Company Law Reform Bill [HL]

– in the House of Lords at 3:39 pm on 10th May 2006.

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Moved accordingly, and, on Question, Motion agreed to.

Clause 341 [Political parties, organisations etc to which this Part applies]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 170:

Page 150, line 22, leave out subsection (4).

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, in moving Amendment No. 170, I shall also speak to Amendments Nos. 171 to 173, 175 to 179, and 183 to 187. These amendments are concerned with Part 14 of the Bill—political donations. Although they address a number of different issues, I will speak to them together for efficiency because, apart from one minor correction, they address concerns that have been raised by noble Lords in Committee.

The first couple of amendments, those to Clauses 341 and 343, simply correct a drafting inconsistency between the definitions of political expenditure that appear in these clauses. I am grateful to the noble Lord, Lord Razzall, for highlighting this inconsistency in Committee.

Clause 342 refers to the definition of "political donation" set out in the Political Parties, Elections and Referendums Act 2000. Changes to this definition have recently been agreed by way of amendments to the Electoral Administration Bill in this House relating to loans made to political parties. The amendment to Clause 342 ensures that the scope of this provision is not altered by the changes to the Political Parties, Elections and Referendums Act 2000 made by the Electoral Administration Bill. In other words, Part 14 of this Bill will continue to apply only to political donations, which are defined as including loans at a non-commercial rate. It remains the case that Part 14 does not apply to loans at a commercial rate.

The next set of amendments in this group concerns Clause 345. The amendments respond to an issue raised by the noble Lords, Lord Hodgson and Lord Razzall, in Committee regarding whether it should be necessary for a holding company to name each of its subsidiaries when passing a resolution that gives approval for a political donation. I accept that the requirements of this clause should not be overly restrictive when a holding company passes a resolution in relation to its subsidiaries. Accordingly, Amendments Nos. 175 to 179 make it clear that a holding company does not need to refer to each of its subsidiaries in the circumstances specified.

The amendments to Clause 348 are concerned with the liability of directors of a holding company in the case of unauthorised political expenditure or an unauthorised political donation by a subsidiary. I hope that it will be helpful to noble Lords, and for the record, if I describe the mechanics of the amendment in a little detail, as I know that this was a point of particular concern during the discussions in Committee, and we believe that these amendments go a long way towards addressing it.

First, Amendments Nos. 183 and 184 adjust the terminology, replacing "responsible directors" with "directors in default". This makes it clearer, for the avoidance of doubt, that a director may apply for relief under Clause 769, which refers to proceedings for default. Secondly, Amendment No. 185 addresses the particular concern that the directors of a holding company could be liable for a political donation made by a subsidiary over which they have no control or of which they have no knowledge.

It is worth emphasising at this point that the liability of such a director of a holding company is already limited by the definition of "subsidiary" in Section 736 of the 1985 Act. Essentially, that section defines a subsidiary as being a company controlled by a holding company by virtue of the fact that the holding company controls a majority of its voting rights or has the right to appoint or remove a majority of its board of directors. Therefore, in many cases the directors of a holding company will control the voting rights that the subsidiary needs to pass a resolution approving a political donation.

We recognise that there may be cases where directors of a holding company are not aware of a political donation made by a subsidiary or are powerless to prevent it. The amendment provides that the directors of a holding company will be liable only if they have failed to take all reasonable steps to prevent the donation from being made by the subsidiary. Accordingly, the directors of the holding company will not be liable for an unauthorised political donation by a subsidiary if, having taken all reasonable steps, they are unaware of the donation or are powerless to prevent it. However, if, for example, the directors of a holding company use the controlling voting rights that they have in a subsidiary to pass a resolution authorising the subsidiary to make a political donation without an authorising resolution from the members of the holding company, the directors of the holding company will be liable. I note that Amendment No. 186, tabled by the noble Lords, Lord Sharman and Lord Razzall, addresses the same point. In the light of my explanation, I hope that they will not move it.

I turn finally in this group to Amendment No. 187, to Clause 356. This is a minor correction to the drafting. I beg to move.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, as the noble Lord, Lord McKenzie, has said, I have added my name to Amendment No. 186 in this group. I begin by acknowledging the very significant steps taken by the Government to meet our concerns in this difficult area. As the noble Lord, Lord McKenzie, said, Amendments Nos. 186 and 185 address the same issue. There is, however, a subtle difference between the two. I will not move Amendment No. 186, but I ask the Government and the Bill team to take on board the issue of knowledge. Government Amendment No. 185 does not address whether the directors had knowledge of the illegal donation, but Amendment No. 186 takes this into account by referring to them having the knowledge and whether they did anything about it. I shall not press the amendment at this stage, but I would like the Government to take that on board.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, before the noble Lord sits down, we did not favour that approach because you could have situations where the directors might deliberately choose not to seek such knowledge or to avert their gaze to allow the donation to happen. That is why we think our formulation is the better one.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, I am grateful for that explanation. I shall reflect on it before deciding whether to come back on the issue.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, I thank the Minister for the two groups of amendments led by Amendment No. 175 and Amendment No. 183. I understand the point made by the noble Lord, Lord Sharman, but the two groups of amendments go a long way towards meeting the concerns that we expressed in Committee.

On Question, amendment agreed to.

Clause 342 [Meaning of "political donation"]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip 3:45 pm, 10th May 2006

moved Amendment No. 171:

Page 151, line 9, at end insert—

"( ) For the purposes of this section, sections 50 and 53 of the Political Parties, Elections and Referendums Act 2000 (c.41) (definition of "donation" and value of donations) shall be treated as if the amendments to those sections made by the Electoral Administration Act 2006 (which remove from the definition of "donation" loans made otherwise than on commercial terms) had not been made."

On Question, amendment agreed to.

Clause 343 [Meaning of "political expenditure"]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 172 and 173:

Page 151, line 19, after "party" insert "or other political organisation,"

Page 151, line 22, after "party" insert "or other political organisation,"

On Question, amendments agreed to.

Clause 344 [Authorisation required for donations or expenditure]:

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

moved Amendment No. 174:

Page 151, line 36, at end insert—

"(a) by a resolution of the board of directors of the company; or"

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, in moving Amendment No. 174, I shall speak also to Amendments Nos. 180 and 181. The amendments are to Clauses 344, 345 and 346, which concern the authorisation required for donations or expenditure under Part 14 in connection with political activities, and relate to the procedure which needs to be followed by companies where they wish to make such donations or incur such expenditure.

The Bill currently provides that political donations or expenditure must be authorised by resolution of all the members of the company. The amendments we have tabled would enable authorisation by a resolution of the board of directors. This would save the time and expense required to seek the permission of all the members.

Much of our debate yesterday centred on the responsibilities and liabilities of directors, a matter addressed by my noble friend Lord Freeman. The new codification of duties, which the Government achieved after a Division yesterday, imposes new statutory responsibilities on directors and the new statutory derivative claim which expand the grounds upon which members can claim against directors on behalf of the company. All these new obligations appear to be designed to ensure that directors follow the correct procedures and take into consideration the correct influences when making decisions for the company. They will also allow greater scrutiny of these processes and greater activism to chase up errant boards and errant directors.

So, bearing that in mind, we are unconvinced by the comments of the noble Lord, Lord McKenzie, in Grand Committee that such political donations,

"might be seen to reflect the director's personal viewpoint rather than the interests of the company".

He went on to state:

"That is the nuisance that we are seeking to avoid, and the requirement for member authorisation is needed to achieve that".

If that really is the case, then what purposes do the newly codified directors' duties achieve? It is strange that the Government should have so little confidence already in the effectiveness of the newly codified duties that they have fought so hard to introduce to this Bill. Therefore, if the Government have faith in their new reforms to directors' duties, we see no reason why it should not be appropriate for boards of directors to authorise political donations and expenditure.

The noble Lord, Lord McKenzie, also spoke about what he perceives as the parity between trade unions and companies when it comes to donations. He said:

"It is also right that trade unions have to go to their members to be able to set up a political front".—[Official Report, 1/3/06; GC 147.]

I do not think he meant "front", but that is what is recorded in Hansard—I think he meant "fund". This is somewhat misleading; as I understand it, trade unions merely ballot their members over the setting up of a political fund once, and then every 10 years subsequently to maintain the fund. A company, however, will be required to do so every time it makes a donation. To compare the two, and to say that all is balanced, strains the bounds of credibility.

