I move: "That the Bill be now read a Second Time".
I wish to apologise to Members of the House for the short period they have had to study the Bill. The Bill concluded drafting early last week, was immediately brought to Government and subsequently approved for publication. There is a certain immediacy so that the IDA and the Financial Services Industry can with confidence proceed to the market place, especially in the United States, with the aim of attracting further business to the International Financial Services Centre. The purpose of this Bill is to provide the structure of an investment limited partnership as an investment vehicle for particular categories of investors.
The taxation aspect has already been addressed in the 1994 Finance Act.
This technically complex 45 section Bill has been developed in consultation with the IFSC through its committee, chaired by Mr. Séamus Paircéir, and the proposed supervisory authority, the Central Bank, with my Department taking a pro-active role to ensure that the legislation is capable of meeting the needs of the expanding financial services industry while ensuring that an appropriate regulatory structure is in place. I believe that the introduction of this innovative measure will secure employment and investment for Ireland. This legislation shows what can be done with a little imagination to generate investment which will create employment at practically no cost to the taxpayer.
The present Bill is designed to respond to the competition in the market place where the availability of the required range of structures is essential. If the desired legal structure is not available then a fund will not be located here.
In drafting this Bill regard was had to: (1) the general requirements of the international financial services market; (2) US structural and fiscal requirements; (3) Irish structural requirements; (4) Irish regulatory requirements and (5) an appropriate taxation environment for the limited partnership structure.
By way of background may I say that the collective investment industry in the IFSC was established in 1989 with the enactment of the UCITS regulations implementing EU Directives. However, it was only with the enactment of the Unit Trust Act, 1990, and the Companies Act, 1990, that the IFSC first became a creditable international location for collective investment schemes.
In the four years since then there has been good progress in the collective investment area. Direct employment in the funds and custody sector now amounts to over 550. Within the IFSC the collective investment industry is the largest single employer, with no one employer predominant. The industry does not primarily rely on the existence of the 10 per cent tax rate and requires minimal use of double taxation treaties.
There is US$14 billion in Irish domicile funds located here in over 160 funds and almost 400 sub-funds. This provides Irish activity in relation to administration, fund accounting and custody. There exists a further US$4 billion of funds, domiciled elsewhere but also under administration in the IFSC. The growth in Irish domiciled funds in terms of value under administration has amounted to a remarkable 143 per cent during 1993.
Those intimately involved in the funds industry inform me that the absence of a particular structure has serious contrary effects: fund managers naturally wish to centralise their activities in a limited number of jurisdictions for reasons of efficiency and marketing cohesion. The greater the range of centralised activities then the greater the job prospects. Dublin as a financial centre now features at the many seminars and conferences which are the natural corollary of a burgeoning collective investment industry.
Ireland has many positive features which keep us to the fore in competing for the available business: first, a strong regulatory environment is provided by the Central Bank, which is an important comfort for the investors who are targeted by the fund managers established in the IFSC. The taxation regime, which provides tax transparency for non-Irish resident unit holders and investors, is not dependent on the existence of the special tax relief for trading activities. However, foremost in our favour is the legislation which underpins the collective funds industry, both in primary legislation dealing with structures and in the range of fiscal provisions which give clarity and certainty to the participants in the IFSC.
To ensure the ongoing success of the IFSC we must have regard to the vital area of the legislative environment. Increasingly, the IFSC will have to be able to respond speedily to the needs of the industry in an increasingly competitive environment, involving the participation of all the major financial services centres. The competition is intensified because of the growth in the volume of that business.
The international promoters of collective investment schemes, especially major international banking and fund management groups, require a wide variety of collective investment legal structures to suit the regulatory, tax and marketing situations in all the countries in which they market. Schemes must be capable of being marketed both to retail and institutional investors, who often have different requirements worldwide.
A number of existing and prospective IFSC participants have identified the need for a regulated, tax transparent limited partnership structure similar to that in use in other financial services but adapted to Irish needs. This Bill will be used as another product on the menu of mutual funds structures to complement the collective investment schemes currently in existence.
A desirable innovation in this Bill is that it has adapted, as required, other primary and secondary legislation and put it within one cover. This, I venture to say, makes the Bill more understandable by non EU users and thus makes it attractive to lawyers. In the North American funds market the primary users will be lawyers, unlike in Ireland or the United Kingdom which would have accountants involved.
This Bill proposes the introduction of a new category of limited partnership — the investment limited partnership, to which, specifically, the Bill will apply. It is proposed that the 1890 Partnerships Act will remain in force and will govern investment limited partnership except to the extent specifically excluded by the Bill. The 1907 Limited Partnership Act is being amended so that the problems which have been identified in relation to it have been removed, while the other, desirable provisions of the Act have been incorporated in the Bill. The 1907 Act will remain in place for other forms of limited partnership.
