, as the requirement to generate income from their permanent endowment is distorting their investment decisions. Cathedrals, of course, as ancient institutions, have more permanent endowment than most. Access to the total return investment allows for a more strategic portfolio of investments, which will provide a better balance between the needs of current and future beneficiaries. I hope that my noble friend, either now or at a later stage of the Bill, can address that point.
I described this earlier as a small, technical but important and welcome measure. However, it is only the first in a series of changes that need to be made if we are to realise the full value and potential for social impact investment. It does not, for example, address the issues or challenges arising from mixed-motive investment, a practice which is very close to total return investing. Mixed-motive investments are made by trustees on the basis partially that they are financial investments, and partially that they are programme-related investments. Programme-related investments are made to advance the charity’s purpose and are not considered to be financial investments at law.
I will give the Committee a brief example of how this might work. A charity which aims to improve educational opportunities and address homelessness invests in a property fund that will invest in properties for social enterprises. The fund focuses investments around three areas of social impact: homelessness, education and community development. Based on conversations with their fund manager, the trustees assess that 60 per cent of their investment can be justified as a programme-related investment that furthers their social mission. They decide that the remaining 40 per cent must be justified as a financial investment. Conversations with their investment advisers indicate that a commercial return on this sort of investment should be, say, 15 per cent per annum. To justify their investment, the trustees decide that there must therefore be a commercial return of 40 per cent and that they must get back the remaining 60 per cent in their PRI investment. When you blend the whole thing together, you have a return across the whole piece of 6 per cent. You can see how close this balanced rate of return is to the whole idea of total rate of return; it is very close indeed. It is a sadness to me that we have not been able to grasp this particular issue and extend this Bill by a series of small amendments to take in this additional way in which charities are now seeking to invest.
If I could glance over my noble friend’s speaking notes, I am sure that the answer to this will be, “Resist this”. It will be resisted because mixed-motive investment might be considered controversial—this is a Law Commission Bill—and because the Law Commission has not consulted on this precise point. Law Commission Bills are invariably consulted on in every aspect.
If that is my noble friend’s answer—and I am sure that it is going to be, but I may as well try—it would be helpful if he could give some indication during the later stages of the Bill whether his department has it in mind to bring forward ideas to tackle the mixed-motive investment as part of the overall approach to social investment.
Social impact investment is coming of age. It is a strategic issue for this country. However, there is a real danger of the necessary legislative changes required to facilitate it falling between departmental stools. My noble friend’s department, the Ministry of Justice, is producing this important but modest measure, yet not tackling other critical issues. The Law Commission will consult this autumn on further charity law reforms, but seems unlikely to tackle the necessary innovative leading edge issues.
The Financial Services Bill, at the Committee stage, is deeply depressing reading. I invite the Minister’s officials to look at the proceedings of the eighth sitting on Thursday 1 March, where attempts were made to raise the social impact investment idea. The amendments themselves were wrong; they were not acceptable. However, the Minister’s reply—it was Mark Hoban—indicated the dead hand of the Treasury across the whole of this area, still thinking in conventional investment terms of invested protection, whereas social impact investment melds financial and social return. It is not an investment for everybody, but the present situation, whereby one can easily give money to a project, but find it difficult to lend money to it, must be counterintuitive. People will be more encouraged to support these leading-edge charities and voluntary groups if there is a prospect of them getting their money back. That might encourage them, if they are successful, to put more money into the next project.
The Government have laid great stress on the need to create innovative ways of financing charities and voluntary groups that are seeking to tackle some of these most deeply entrenched social problems in our society. I hope that somebody, somewhere, in Whitehall is getting a grip of these various separate legislative proposals to ensure a proper degree of co-ordination and impact. The statutory stars are in alignment at the moment with all these pieces of legislation around, and it would be a great opportunity missed. Indeed, strategically, from the country’s point of view, it is a chance to make London the world centre of expertise for this rising and new activity.
My Lords, I rise briefly to support my noble friend on these proposals. First, I should declare an interest as a trustee of a substantial charity, which at the moment does not operate a total return investment policy but I am pretty sure would want to do so in the future. I could not help smiling at my noble friend Lord Phillips, because I too have enjoyed being here with the nostalgia of thinking of all the time I wasted as a young man learning about Howe v Earl of Dartmouth, Allhusen v Whittell and all of these cases, which are from many years ago so far as I am concerned.