Our amendments seek to redress the balance a little. Companies would still be able to make donations or expenditure of a political nature where it is in the best interests of the company. In fact, under these amendments, it would probably have to be even more clearly in the interests of the company as the directors have a duty to so act while the members, acting in their personal capacity, have no such duty and may well be swayed by their own political inclinations, despite any benefit the company in which they are invested may obtain. Companies would be able to do so with a minimum of administrative effort and expense, unlike the proposed mechanism in the Bill. Shareholders would retain their ability to be in overall control through the various checks and balances that already regulate directors' conduct and those that the Bill introduces or amends. I beg to move.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I fear that I shall disappoint the noble Lord by singing a song he has heard before. We agree, of course, that directors should comply with their general duties to the company in everything that they do as a director. In a perfect world, that would be sufficient. However, it would be unrealistic to overlook the fact that when it comes to political donations, the possibility of a conflict of interests is particularly acute and a requirement for shareholder consent is appropriate.

Amendments Nos. 174 and 181 would remove the requirement for prior shareholder authorisation and, in doing so, would neuter the provisions entirely. In this context, we do not believe that Amendment No. 180, which draws an explicit link between the ability of a board to authorise a political donation and its general duties, provides anything more than window dressing.

I do not think that there is very much to be gained by setting out in detail our reasoning for opposing the amendments as it simply boils down to a matter of principle. But it is worth noting that the requirement for member authorisation is hardly unique to this part of the Bill. For example, Chapter 4 of Part 10 details a number of transactions that require the approval of members.

We believe the approach that we have adopted in this part provides business with sufficient flexibility to manage legitimate activities with the minimum of process overhead. To relax the restrictions in the manner proposed by the noble Lord would be a radical change that would undermine the entire raison d'être of this part and reverse the existing law. I need hardly remind noble Lords that the current law is based on the recommendations of the Committee on Standards in Public Life.

I hope that the noble Lord, Lord Hodgson, will recognise that on this point of principle we have no flexibility, and does not feel it necessary to press the amendment.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, I am grateful to the Minister. As he said, the tune was, as I expected, slightly familiar. I notice that he fell back on the issue of conflicts of interest. That is a fair point but, if that were the case, it would be good if trade unions had to make a similar annual requirement to poll their members, ensuring that there was no conflict of interest on that side either. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 345 [Form of authorising resolution]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 175 to 179:

Page 152, line 28, at end insert—

"(1A) A resolution may be expressed to relate to all companies that are subsidiaries of the company passing the resolution—

(a) at the time the resolution is passed, or

(b) at any time during the period for which the resolution has effect, without identifying them individually."

Page 152, line 29, leave out "For each company to which it relates"

Page 152, line 33, at end insert—

"( ) The resolution must specify a head or heads—

(a) in the case of a resolution under subsection (1A), for all of the companies to which it relates taken together;

(b) in the case of any other resolution, for each company to which it relates."

Page 152, line 36, leave out from "For" to second "each"

Page 152, line 39, at end insert—

"( ) The resolution must specify such amounts—

(a) in the case of a resolution under subsection (1A), for all of the companies to which it relates taken together;

(b) in the case of any other resolution, for each company to which it relates."

On Question, amendments agreed to.

[Amendment No. 180 not moved.]

Clause 346 [Majority required for authorising resolution]:

[Amendment No. 181 not moved.]

Clause 348 [Liability of directors in case of unauthorised donation or expenditure]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 183 to 185:

Page 153, line 12, leave out "responsible directors" and insert "directors in default"

Page 153, line 17, leave out "responsible directors" and insert "directors in default"

Page 153, line 21, leave out paragraph (b) and insert—

"(b) where—

(i) that company was a subsidiary of a relevant holding company, and

(ii) the directors of the relevant holding company failed to take all reasonable steps to prevent the donation being made or the expenditure being incurred, the directors of the relevant holding company."

On Question, amendments agreed to.

[Amendment No. 186 not moved.]

Clause 356 [Donations not amounting to more than £5,000 in any twelve month period]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 187:

Page 157, line 12, after "to" insert "a donation made by"

On Question, amendment agreed to.

Clause 378 [Exemption for company included in EEA group accounts of larger group]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 188 to 190:

Page 168, line 25, after first "the" insert "allotted"

Page 168, line 29, after "remaining" insert "allotted"

Page 168, line 30, after "total" insert "allotted"

On Question, amendments agreed to.

Clause 379 [Exemption for company included in non-EEA group accounts of larger group]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 191 to 193:

Page 170, line 7, after first "the" insert "allotted"

Page 170, line 11, after "remaining" insert "allotted"

Page 170, line 12, after "total" insert "allotted"

On Question, amendments agreed to.

Clause 393 [Duty to prepare directors' report]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, in moving the amendment I shall speak also to the 61 other amendments which stand in my name in this group. I said during the debates on the business review and the operating and financial review in Grand Committee that we hoped to bring forward amendments to reflect the outcome of the Government's consultation on narrative reporting as soon as practicable. I am pleased that we have been able to do so in time for Report to give the House the opportunity for debate before the Bill passes to the other place.

Our proposal on narrative reporting, which Amendment No. 196 will add to the requirements for the content of the business review, represents consistent and balanced policy in light of our recent consultations and discussions with interested parties. Our aim has always been to encourage meaningful, strategic, forward-looking information to assist shareholder engagement while avoiding disproportionate burdens on business, in line with our better regulation agenda.

The Government have concluded that the additional burden imposed by the statutory OFR requirement is not justified in the light of the competitiveness of UK business. Amendments Nos. 200 to 202 and the consequential amendments will therefore remove the OFR provisions from the Bill. The proposed changes to the narrative reporting requirement will add value to the quality of the reporting without imposing unnecessary costs.

As part of this package the Government will also clarify the position on liability for disclosures, both under the Companies Act and for implementation of the EU transparency obligations directive. To encourage open and meaningful reporting, it is necessary to provide certainty on the issue of liability. We expect shareholders to make full use of this further information. We want to achieve a proper balance between the ability of directors to report on their business in good faith and shareholder rights.

The narrative reporting requirements have been streamlined so that the requirements for quoted companies are now more closely aligned to those for unquoted companies in the business review. Under the proposed new narrative reporting arrangements, all companies other than small companies will need to produce a business review as required by the EU accounts modernisation directive. The purpose of the review is to inform shareholders of the company and help them assess how the directors have performed their duty under Clause 156, which relates to duty to promote the success of the company.

Quoted companies will need to ensure that, to the extent necessary to understand the development, performance or position of the company's business, their business review includes certain information relating to the main trends and factors which are likely to affect the business in the future and to environmental, employee, social and community matters, as set out in Clause 395(5).

Where directors have nothing to report on environmental, employee or social and community matters, the review must say so. Auditors will continue to be required by Clause 487 to report on the consistency of the directors' report, including the business review, with the accounts, as is required by the EU directive, but there will be no additional requirements to check for inconsistency. This preserves the £30 million saving made by repealing the requirement for an OFR under the Companies Act 1985. All companies will be exempted from disclosing in the business review information that is seriously prejudicial to the company's interests. That extends to all companies. The exemption previously only provided for quoted companies producing an OFR. This will also mean that companies would be exempt from any disclosure that would prejudice national security.

There will also be no statutory reporting standards for the business review as there were for the OFR. It is important to emphasise that the new narrative reporting proposals seek to enhance the narrative reporting without imposing unnecessary burdens on companies. In bringing forward these new measures we listened carefully to the concerns and wishes expressed by a wide range of business groups, shareholders and other interested parties. We also paid careful regard to the remarks made by noble Lords in Committee, and considered them closely.

I turn now to the amendments to the new clause tabled by the noble Baroness, Lady Noakes. I am grateful to her for tabling Amendment No. 197, as it gives me the opportunity to explain the Government's rationale behind specifying the purpose of the business review under the new subsection (2). Our reasons are twofold. First, specifying for whom the business review is intended is an important part of the package concerning liability. Specifying that the review is to inform members of a company is intended to make clear that the business review is designed for the benefit of members as a whole so that they may exercise their governance rights more effectively. It is not designed to help individuals decide on investment decisions, nor is it targeted at the wider public in the sense that they should be entitled to rely on it, although they may well read it. The effect of the provision is to limit directors' liability to the company only, and ensure that neither individual investors nor anyone else is entitled to sue. In effect, this has codified an aspect of the Caparo judgment. We consider that making that clear will facilitate open and meaningful reporting.

