Electoral Administration Bill

I understand the concern of the noble Lord, Lord Kingsland. He is concerned with capitalisation—the adding of accrued interest to the total sum outstanding on a loan. He is saying that it would be unduly burdensome to require the capitalisation of interest, which might occur frequently during the lifetime of a loan, to be treated as a separate regulated transaction. I do not think that the regime would require this, but the treatment of capitalisation under the new regime depends on whether the regulated transaction initially provided for capitalisation or roll-over, or on whether the regulated transaction was later varied to provide for it. Where the regulated transaction originally provided for capitalisation, the operation of the capitalisation provision would not be treated as the making of a fresh regulated transaction. Rather, the capitalisation provision would amount to a term of the original transaction that would affect its overall value. The difficulty about that approach is in relation to what value one gives to the loan at the beginning, if one of the terms is that unpaid interest can be rolled over or that one is allowed to roll it over. Where a regulated transaction which did not originally provide for capitalisation is varied to provide for capitalisation, this change would obviously have to be reported under the continuing reporting requirement in new Section 71N. This is because such a variation provides for the value of the transaction to be increased. The requirement to report changes applies where a variation is made to the particulars that are required to be reported in the original transaction report. A change in the value of a regulated transaction is such a change. I can also confirm that where a regulated transaction which existed at the time of the commencement of the new regime provided for capitalisation, such a transaction would be exempt from the permissibility requirements. The operation of the capitalisation provision at a later stage, after the new scheme has commenced, will not bring the pre-existing transaction within the scope of the permissibility requirements. I hope that I have reassured the noble Lord, Lord Kingsland, that the operation of a capitalisation provision will not, therefore, give rise to a fresh regulated transaction. However, his amendment has helpfully raised the question of whether agreements for capitalisation give rise to difficulties in valuation. A capitalisation provision will mean that the overall value of the total amount to be lent at the outset will, to a limited extent, be unclear. Although the initial capital to be lent will be readily ascertainable, the amount that may be added will depend on how the capitalisation provision is in fact operated during the lifetime of the loan. So, for example, the agreement may provide that interest will only be capitalised if it is not paid within 30 days of accrual, but that if a party always pays the interest within the 30-day limit no sums will be capitalised during the lifetime of the loan. The value that it adds to the transaction will accordingly be variable. This will not be a problem where the initial capital extended clearly exceeds the reporting threshold of £5,000. Whatever the true value of the loan, it is clearly one which must be reported but it could conceivably give rise to difficulties in a narrow category of cases where, say, a loan for £4,000 provides for capitalisation. It is not right that there should be a doubt about whether this is a transaction that is required to be reported. In the light of the amendment, we need to consider how to deal with the capitalisation issue. We will either end up with a difficulty of valuation, which satisfies the point made by the noble Lord, Lord Kingsland, on the need for not too many transactions to be disclosed but does not deal with the difficulty of valuing the transaction, or we do not satisfy the noble Lord, Lord Goodhart, because he would like all the transactions to be disclosed. We need to take that one away and think about it a bit more.