My concern is a relatively simple one. I am perfectly content with what is being proposed, but recognise that all these things take quite a long time. As the Minister said, the Charity Commissioners have for a number of years now operated a scheme on a one-off basis to deal with cases that came forward, for suitable charities, where they allowed a total return investment policy to happen. I am concerned that there should not be a delay between that system and the new system, bearing in mind there has got to be consultation, regulations have to be drafted and implementation has to take place. I would like the Minister to be able to tell me that the existing system of the informal but important way the Charity Commissioners have worked in the past will continue to operate until the new system, with consultation and everything else, has been finalised. There should not be a gap when neither the old nor the new system is in operation for charities that wish to adopt this total return investment policy. When you stop and think about it, for the appropriate charities, it is very hard to consider a trustee is doing his job properly today if he does not think in terms of that. That is the only consideration I have and I hope that my noble friend can give me some encouragement on that point.
My Lords, I am in no sense an expert in this area, but over the past two or three years I have been involved in negotiations with the Charity Commission. I certainly join with those who have expressed appreciation to the Law Commission for its work on this. I think I have only on one previous occasion had a debate in this Chamber on one of its reports. Am I right in thinking that this does not go to the Commons at all and is dealt with exclusively in your Lordships’ House? I was not clear about that.
I also pay tribute to the way the Charity Commission has handled the particular negotiations in which I have been concerned. I understand it is being quite severely affected by the cutbacks but it managed to get through these particular negotiations before that had too serious an effect.
I will raise only some very simple points. The explanation given by the noble Lord, Lord McNally, points out that the four burdensome 19th century rules requiring apportionment between capital and income, which are described so adequately in the Explanatory Memorandum, will be renewed for new trusts. My very simple question is: will it apply only to new trusts, or can existing trusts make arrangements to take advantage of the changes as well?
The Explanatory Memorandum draws rather a charming analogy with trees and the fruit of trees. In the trust about which I am concerned, we had considerable problems over whether to regard a particular asset as income or capital. In addition to the original trust being set up, it was then given the royalties from a particular operation and was therefore continually topped up in this way. This gave us considerable problems in deciding whether that should be regarded as capital or income. However, it will be very helpful overall if time and costs can be saved by the Charity Commission making regulations, rather than people having to apply on a case-by-case basis, as is the present position.
The Minister’s letter has a final line which states that the Bill is expected to be beneficial to small firms and micro-businesses. I am rather puzzled as to how that will be the case but no doubt the Minister can explain.
My Lords, I join other noble Lords in congratulating the Minister on the clarity of his exposition of this intrinsically complex area, and in congratulating the Law Commission on producing the report. As the Minister reminded us, the process began eight years ago, so it has not quite reached the proportions of Jarndyce v Jarndyce. The commission has certainly done a thorough job.
My acquaintance with the rules of apportionment began with my law degree and effectively ended with the solicitor’s final examinations to which the noble Lord, Lord Phillips, referred, save that I learnt to take the precaution of ensuring that the rules were excluded from any will I subsequently drafted. Of course, that will now no longer be necessary. It will be a case of opting in rather than opting out, for which the commission and the Government should certainly take credit.
This afternoon I find myself visited by a slight sense of déjà vu. Many years ago I found myself acting in a divorce case and waiting for my case to be called on behalf of my petitioning client. I sat next to the counsel in the preceding case, a delightful if somewhat eccentric individual. For the avoidance of doubt, it was not the Minister on that occasion. At one point counsel turned to me and said, “Mr Beecham, where is the petition?”. I had to reply, “I am not instructing you”, to which he replied, “I know, I know, but where is the petition?”. Around three weeks ago, my noble friend Lord Bach said to me, “You are to be in charge of this Bill”. It was a visitation that was quite unlooked for. Nevertheless, I am here today to represent the Opposition on this matter and to welcome the simplification that the Bill embodies, in relation to both the rules of apportionment and, in particular, the position in respect of charities and the question of total return. I declare an interest as a trustee of the Trusthouse Charitable Foundation, which already operates a total return policy.