Secondly, we want to make an express link between the business review and the directors' duties under Clause 156. That clause, as we discussed yesterday, embodies the concept of enlightened shareholder value. That is relevant to reporting on matters such as the environment and employees in the business review, which my noble friend Lord Clinton-Davis drew attention to yesterday. As we explained with regard to Clause 156, the Company Law Review concluded that the success of the company could only be promoted taking due account of such factors, which reflect wider expectation of responsible business behaviour. By making the link to directors' duties, it helps to make clear that those factors contribute to the success of the company for the benefit of members as a whole, and it is in that context that directors are being asked to report on them.

Subsection (2) is a response to the view of stakeholders during the Government's recent consultation. Business and investor groups alike called on the Government to clarify the position on liability. As I said, specifying the purpose of the business review is one element of the package to limit directors' liability. The direct link to directors' duties was pressed for by a significant number of interest groups. They echoed the Company Law Review in seeing a clear and important link between enlightened shareholder value and narrative reporting. I therefore urge the noble Baroness to withdraw Amendment No. 197.

I applaud the intention behind the noble Baroness's second amendment. The effect would be to relieve companies of the burden of having to copy out into the business review information required to comply with the review, if it is already included elsewhere in their annual accounts and reports. We agree entirely with that aim. However, the amendment is not necessary. Cross-referencing to material included elsewhere is already allowed, and happens in practice. The Government's guidance on the business review makes clear that this is the case. We fear that making express provision in the Bill for cross-referencing would cast doubt on existing practice.

I also reassure those with concerns about the validity of information for the business review that is included by cross-referencing. Any information that is included by reference to other materials elsewhere is subject to all the statutory requirements applied to the business review. That would include, for example, that the cross-referenced materials be subject to the same auditor's report requirements as the business review as part of the director's report, under Clause 487, and that all cross-referenced materials be circulated to every shareholder in the company and others entitled to receive the annual account or report, under Clause 404.

I hope, in the light of this explanation and reassurance, that the noble Baroness will not press her amendment. I beg to move.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions 4:00 pm, 10th May 2006

My Lords, I state at the outset that we on the Conservative Benches support the government amendments in this group. Indeed, we even tabled some of them ahead of the Government.

I am sure that the Minister will agree that the Government have not handled the whole OFR debacle well. It is a pity that so much time has been spent veering from one policy position to another, and satisfying none of the interest groups. I know that some of those interest groups will not be wholly satisfied with what the Government have done with these amendments. Indeed, other amendments have been tabled for discussion today which demonstrate that. However, we think that the Government have achieved the right balance.

From the perspective of corporate reporting, the most important thing is to have certainty. Alongside certainty I particularly welcome the fact that the Government have not included the more onerous audit requirements that went with the OFR and have not introduced the reporting standard provisions. Those two provisions were drivers of the cost, which was significantly in excess of the £30 million that was initially estimated.

The Minister kindly dealt with the two amendments that I tabled, which were probing amendments, as he correctly deduced. My first amendment probed the meaning of subsection (2) of the new clause replacing Clause 395. The Minister explained that the provision ought to demonstrate enhanced shareholder value. I was trying to tease out whether the report had to show how the directors had had regard to the various items listed in Clause 156—which we debated at some length yesterday—or whether those items had any special relevance. Ambiguity may arise in the minds of the preparers of OFRs on what precisely they have to report on. As we can see, enlightened shareholder value is already set out in subsection (5), and to some extent in subsection (6), so what is it within subsection (2) that adds to reporting on enhanced shareholder value? I stress that I seek clarity on these matters from the Government because preparers of business reviews will want to know what they have to comply with.

I was also grateful for the Minister's response on my second amendment about whether everything had to be stuck into the directors' report, which as I am sure the noble Lord will be aware is about the most boring bit of the annual report and accounts, unless companies choose to put other material in there. Is it sufficient for the matters to be dealt with in separate reports? As I am sure the noble Lord is aware, some companies issue separate corporate social responsibility reports and separate environmental reports, which give a much fuller account than what may sometimes be a couple of paragraphs in the main body of the annual report. Will it be sufficient to refer to documents that are not physically a part of the main annual report and accounts?

Subject to the Minister's comments on those points, I reiterate our support for these amendments.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, I congratulate the Government on rebranding a part of the Bill. To the average man in the street we now have the business review, formerly known as the OFR. I also congratulate the Government on having the balance about right. As the noble Baroness said, the issue with the OFR has always been how much was in it and the degree of certainty that there had to be over the information that was contained therein. This series of amendments gets the balance about right. It is a welcome addition and I support it.

However, I have a couple of concerns. In introducing the amendments, the Minister said that there would be no reporting standard for the business review. I cannot believe that he honestly believes that. I think that it will just be a question of time before someone decides that we need a reporting standard for the business review; it is just the way that accounting goes, in my view. Having said that, I go back to my first remarks that the Government have got the balance about right, and I congratulate them on that.

Photo of Viscount Bledisloe Viscount Bledisloe Crossbench

My Lords, I should like to raise one point on Amendment No. 196, which appears to me—and I am sure that I am wrong—to contain one rather serious illogicality. It basically requires a business review, which is an objective review of how the company has done, how it is doing, and the extent to which it has had proper regard for employees, environmental matters, and so on. That is a report on how the company is doing. But subsection (2) of the amendment says that the purpose of the review is to inform members of the company how the directors have performed their duty.

A report on how the company is doing may not in any way tell you how the directors are doing. A company may be doing very well because it has excellent managers, or because the economic trend has favoured it tremendously, or because its product has suddenly become very desirable for outside reasons. Although it is doing very well, the directors may have met three or four times a year for a quarter of an hour, nodded through the business in front of them without having read it, and then retired to a very good and perhaps rather over-refreshed lunch. The fact that you are told how the company is doing does not tell you at all how the directors are doing. Surely subsection (2) is an illogicality. While not asking the noble Lord to deal with the matter today, I ask him to consider whether subsection (2) really does logically fit, in the way that it is worded, with the rest of the amendment.

Photo of Baroness Northover Baroness Northover Spokesperson in the Lords, International Development, Liberal Democrat Lords Spokesperson (International Development)

My Lords, I support Amendment No. 196 and related amendments, and I urge the Government to go further. The Company Law Review recommended what became the OFR, and we have had a debate on that. The DTI drew it up; business welcomed it by and large—and that itself was welcome—but then the Chancellor knocked it back in November. We are now in a rather unique situation where on the one hand the Government are taking away sections of the Bill but on the other they are putting bits back in again, by the back door, as it were.

It is to be welcomed that they are retaining some of those elements, given that they plan to take out the OFR. It is clearly welcome that environmental and community concerns will come within the business review, and I echo what my noble friend Lord Sharman said in welcoming where this has got to. But I remain concerned that certain elements are not here. I hope to be able to address some of those in the next group. It is clearly vital that we improve the transparency and accountability of companies, especially in relation to the environment and where businesses are working in developing countries. Of course there are enlightened companies, and it is notable that many of them have welcomed the idea of the reports. We are all familiar with unenlightened companies, and I mentioned yesterday those working in the DRC. The more that we can do to promote transparency and accountability in British companies through this Bill the more welcome that will be, and the easier it will be to try to bring such companies to account.

Photo of Lord Dubs Lord Dubs Labour

My Lords, I give a broad welcome to Amendment No. 196, but if it had gone a little further, the amendments in the next group might not have been necessary. There are two points on which I would like to ask my noble friend for a little more information. In his introductory remarks, he used the words "other than small companies". What does he mean by that? My understanding is that the Government were talking about 1,500 companies, and I would have wished to argue that the scope of the amendment should have gone as far as 37,000 companies. That would still exclude the small ones but it would include the bulk of the companies to which this amendment would appropriately apply.

Secondly, I endorse the comment from the Liberal Democrat Benches that it is a pity that Amendment No. 196 does not include reporting standards. Surely it would be desirable to have them, and I hope that my noble friend can give us some reassurance on that.