Perhaps most important the Bill proposes the introduction of a regulatory system which would provide for the regulation of investment limited partnerships by the Central Bank of Ireland along the lines of that which applies under the UCITS regulations, the Unit Trust Act, 1990, and Part XIII of the Companies Act, 1990.
The specific problems which were identified in connection with the 1907 Limited Partnership Act and which have been addressed in the Bill are, for example, restriction on the number of partners set out in the Companies Act; doubt about the precise extent of the liability of the limited partners in the event of a withdrawal of capital and the possibility that creditors could levy execution against limited partners for debts of the firm, notwithstanding the limit on their liability.
To enable limited partners to realise their investment, express provision permitting withdrawal of capital by limited partners has been included, subject to certain conditions. A limited partner will also be able to assign his or her interest with consent. In line with the investment nature of the investment limited partnership, general partners have also been given significantly more control over the affairs of the partnership than would be the case with the existing form of limited partnership.
The general partner also assumes a higher degree of responsibility to creditors and less emphasis has been placed on the capital of the partnership as a protection for creditors. As an investment vehicle, the partnership is not expected to engage in the kind of high risk venture normally engaged in by a limited partner and would be subject to the various prudential limits imposed by the Central Bank as the designated regulator.
Before commencing business the investment limited partnership will be required to apply for, and obtain, authorisation from the Central Bank. The authorisation must be maintained throughout the life of the investment limited partnership. The Central Bank is given very substantial powers to regulate and supervise investment limited partnerships, including powers to impose conditions as appropriate to particular circumstances. The relevant provisions in the Bill generally follow those set out in Part XIII of the Companies Act, 1990, in relation to investment companies with variable capital and it is envisaged that the regulatory regime would be very similar, ensuring that the new structure would dovetail neatly with the existing range of available investment vehicles.
The Bill further provides for the appointment of a custodian who will have specific responsibility imposed on it by the Central Bank — analogous to the role of a trustee for unit trust schemes supervised under the Unit Trusts Act, 1990. There will be an obligation to publish annual accounts.
The industry has identified the primary business applications which this Bill can facilitate. That relates to multinational profit sharing plans. Large multinational corporations have provided these type of benefit plans to employees in an ad hoc manner, depending on local country customs and regulations. In an effort to consolidate streamlined costs associated with the maintenance of multiple benefit schemes, large corporations have been establishing benefit plans in which all global employees participate. This Bill provides an appropriate legal framework in a well supervised, established, financial centre to ensure safety of employee assets. This occurs because it affords fiscal transparency to the end beneficiaries.
The limited partnership structure is a well established and accepted form of investment in the United States. The investment limited partnership, from a US perspective, is designed to be a vehicle by which multiple investors can pool their capital resources and avail of the same professional asset management expertise while benefiting from economies of scale and the reduction of management and administrative fees.
Tax transparency is very important if an investor is to avoid double taxation and the non-US investor is to avoid unnecessary US tax liabilities. In addition, many countries recognise the partnership as completely transparent providing for investors — limited partners, who might be called shareholders under another structure — the benefits of double taxation agreements between their home country and the country where partnership assets may be invested. For example, a French investor who invests in an investment limited partnership which is investing in US securities will be in a position to reclaim tax with "held-on" dividends in the US at the French-US treaty rate. It is anticipated that the greatest use of Irish investment limited partnerships will initially be as an investment vehicle for both US inbound and outbound investment.
The IFSC has a clear, competitive advantage over other financial centres in the matter of employment potential. Our European based competitors are suffering from problems of success. Luxembourg, Guernsey and Jersey have near full employment and significant infrastructural constraints which limit their future development. In contrast, Ireland has a significant, well-educated labour pool ideally suited for financial services work and an infrastructure up to the highest international standards. The availability of these resources is a necessary, but not sufficient, condition for the development here of a collective investment scheme industry. Ireland's competitiors, particularly Luxembourg, have a very long tradition in the industry.
In addition to the direct employment in the IFSC already referred to, the funds industry is an intensive user of other professional services. Each fund requires significant legal input; the industry must use accountancy services, including audit and taxation services. The funds are users of the Stock Exchange and stock broking services. There are spin-off benefits in these areas.
The Finance Act brought into law this year contains the requisite provisions to enable the investment limited partnerships which will be established under this Bill to benefit from the tax regime applying to collective investment undertakings of the IFSC.
In view of the advent of the December 1994 deadline for new IFSC companies, it is urgent that entities formed by existing IFSC companies, whether for their own investment limited partnerships or for a sponsoring company, should not be regarded as falling outside the scope of the existing legislation. As the opportunity to promote such an attractive investment structure is limited due to the constraints imposed by the 1994 European Union new certification moratorium, the early enactment of this legislation is required not only for that reason but more especially that the industry and IDA can market this package to potential investors, especially in North America.
I commend the Bill to the House.