The noble Lord, Lord Phillips, referred to the Law Society briefing, for which I am very grateful. The Law Society is a body to which President Kennedy’s memorable injunction is often thought by solicitors to apply: “Ask not what the Law Society can do for you, but what you can do for the Law Society”. On this occasion, the Law Society has done us all a service in a briefing that contains the recommendations that the noble Lord, Lord Phillips, referred to in respect of Clause 3, where it suggests a new subsection and some clarification. I hope that can be shared with the Minister following this Second Reading, if he has not yet seen those proposals. They seem to make sense in exactly the way that the noble Lord, Lord Phillips described.
Other of your Lordships have made points particularly in relation to the position of charities and, in the case of the noble Lord, Lord Hodgson, in respect of cathedrals. Those matters seem to be worth pursuing. I had the same question in my mind as the noble Lord, Lord Higgins, about whether it is necessary to include a reference to existing trusts in the Bill. That is a matter that I am not qualified to make a judgment about, but it might usefully be considered, because if it is not currently possible for existing trusts to modify the rules then it would seem that they ought to be given that opportunity. They would not have to take it but it might be relevant. That is perhaps, again, a matter that we could return to in Committee.
In principle, and so far as the thrust of this short Bill is concerned, we are completely at one with the Government and look forward to concluding this matter rapidly for the benefit of trustees, beneficiaries and charities.
My Lords, I should have declared an interest earlier, which I need to do now. I am the founder of, and am still a consultant to, a firm of charity lawyers, Bates Wells & Braithwaite. I should have said that and apologise for not so doing. I will not enumerate the charities of which I am a trustee.
The Committee will be grateful to the noble Lord for that declaration of interest.
I start by congratulating the noble Lord, Lord Beecham, on being the first speaker in this debate to mention Dickens, in this bicentenary of his death. I was wondering how long it would be before Jarndyce v Jarndyce appeared, and assure him that I was about to mention it. Although the noble Lord says that this has been only eight years in gestation, as my noble friend Lord Phillips put it, if we go back to a case that I was not familiar with but which is no doubt up on the wall in the noble Lord’s lavatory, Bouch v Sproule, that was some 125 years—so it has been going on for a considerable amount of time.
I hope to deal with some of the points that have been raised, but give an assurance to the House that this is the beginning of proceedings. We have rather a good form of procedure before us for these Law Commission Bills, which will allow this Bill to be properly scrutinised later on in Committee. Another place will also scrutinise the Bill properly—as it always does—in due course. I am sure we do it slightly better, but another place will have its role to play. I can give that assurance to my noble friend Lord Higgins—this is not some odd procedure whereby the Bill comes only to this House. It will go to another place in due course.
The first point that came up was raised by my noble friend Lord Phillips about Clause 3 and the discretion that is available to the trustees. What qualification was there for that discretion and might there be some alarm among trustees about whether they could be liable for how they exercise it?
I say to my noble friend that the Bill has so far been very carefully constructed. It has been looked at by many people of much greater erudition than me and, possibly, of even greater erudition than my noble friend. They have taken these points into consideration but the great advantage of this procedure is that we can look again as the Bill goes through the House. It is certainly something to which my noble friend might want to come back in Committee when we get to that stage, at which point our mutual noble friend Lord McNally will be dealing with the Bill for the Government. It will be a matter for that Committee.
Obviously, we are always more than happy for there to be consultation before, during and whenever to deal with these matters. They ought to be looked at and that is how we get the right result in the end on all Bills. It is something that we would more than encourage. I am sure the noble Lord will be in touch with the officials, and that he has already spoken to them, the Charity Commission and the Law Commission at some stage.
I move on to my noble friend Lord Hodgson’s concerns about whether the regulations in Clause 4, particularly the total return investment regulations in new Section 104B, will be too restrictive. Again, this is a matter that we will need to look at in some detail. However, it is a matter that the Charity Commission should be able to get right following consultation. I am certainly confident that it will strive to ensure that the regulations achieve just the right level of trusting the trustees to get things right and protecting charity funds. It is a matter that I hope the House will look at in detail.