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Spokesperson in the Lords (Id Cards & Charities Bill), Home Affairs 4:15 pm, 10th May 2006

My Lords, I hesitate to make my first contribution to this mammoth debate at this stage, but one of the prices of running major legislation in the Moses Room as well as in this Chamber is that those who are engaged on other Bills are excluded from participation in mainstream Bills such as this, and I was heavily involved in the Identity Cards Bill.

Having said that, I, too, am cheered by the extension that Amendment No. 196 makes to the Bill—in particular, subsection (5). That subsection seems to be completely new and to embrace many of the issues contained in Amendment No. 194B to be addressed by my noble friend Lady Northover in the next group. However, I have the sensation that if Amendment No. 196 is passed, Amendment No. 194B may fall, but no doubt the Deputy Speaker will comment on that.

My questions to the Minister are twofold. First, the requirements of subsection (5) are confined to a quoted company, and in time it may be found that that is too restrictive. I believe that the majority of the British companies named in the OECD report on operations in the Democratic Republic of Congo were not publicly quoted companies. It might be interesting if the Minister would comment on that.

My question concerns the formulation at the start of subsection (5), which says:

"In the case of a quoted company the business review must, to the extent necessary for an understanding of the development, performance or position", and so on. It seems to me that the phrase "an understanding" is a bit limp. I would have hoped that we would be talking here of "a rounded understanding", "a comprehensive understanding" or even "an adequate or reasonable understanding". Without some qualifying objective, "an understanding" represents such a low hurdle that it is almost impossible to conceive how it will not be taken unless there is a complete ignorance of the factors mentioned in paragraph (b). Perhaps the Minister will comment on that, although I shall quite understand if he wants to do so outside the Chamber after the debate.

The second point on which I ask him to enlighten us concerns the final three lines of subsection (5), which say:

"If the review does not contain information of each kind mentioned in paragraph (b)(i), (ii) and (iii), it must state which of those kinds of information it does not contain".

That is a slightly gnomic formulation. I wonder whether, if I understand it aright, it should not merely say that it does not contain that information but why it does not contain it. Again, it seems extraordinarily ineffectual to leave it at that.

Finally, there is an issue which concerns the independent contractors of British companies abroad. I perfectly accept that the proposed new Clause 395 addresses the position of the company's employees, and that that includes the company's subsidiaries' employees, but it does not appear to cover independent contractors. In most third-world countries where there is serious abuse of overseas workers, they make sure that they are not employees but so-called independent contractors, although under British law that might be an extremely doubtful arrangement. Under indigenous law, they will indeed not be employees.

This morning, I had a message from Mr Saunders who is the company secretary and general counsel of Oxfam, who said that,

"when some companies outsource parts of their business, they often try to outsource any responsibility for their social . . . impacts".

He mentioned cases where women and men are forced to work under punishing conditions in factories to meet the demands of British company employers. The question is whether the formulation in Amendment No. 196 requires a reference to those circumstances. I see that there must be information about social community issues. The Minister may be in a position to assure me that that will be sufficient to bring the position of those so-called independent contractors within the purview of the directors' report.

Photo of The Bishop of Chester The Bishop of Chester Bishop

My Lords, from these Benches, I add my thanks to the Government for their Amendment No. 196. Like the noble Lord, Lord Phillips, I was slightly puzzled about the order in which we are doing things, because I understand that Amendment No. 196, which would replace Clause 395, will not be moved until Clause 394 has been discussed. We shall discuss the points then anyway, although many of them have been partly dealt with in Amendment No. 196, which I welcome. It brings this part of the Bill much more in tune with Clause 156 than the current Clause 395.

To pick up the point made by the noble Lord, Lord Phillips, the question on the use of contractors also relates to associated companies and subsidiaries where there is only a minority stake. It would be good to hear what the responsibilities under the prospective new clause would be to companies in relation to subsidiaries and associated companies that are not wholly owned.

Amendment No. 196 is very important. It is significant not only to Oxfam but to a number of other organisations that have made representations to me. In the future, in our increasingly global world, the way in which multinational companies operate in other countries will have a huge impact beyond their own immediate concerns and those of their shareholders. The sort of imbalances that can be set up in a world in which information and the movement of people is ever increasing means that there will be a need for multinational companies increasingly to pay attention to the wider social and environmental impacts of their activities. I am pleased that Amendment No. 196 extends the current Clause 395 to speaking about the communities in which companies operate and not just on issues of the environment and employees. There is ample evidence from Scandinavia, for example, that it is perfectly possible to be successful economically while giving a high profile to the wider social and economic responsibilities that companies bear.

We thank the Government from these Benches for Amendment No. 196. To save me speaking again, let me say that Amendment No. 194B usefully sets out the implications of Amendment No. 196 if it is accepted.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, I shall deal first with the important point raised by the noble Baroness, Lady Noakes, on the cross-referencing of material. I hope that I have dealt with that by saying that any material that is cross-referenced is subject to the same statutory requirements applying to the business review. That will include, for example, that cross-referenced material be subject to the same auditors' report requirement as parts of the directors' reports, and that cross-referenced material be circulated to every shareholder of the company and others who are entitled to receive the annual report and accounts. I think that that covers the point. Yes, it can be in separate material but it has to take the same account of issues.

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Spokesperson in the Lords (Id Cards & Charities Bill), Home Affairs

My Lords, I am grateful for the Minister giving way. Is it right to assume that cross-referencing is specific and targeted, and not merely to page 155 or whatever? That could be pretty useless to a lay reader of the document.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, we have not yet got to that point. I am sure that when we do, the attempt will be to make that as intelligible as possible. The key point is that it would have to be circulated in the same way as other material. You could not simply refer to a document which people had not received.

The noble Viscount, Lord Bledisloe, I think, lives in a different world from the one that we live in. In the world in which I live, at least, there is thought to be a relationship between the managers, their performance and the performance of the company. That is rather important and fundamental to this whole Company Law Reform Bill. If we do not believe that, it is, frankly, not worth spending a lot of time on this Bill. That is the assumption. Of course, there will be cases where companies do well despite their directors' efforts. However, the fundamental principle of company law is that directors are responsible for the company and manage it. Speaking for most directors, the picture he paints of their meeting rarely and going off and having a nice lunch is really unfair. In the world we live in, directors bear a heavy responsibility, in many cases putting in long working hours because they believe passionately that their performance affects that of the company.

Photo of Viscount Bledisloe Viscount Bledisloe Crossbench

My Lords, of course I accept that that is how a company should be run. Fortunately, I think I can say that whenever I was a director that was how the company was run. However, that does not alter the fact that a report which merely says that the company is doing well does not necessarily reveal that the directors are doing their duty at all. That was the only point I was making.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, with all respect, where one is talking about performance indicators, it will become clear. That is partly what the business review is about: what is due to external circumstances, and what is due to key performance indicators showing how the business is run.

On the point of the noble Baroness, Lady Noakes, subsection (2) of new Clause 395 is quite clear. The purpose of the business review is to inform members of a company and to help them assess how the directors have performed their duty under Clause 156, providing information showing how well they have done. As regards SMEs, the criteria are that an SME must not have turnover of more than £5.6 million, a balance sheet of not more than £2.8 million and not more than 50 employees. I am not certain that I can cross-reference that exactly to the number of companies in each category, but it is important that we simply exclude those companies.

The noble Lord, Lord Phillips of Sudbury, raised a question about "understanding". It is a rather limp phrase, coming straight from Article 46 of the fourth directive, as amended. We do not need to gold-plate that, or go into great detail. It gives the answer we need. We have dealt with the cross-referencing. A lot of work has been done on reporting standards. In fact, we found that it did not greatly add to what was already set out and, to the extent that it did, it simply seemed to be adding on responsibilities rather than clarifying the situation. We want to avoid that. I hope that has dealt with the main issues that noble Lords have with this clause.

Photo of Lord Dubs Lord Dubs Labour

My Lords, before my noble friend sits down, what about the number of companies that will be covered by this?

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, I cannot give my noble friend an exact figure. If you start excluding SMEs in the categories that I mention, you already exclude a huge proportion: 98 per cent of British companies, I think. My noble friend mentioned a figure of about 30 million. I cannot comment on that, but I will let him know what the figures are.

Photo of The Bishop of Chester The Bishop of Chester Bishop 4:30 pm, 10th May 2006

My Lords, before the Minister sits down, will he comment more directly on the use of contractors or employees of associated or subsidiary companies in which there may be a minority holding, and so forth? How far will these provisions apply to that wider range of associates of a company?

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, we feel that it is necessary to draw the line somewhere. When we consulted on this, the practicalities made monitoring the performance of contractors an impossible task and there was no desire to extend monitoring to them. Where there is a group company, these provisions extend to the group. But if one starts to try to monitor the policies of all a company's contractors against these standards, it is impossible.

On Question, amendment agreed to.

Clause 395 [Contents of directors' report: business review]:

Photo of Baroness Northover Baroness Northover Spokesperson in the Lords, International Development, Liberal Democrat Lords Spokesperson (International Development)

My Lords, in speaking to Amendment No. 194A, I shall speak also to Amendments Nos. 194B and 314A, which are tabled in my name and the names of my noble friend Lord Razzall and the noble Lord, Lord Dubs, and to Amendment No. 194C, which is tabled in my name and the names of my noble friend Lady Miller of Chilthorne Domer and the noble Lord, Lord Dubs.

These amendments fill in some of the gaps left by the proposed removal of the OFR, even if we shortly agree to add the business review. Amendment No. 194A would delete the words "where appropriate". The information required to be supplied under this subsection is already qualified by the use of the phrase,

"to the extent necessary for an understanding of the development, performance or position of the business of the company".

The words "where appropriate" are superfluous and may weaken that requirement.

Amendment No. 194B would delete the words,

"environmental matters and employee matters", and would insert a more detailed specification of what should be included. The requirement for companies to provide information on social and community issues, which has been referred to, was included in the OFR regulations, but is absent from the business review provisions as currently drafted. That means that there is no requirement for companies to report on the impact of their activities on any communities in which they operate, including on any related human rights issues. In addition, the requirements, as currently drafted, to report in the business review on environmental matters are weaker than those under the OFR regulations.

The business review requires the provision of information on environmental matters,

"to the extent necessary for an understanding of", a company's,

"development, performance or position".

However, the OFR also required the provision of information on the impact of the business of the company on the environment to the extent necessary for such an understanding. This amendment refers to the social aspects, to which we believe explicit reference should be made, the impact of the company's activities on the environment and, as my noble friend Lord Phillips said, the persons with whom the company has contractual or other arrangements that are essential for the business of the company.

The proposed new Clause 395(4)(b)(iv) requires the inclusion of information on,

"the areas described in sub-paragraphs (i) to (iii) and the extent to which those policies have been successfully implemented", because companies could easily introduce policies to address those issues simply for PR purposes. This provision, which is also in the OFR, is vital to ensure that companies cannot pay lip-service to such policies without serious intentions of implementing them.

Amendment No. 194C would delete Clause 395(7), which would mean that the provisions applied to medium-sized as well as large companies. This issue has been mentioned by the noble Lord, Lord Dubs. Where medium-sized companies impact these factors, we believe that they should be required to report on them.

Amendment No. 314A concerns the auditing of what I have just described. The auditing requirements for the business review are less stringent than those for the OFR. The OFR regulations require, first, a consistency check—that is, a check by the auditor that the information provided in the OFR corresponds with the available evidence—and, secondly, consideration by the auditor about whether any other matters that have come to his attention during the audit were inconsistent with the information provided in the OFR. The Government asserted that that second check was necessary to provide adequate assurance for investors and other users. However, the second check is not part of the audit requirements for the business review included in the current draft. That is why I also put forward this amendment.

So, in the interests of transparency—a matter I have mentioned before—and corporate responsibility, for the reasons we all know, and in the interests of putting back in some of the protection that was provided in the OFR in the first place, I commend these amendments to the House. I beg to move.

Photo of Lord Dubs Lord Dubs Labour

My Lords, I support what the noble Baroness, Lady Northover, said. Of course none of us wants to rush in and impose an additional heavy bureaucratic burden on companies. We are not doing that with these amendments, but we are seeking to elaborate a little on the main thrust of Amendment No. 196, which we were debating, to add a little more precision as regards environmental responsibilities, as in Amendment No. 194B, and to bring within the net some of the companies that would be excluded from Amendment No. 196. I commend the amendments to my noble friend.

Photo of The Earl of Sandwich The Earl of Sandwich Crossbench

My Lords, I do not want to prolong the discussion, which has been had many times over. The case for the comparison with the OFR has been very clearly stated by the noble Baroness, Lady Northover. As I said yesterday in our discussion of Clause 156, which in a sense is still linked to this debate, there is a strong coalition in favour of these amendments, although I think that it will warmly welcome the new government clause. I remain convinced that companies should not only report on but also take account of their impact on the environment and communities. This new form of business review, welcome as it is, will certainly help, but it does not, of course, cover the fundamental issue.

Photo of Baroness Tonge Baroness Tonge Liberal Democrat

My Lords, I support the amendments tabled by my noble friends. Having been shadow Secretary of State for International Development in the other place for nearly eight years, I would like to commend to the House the work that the Government have done on international development. There is no question in my mind but that they have made huge progress and have been extremely committed to international development. More progress has been made on debt than any of us dreamt of, and the commitment to aid is one of the best for many decades.

One of the main engines for development nowadays must be industrialists and companies operating in developing countries. You only have to look at Britain in the 19th century to see what developed us. We did not just think off the top of our heads that education and public health were a good idea; the drive came from the needs of big companies and industrialists operating in our towns and cities to have a better-educated and healthier workforce.

It is terribly important when our companies—medium-sized as well as big—are operating in developing countries that they should be mindful of their huge responsibility in that country and of how much difference they can make. Sometimes I have read the brochures produced by the companies. They are admirable; the companies are well aware of the social and environmental consequences of their actions. However, when you go to those countries, sometimes what the companies say is not actually happening on the ground. Therefore, I think that it is very important that we tighten up a little bit how those companies operate.

The OFR was welcomed by everyone—by the NGOs and by the Opposition—so we were incredulous when it was suddenly withdrawn. It seemed so strange that the OFR should be withdrawn.

Photo of Lord Gordon of Strathblane Lord Gordon of Strathblane Labour

My Lords, I thank the noble Baroness for giving way. To say that the OFR was welcomed by everyone is, I fear, nonsense. The business community was up in arms about it. The auditing profession was up in arms because it was being asked to audit opinions about the future rather than facts about the past. So it was certainly not universally welcomed.

Photo of Baroness Tonge Baroness Tonge Liberal Democrat

My Lords, it was not universally welcomed by companies. What I implied is that it was universally welcomed by those people who wanted developing countries, their workforces and their environment to be protected. I also understood that many companies had already started to prepare their OFRs and were rather shocked that it was suddenly withdrawn.

Nevertheless, we are now discussing the business review and I welcome government Amendment No. 196. It recognises that something had to be done and that markers had to be put down on these issues. Our amendments have been tabled because we feel that that amendment does not go quite far enough. It needs to be tightened up. Like my noble friend Lord Phillips, I find it quite difficult to understand the opening paragraph of subsection (5) of Amendment No. 196. I read it as saying that everything is being done in the interests of the company's business. It should also be done in the interests of the country in which the company is operating.

I very much hope that my noble friends' amendments will be considered by the Government, especially before the Bill goes to the other place, where I am sure there will be very similar debates to those that we have had here.

Photo of Lord Clinton-Davis Lord Clinton-Davis Labour

My Lords, Amendment No. 194B does not add very much to what the Government have already said. I am deeply concerned about environmental matters and I am deeply concerned about employee matters. But I really do not know why it is asserted that the amendment adds anything to the obligations that are already imposed. I see no value in putting in other words than those that the Government assert to be essential. My noble friend's amendment is perfectly adequate.

However, I am a little concerned about the words "where appropriate". Perhaps my noble friend can tell the House exactly what is meant by that.

Photo of Lord Phillips of Sudbury Lord Phillips of Sudbury Spokesperson in the Lords (Id Cards & Charities Bill), Home Affairs

My Lords, I briefly return to the issue of independent contractors, which has now been raised by several speakers. When winding up on government Amendment No. 196, the noble Lord, Lord Sainsbury, said that to try to bring into the directors' reporting requirement people who were not employees was too far and too complicated for the companies.