I understand my noble friend’s concerns about English cathedrals and that he raised the matter at the Peers’ briefing in March. As a result of ongoing discussions at official level between the Ministry of Justice, the Law Commission, the Charity Commission and the Church Commissioners, they are all looking at the issue. In essence, the Association of English Cathedrals, which represents all the corporate bodies of our 42 cathedrals, has asked that Clause 4 be extended to include the cathedrals in its scope. The association considers that this would benefit the 20 or so cathedrals that have permanent endowment. That would put those English cathedrals on the same footing as the Welsh cathedrals. However, unlike cathedrals in Wales, cathedrals in England are not subject to the general regulation of the Charity Commission. The Government will consider the request from the Association of English Cathedrals carefully, but at present no final decision has been taken.
I cannot remember whether it was on this issue or another that my noble friend speculated as to whether the word “Resist” appeared in my briefing. I can assure him that it does not, although it might appear later as we discuss these matters further. However, this is not really a matter for the Government to resist; it is a matter for all of us to make sure that we get right. Again, I stress that this is not a government Bill; it is a Law Commission Bill, which we are ensuring gets on to the statute book.
My noble friend also asked about social impact and mixed-motive investment. The Government acknowledge that social or mixed-purpose investment is a highly important issue and are grateful to the noble Lord for drawing attention to it, both today and as part of the work of his ongoing review of charity law. The Government’s ambition is that social investment should become a major source of finance for the social sector. To this end, the Cabinet Office’s social investment team is working with other government departments to make this vision a reality. Social or mixed-purpose investment did not, however, form any part of the Law Commission’s work on capital and income in trusts and therefore has not been included in the Bill, by the Law Commission in its report or by the Ministry of Justice in its consultation. Therefore, at this stage we would not want to see anything further added.
I have already dealt with the question from my noble friend Lord Higgins as to whether the Bill will go to the Commons. I can give that assurance. My noble friend also asked whether it will apply only to new trusts, which I think was a question also raised by the noble Lord, Lord Beecham. I can give an assurance that the reform is prospective only. We believe that retrospective interference with existing trusts could frustrate the intention of the person who created the trust, contrary to the general principles of trust law. However, as the noble Lord, Lord Beecham, reminded us, in any drafting of trusts that he has been doing over the last however many years, he has been excluding the rules in Howe v Earl of Dartmouth and others, just as, I imagine, most practitioners have been doing.
My noble friend Lord Higgins also asked about the letter and whether there was going to be any effect on small and medium-sized businesses. We believe that it is unlikely to have a major effect on small and medium-sized enterprises. However, the impact assessment published by the Ministry of Justice states:
“While a reduction in the complexity of the current legal rules may lead to a very marginal reduction in trust related business for small legal firms and trust service suppliers, this is expected to be more than offset by reduced costs for trusts. Small legal firms and trust service suppliers may also benefit from additional business if there is an increase in the number of charities operating total return investment … We do not consider that the Bill is likely to have a disproportionate impact on the operations and performance of small businesses compared to others”.
I am still slightly puzzled about this. It says that the Bill is expected to be beneficial to small firms and micro-businesses. Does it mean small legal firms? The idea of a small legal micro-business strikes me as a little unlikely, so I do not understand how it affects small businesses and micro-businesses.
My Lords, I had better look at the letter more carefully myself in due course and write to my noble friend to deal with that point.
My noble friend Lord Wakeham talked about the possibility of delays of the sort one finds in law, which no doubt provided the noble Lord, Lord Beecham, with his opportunity to bring in Jarndyce v Jarndyce. I hope that there will not be undue delay in dealing with this, but I can certainly give him an assurance that there will not be the gap that he was talking about. We will continue with the old system until we have the new system.
Lastly, I will correct a point that I made earlier, when I said that this was a Law Commission Bill. I must make it clear that it is actually a government Bill. However, the Government recognise that it is uncontroversial and that it has been put forward by the Law Commission; it can therefore continue through Parliament under this special procedure, which I think is appropriate for Bills of this sort.
I hope that I have dealt with most of the points. I will look carefully at what I have said in due course and if necessary write to noble Lords to deal with any points that I have missed. I commend the Bill to the Committee.