I perfectly understand the gist of what the Minister is saying; I am a director of several companies myself. No one is trying to throttle the poor old companies and prevent them from doing their work. However, he will agree—this cannot be contentious—that when one is dealing with certain third-world countries, there are no employees according to local law. They are not employees; they are independent piece workers. Dare I say that some companies trade off that? They may not employ more than a single employee in the country concerned, and that person will be an expatriate. I therefore ask whether the Government will at least think about this.

The noble Lord, Lord Clinton-Davis, said that Amendment No. 194B added nothing substantial to the government new Clause 395(5), but I think that he will agree that paragraph (iii) of Amendment No. 194B attempts to get at the difficult issue of contractors of companies working in overseas countries. There may be a way of dealing with this practically by indicating, obviously at the last stage of the Bill, that "employees" in the Government's amendment means "employees" as defined by UK law. I do not think that that would place a burden on companies at all, because the Government's intention is that employees, as we understand the term, are to come under the reporting requirements of the directors.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation) 4:45 pm, 10th May 2006

My Lords, the noble Baroness has tabled some interesting amendments that echo amendments tabled in Grand Committee, to which several Members of the House have spoken. The amendments would strengthen the requirements of the business review and reintroduce elements of the operating and financial review. However, I fear that this would impose unduly onerous burdens on all companies, not only quoted ones. The OFR was originally a requirement for quoted companies only. No evidence from the Government's recent consultation on narrative reporting suggested that any requirements to report on specific information relating to the environment, employees, and social and community matters should apply to a different set of companies.

We made it very clear yesterday in our discussion on Clause 156 that we are determined that the essential duties of directors should be clear, and we have made the link between that and the business review. The business review is therefore clearly positioned so that people can judge how well directors are doing against those duties. I think that it would be sheer folly to pile unrealistic and onerous reporting duties on them.

On the point about contractors, many companies I know of have 500 or 600 contractors and others working for them in disparate relationships. The idea that directors are required to have some kind of responsibility not only to provide a good service but to have regard to the environment and all other policies is quite impossible. In any case, it is for those companies to answer for their responsibilities. What the amendments suggest is simply not feasible or practical. If we are going to make the business review work sensibly, we must be very clear about what is practical and sensible and not place too great a burden on companies.

Amendment No. 194A, which would remove the words "where appropriate" from the beginning of subsection (4)(b) of Clause 395, would remove the directors' ability to judge whether it was appropriate to include analysis using non-financial key performance indicators in the business review. That would make the provision much more onerous than the EU accounts modernisation directive, and we do not think that that is justified. New Clause 395, in government Amendment No. 196, provides that, where directors of quoted companies do not consider certain information to be material, they must say so in the review. We think that that is the way in which to do it, because that will be a prompt to directors to consider such matters.

Amendment No. 194B would require all companies to include analysis using key performance indicators of the impact of the company's policies and activities on the environment, on the communities they operate in, and on employees and other contractual arrangements, as well as the extent to which such policies have been successfully implemented. Elements of this are now incorporated into the new business review in Clause 395. But, again, we have included them for quoted companies only. We see no justification for imposing on other companies requirements over and beyond what the EU directive requires. That is not to say that we do not think other companies should be reporting less. We have rationalised the narrative reporting requirements in one place under new Clause 395. Although the information specified under subsection (5) is required of quoted companies, there is nothing to prevent other companies from providing this level of information, too. Indeed, we hope that they are encouraged to do so.

Amendment No. 194C would remove the exemption for medium-sized companies from having to disclose non-financial KPIs. The exemption is an option that the EU directive allows member states in implementing the business review requirements. Again, we see no justification for not granting this exemption in the UK. Not to do so could hinder the competitiveness of UK plc.

We recognise that the CORE coalition, the TUC and some other interest groups called for all or some of the OFR provisions to be reinstated or inserted into the business review, as the noble Baroness's amendment seeks to do. However, some business organisations argued strongly against reintroducing the OFR reporting burdens. That is not to say that companies were against the OFR in itself. Quite the contrary: many companies remain supportive of the OFR and already produce voluntary OFRs. Their contention was to avoid reimposing the undue cost burdens of the statutory OFR.

We have therefore elaborated on specific information relating to environmental, employee, social and community issues to be included for a better understanding of the company's business. This is the basic level of information that we would expect quoted companies to include in their business review. But if the directors consider that such information is not necessary for a better understanding of the company's business, they may say so and not include it. This is a matter for the directors' judgment.

Finally, Amendment No. 314A would require the auditor to report on any other matters that are inconsistent with the information provided on non-financial KPIs that have come to their attention. We see this as reimposing a significant burden. The matter of the audit requirements was raised by a majority of the respondents to the Government's recent consultation. Some called for an audit opinion stating not only whether the business review was consistent with the accounts, but also that there were no inconsistencies with matters identified during the audit. That had been the level of audit scrutiny for the OFR. Others, however, pressed strongly for this higher level of audit requirement not to be reintroduced on the grounds of undue cost burdens.

As I said earlier, removing the higher level of audit requirement for the OFR was a major saving of £30 million made by repealing the requirement for a statutory OFR. This is a crucial area of regulatory impact relating to narrative reporting that we have had to consider. We believe that the benefits of greater assurance on the business review do not justify the significant additional cost burdens of this additional audit check.

We recognise that the noble Baroness proposes to limit the scope of the additional check by the auditors to reporting on inconsistencies with non-financial KPIs only, rather than on all information in the OFR. In reality, that will be no less of a burden, because the checking of non-financial information is onerous and therefore extremely costly, as I am sure the noble Lord, Lord Sharman, on the Liberal Democrat Front Bench will concede. This would be a nightmare in terms of costs and difficulty. That is why we propose that auditors should continue to be required to report only on the consistency of the business review as part of the directors' report, with the accounts, as required under Clause 487.

We have developed what we believe to be a balanced and consistent package of proposals on narrative reporting, which reflects the outcome of our recent consultation and our discussions with interested parties. Our objective has been to ensure effective and appropriate narrative reporting without imposing unnecessary burdens on companies. We want to make a very clear statement of what we think are the principles of the directors' duties. We will stand very carefully behind that responsibility. We want to have reporting on this, but we want to do so without imposing on business a huge regulatory burden. I therefore urge the noble Baroness to withdraw this amendment.

Photo of Baroness Northover Baroness Northover Spokesperson in the Lords, International Development, Liberal Democrat Lords Spokesperson (International Development)

My Lords, I thank the noble Lord for such a full reply. The noble Lord linked this to directors' duties, which we discussed yesterday when he mentioned that the Government would agree to publishing guidance for directors. At Third Reading, perhaps the Minister will outline what will be in that guidance, which might help us along.

I thank noble Lords for their comments. I also pay tribute, as I should have done before, to the Trade Justice Movement and the Corporate Responsibility Coalition for their persistence, commitment and assistance on these extremely important issues. I will look carefully at what the Minister has said. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 194B and 194C not moved.]

[Amendment No. 195 had been withdrawn from the Marshalled List.]

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 196:

Leave out Clause 395 and insert the following new Clause—

"CONTENTS OF DIRECTORS' REPORT: BUSINESS REVIEW

(1) Unless the company is subject to the small companies' regime, the directors' report must contain a business review.

(2) The purpose of the business review is to inform members of the company and help them assess how the directors have performed their duty under section 156 (duty to promote the success of the company).

(3) The business review must contain—

(a) a fair review of the company's business, and

(b) a description of the principal risks and uncertainties facing the company.

(4) The review required is a balanced and comprehensive analysis of—

(a) the development and performance of the company's business during the financial year, and

(b) the position of the company's business at the end of that year, consistent with the size and complexity of the business.

(5) In the case of a quoted company the business review must, to the extent necessary for an understanding of the development, performance or position of the company's business, include—

(a) the main trends and factors likely to affect the future development, performance and position of the company's business; and

(b) information about—

(i) environmental matters (including the impact of the company's business on the environment),

(ii) the company's employees, and

(iii) social and community issues, including information about any policies of the company in relation to those matters and the effectiveness of those policies.

If the review does not contain information of each kind mentioned in paragraph (b)(i), (ii) and (iii), it must state which of those kinds of information it does not contain.

(6) The review must, to the extent necessary for an understanding of the development, performance or position of the company's business, include—

(a) analysis using financial key performance indicators, and

(b) where appropriate, analysis using other key performance indicators, including information relating to environmental matters and employee matters.

"Key performance indicators" means factors by reference to which the development, performance or position of the company's business can be measured effectively.

(7) Where a company qualifies as medium-sized in relation to a financial year (see sections 448 to 450), the directors' report for the year need not comply with the requirements of subsection (6) so far as they relate to non-financial information.

(8) The review must, where appropriate, include references to, and additional explanations of, amounts included in the company's annual accounts.

(9) In relation to a group directors' report this section has effect as if the references to the company were references to the company and its subsidiary undertakings included in the consolidation.

(10) Nothing in this section requires the disclosure of information about impending developments or matters in the course of negotiation if the disclosure would, in the opinion of the directors, be seriously prejudicial to the interests of the company."

[Amendments Nos. 197 and 198, as amendments to Amendment No. 196, not moved.]

On Question, Amendment No. 196 agreed to.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

moved Amendment No. 199:

After Clause 395, insert the following new clause—

"DIRECTORS' LIABILITY

(1) The directors responsible for preparing the review required by section 395 shall not be liable as a result of—

(a) the review not complying with the provisions of that section relating to the preparation and contents of the review; or

(b) any statement in the review being untrue or misleading.

(2) Subsection (1) does not apply if the directors who signed the directors' report in accordance with section 397 knew that the provisions of this section relating to the preparation and contents of the review were not complied with, or that any statement in the review was untrue or misleading.

(3) Nothing in this section shall impose upon any person responsible for preparing the business review a duty to update any statement which has been included in the review."

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, Amendment No. 199 introduces a new clause after Clause 395. This new clause introduces what is known as a safe harbour provision. Clause 395 concerns extended narrative reporting to improve the information that companies make available about themselves and their performance.

When the Government first consulted on introducing an OFR, which was the predecessor to what is now Clause 395, a number of responses said that the OFR would never advance beyond legalistic boilerplate unless there was a safe harbour provision. Indeed, the Company Law Review also recommended a safe harbour provision, but the Government ignored that when they introduced the initial OFR requirements.

We will never know what kind of OFRs might have come out of the statutory instrument that was introduced last year but withdrawn before it ever came into effect. We are clear, however, that the new business review requirements will not succeed unless there is adequate protection from legal liability.

The Government have now introduced the new business law requirements but have not yet introduced related safe harbour provisions. Although I am well aware that, last week, the Government issued draft clauses on the liability of directors, they are not tabled for today's Report debate. Therefore, I felt it would be important for your Lordships' House to have an opportunity to debate the key features of a required safe harbour provision for a business review in the hope that whatever the Government bring forward for Third Reading will be satisfactory. I hope the Minister will outline the timetable for the new clauses and confirm that he will be tabling an appropriate amendment at Third Reading. We feel it would be inappropriate for this Bill to go to another place without a safe harbour provision.

It will be clear that Amendment No. 199 is a probing amendment. When I tabled the amendment in Grand Committee the debate proceeded on general principles, not on the specifics. I am aware that the Government's draft clause is structured in a different way and, hence, is not directly comparable to Amendment No. 199. I shall not be arguing that the structure and scope of my amendment are superior, but I would like to draw the Minister's attention to subsection (3) of my amendment, which relates to the updating of statements included in the business review. As far as I can see, there is no equivalent in the Government's draft clause.

This subsection was drafted to ensure it was clear that the directors had no ongoing responsibility to update statements in the business review. As I am sure the Minister is aware, it is based on the provisions of Section 102 of the 1995 Private Securities Litigation Reform Act in the United States of America.

There is common ground that the most valuable aspects for a business review will be the insights it gives for the prospects of a company. So it is quite likely the information that is given about the prospects of the company will be overtaken by later information. Let us suppose that information is given about a company's market share based on trade association data, which several months later are revised and the market share is, thus, a smaller or larger figure. Alternatively, the company may comment on the relationship of its business to GDP growth but an oil price shock or something similar comes along, which destroys that relationship. Clearly, if that puts a company into profit-warning territory, there are already market obligations to update shareholders about the changes. But all sorts of changes that have been put into a business review would not put a company into profit-warning territory.

So the question arises whether the directors have to do anything if circumstances change after the business review has been prepared. My amendment makes it clear that they do not because anything else would require the directors to have their eyes firmly on the rear-view mirror, which is the very antithesis of what they should be doing to promote the success of the company. I hope that the Minister will explain the Government's position on the correction of information once it has been published. I beg to move.

Photo of Lord Clinton-Davis Lord Clinton-Davis Labour 5:00 pm, 10th May 2006

My Lords, even though it has been said that this is a probing amendment, it is still the duty of those moving it to ensure that such an amendment can be of some value. What is proposed in subsections (1) and (2) represents an incentive for carelessness, or even worse. The situation is not wholly or even partly saved by subsection (2). Frankly, despite what the noble Baroness has said, I cannot comprehend how this amendment came to be tabled. I think it is absurd. Why should the directors be free of liability in the circumstances envisaged? That has not been explained at all by the noble Baroness, although of course I await with interest to hear what the noble Lord, Lord Sharman, has to say about it. But as I have said, I think the whole thing is absurd.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, I am grateful for that intervention because I support the amendment in its totality. When we go back to the remarks made by the noble Lord on the Benches opposite about the welcome or otherwise of the OFR, one of the key issues of concern was the degree of care and the degree of liability attaching to it. If you want anything other than boilerplate reporting—it has been stated on numerous occasions in the debates on the Bill that what we are looking for is a development of narrative reporting; I stress the word "development"—we are not going to get to a fixed point in time with it. The process will develop over time. If you want that to take place and to address the issues that my noble friend Lady Northover and the right reverend Prelates opposite have been talking about, there must be some degree of protection. Otherwise all you will get—I would have thought that the noble Lord, Lord Clinton-Davis, with his background as a practising lawyer, would have understood this—will be volumes of things known as completion notes or proof of notes. With those you can go back and relate every single comment in the report to something that can be substantiated in detail and with an audit trail. If that is what we want, fine; we will get it.

But I do not believe that is where we want to go. I believe that we want to get to better narrative reporting and to see that process develop. To do that, it is absolutely essential to provide what I call a safe haven and the noble Baroness, Lady Noakes, calls a safe harbour, but we shall leave that to one side. Again, I support the amendment and I note that it is probing in nature. We look forward to hearing what the Government have to say and what they may bring forward at Third Reading.

Photo of Viscount Bledisloe Viscount Bledisloe Crossbench

My Lords, I am impressed with what the noble Baroness had to say about subsection (3). It is essential that there should not be a duty to update the entire time, otherwise at what stage does one do so? Should one do that when one sees a change of 1 per cent, or perhaps of 5 per cent? One would be issuing something the entire time and, as the noble Baroness pointed out, spending most of the time in board meetings looking back at what had been said rather than looking at the future.

However, I am somewhat surprised by the second half of subsection (2), although not to the same extent as the noble Lord, Lord Clinton-Davis. It seems surprising to say that someone is not in any way liable for a statement which is "untrue or misleading" unless they actually knew that it was. Is there to be no duty on directors looking at these reports to say to themselves, "Cor, that looks pretty surprising. Are we really right to say that we are going to make twice as much money next year? The sales prospects do not accord with what I thought was the atmosphere three months ago at the last board meeting"?

I fully see that the duty should be limited because otherwise, as the noble Lord said, the review could become 400 pages long, 346 of which would be drafted by lawyers merely to provide one with a defence if one was sued on it. However, I think there should be, perhaps, some liability if a director fails to notice that what is being said seems wholly inconsistent with what had been said at all previous board meetings. He should take some care to ensure that the statements are not untrue or misleading, but I do not quite see how this ties in with a general duty of care. I agree that the general duty of care must be limited, particularly in the case of a non-executive director or a director who is not the production director in relation to finance and so on. He should not have to go in and second-guess the man who drafted the statement and whose expertise it is.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, unlike some noble Lords, I very much understand the important issue raised by the amendment—that is, that there need to be clear limits to the liability of directors in connection with the business reviews. As was discussed in Grand Committee, there is a broadly held view that it would facilitate open and meaningful reporting if there was clarity on liability. We have been discussing this issue with interested parties. It is clear that it is unhelpful to look at liability for business reviews under company law in isolation from other reporting and disclosure requirements, including disclosures which will need to be made once we have implemented the transparency obligations directive. What is needed is a coherent and consistent regime.

In developing such a regime there are some key factors we must consider. First, there is the risk that, with too strict a liability for narrative reporting, company directors will tend to make caveats and heavily qualified statements, which could impose needless bureaucracy without achieving meaningful forward-looking statements. The same risks apply if the potential liability is unclear.

Secondly, if we clarified liability for some aspects of reporting and not others, this could make the position worse. It is desirable to provide consistency in liability across the directors' reports and other narrative reporting under the Companies Acts as well as the transparency obligations directive implementation disclosures. We would still require a stricter liability regime for prospectuses as required under the prospectus directive as prospectuses are intended specifically to inform investment decisions and invite purchases of securities of the issuer.

Thirdly, the nature of narrative reporting, which involves trying to predict future performance, with its inherent uncertainty, is different from accounts reporting, which is, to a much greater extent, objectively determinable. There is also difficulty in drawing a clear line between past performance reporting and forward-looking statements. It is an extremely complex area.

As the noble Baroness will be aware, we have issued draft clauses for comment by interested parties covering provision for liability, both under Part 15 of the Bill for directors' reports, directors' remuneration reports or summary financial statements derived from them, and for disclosures under transparency obligations directive implementation. In both cases, these provisions ensure that directors will only be held liable for untrue or misleading statements and omissions made in bad faith or recklessly, and where there is deliberate and dishonest concealment. This is very close to what the noble Baroness is proposing. However, our proposals go further in seeking to provide clarity for those to whom the director may be liable.

In that context, let me deal with the question of updating. We have not included anything on updating because there is no implication that you have to update reports. If we were to include it in relation to the business review, it could imply that there is a need to update other reports and accounts. Depending on the response of interested parties, we shall consider what measures on this might be brought forward for inclusion in the Bill. It would be unwise to rush today into introducing measures seeking to limit liability. We need to ensure that we set the hurdle for any potential legal challenge high enough so that directors can feel confident in what they say in their reporting but not so high that there is little incentive to be careful. In practical terms, we would like to bring forward clauses at the earliest opportunity but will wish to consider, in the light of responses from the interested parties, whether we can do that in time for Third Reading. I therefore hope that the noble Baroness will withdraw the amendment.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, I thank the Minister for that reply and all noble Lords who have taken part in this debate. I apologise to the noble Lord, Lord Clinton-Davis, for not having fully explained the amendment. I dealt with my amendment in a rather shortened form on the basis that several of us here had been through it in Grand Committee and did not need to hear it all again, and I focused on the one point that I wanted to put to the Minister today. I thank the noble Lord, Lord Sharman, for his support. I take the point raised by the noble Viscount, Lord Bledisloe, about subsection (2). I think that he will find that the Government's amendments, which are currently in draft, deal with that point. We wait to see what the Government will produce.

I would like to think about updating in greater detail. The US provisions have an explicit non-updating provision, which is why a number of people will be looking for one. Forward-looking statements expose directors to a greater degree of susceptibility to potential update and raise different issues from, say, updating judgments that were in the audited accounts where a line is necessarily drawn to produce financial statements.

I was disappointed at the Minister's hint that the clauses would not be ready for Third Reading, which is only a couple of weeks away. I said in my opening remarks that we would not want the Bill to go to the other place without a safe harbour provision. So I hope that the Government will feel able to table for Third Reading—

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, the problem with hints is that they are only hints. I thought I had made it clear that we would try to bring the clauses forward if we could but this is such a serious issue that we would not want to rush into doing so just to achieve that goal.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, we are so used to reading ministerial code that when Ministers do not give a positive commitment to tabling provisions at Third Reading, it usually means that they are not going to. I apologise if I have over-interpreted what the Minister has said. We have had a useful debate on the subject; this is an important issue and we look forward to debating it again at Third Reading. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 398 [Duty to prepare operating and financial review]:

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

moved Amendment No. 200:

Leave out Clause 398.

On Question, amendment agreed to.

Clause 399 [Objective and contents of operating and financial review]:

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

moved Amendment No. 201:

Leave out Clause 399.

On Question, amendment agreed to.

Clause 400 [Approval and signing of operating and financial review]:

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

moved Amendment No. 202:

Leave out Clause 400.

On Question, amendment agreed to.

Clause 402 [Contents of directors' remuneration report]:

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

moved Amendment No. 203:

Page 183, line 20, at end insert "; such information to include—

(i) an analysis of the general pattern of remuneration in the enterprise and how that has been taken into account in determining directors' remuneration;

(ii) equivalent information on all subsidiary companies,"

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, I think this amendment could be agreed to without too much discussion. The last pay statement summarising the position of Britain's 350 largest companies showed that directors' pay increased by 18 per cent last year, compared with 4 per cent for the average. Four per cent may be the average technically and politically, but common sense tells us that that average includes people on many millions. We should be talking about the median. It is not so straightforward a statistic to produce quarterly, but it is much less than the average.

The growth of inequality between the median and the top 1 per cent has been going on for many years, and one would obviously question its justification. I draw your Lordships' attention to an interesting article on the United States by Samuel Brittan in the FT on 10 February. It showed how the median worker there had not benefited at all from the increases in the so-called average, because the increases were all at the top; in other words, the inequality is exactly the same, if not even greater, on the other side of the Atlantic in the iconic Anglo-Saxon country. Brittan was reluctantly driven tacitly to reflect the view—he has confirmed it to me subsequently that this is a proper reading of his article—of a US commentator that this was down to,

"mutual pay determination by an exclusive cabal of chief executive officers".

That is not the language of a middle-of-the-road person such as me—I do not normally use the language of these firebrands—but it is what he said. He summed it up as,

"if you scratch my back, I'll scratch yours".

I think that we know what that means.

All sorts of codes have been drawn up in recent years—I shall read from one of them shortly. It is not just people who are somehow left of centre—I do not know whether I include the Liberal Democrats in that these days—who are raising this issue. The director of investment affairs of the Association of British Insurers recently said that there would be,

"detrimental consequences if the premium commanded by executives rises too far above general levels of pay in the economy . . . It can't go on forever without something snapping".

Another interesting observation was made by the Co-operative Insurance Society, which gives advice to people asking questions of boards of directors. It stated, with tongue in cheek—noble Lords may not want to take it too much at face value—that remuneration committees are becoming increasingly innovative when it comes to maintaining executive pay growth,

"often regardless of performance".

I am sure that the Minister will refer to codes of practice. Members on the other side of the House will know of the standing and provenance of the Financial Reporting Council. It produces the combined code. The code is not government policy—it is even more interesting than that. As I understand it, it is the policy of accountants and the City. I do not know whether the noble Lord, Lord Sharman, can confirm it, but that is its provenance.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry 5:15 pm, 10th May 2006

My Lords, the combined code is produced under the stewardship of the FSA. The Financial Services Authority is the regulatory authority for the stock exchange. When a company becomes listed, it has to sign up to the combined code. The combined code incorporates a number of things, most recently from the Higgs report.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, I am glad to have that spelt out in such an authoritative way. Paragraph B.1, which is entitled "The level and make-up of remuneration", relates to the remuneration of committees and boards. It says, under the heading "Supporting principle":

"The remuneration committee . . . should also be sensitive to pay and employment conditions elsewhere in the group"— that means apart from at the board level—

"especially when determining annual salary increases".

Again, the noble Lord, Lord Sharman, will correct me if I am wrong, but that is therefore an obligation on companies. Am I right? He is nodding. If it is an obligation on companies, it is perfectly straightforward to assume that, unless my friends in the Government think that the Government's policy is somehow different from that, the codes that will derive from the legislation that we are discussing today should also incorporate it.

I will say one more word about the lack of justification for what is happening with the galloping growth of inequality before I revert to what is essentially an amendment to do with transparency. Those noble Lords who were present on all those days in Grand Committee will know that there seemed to be a consensus. Perhaps the noble Lord, Lord Hodgson, and the noble Baroness, Lady Noakes, will correct me if I am wrong, but everyone seemed to say, "Transparency good, regulation bad". I am now a convert. I am on the side of the angels, more or less. I am calling for transparency, and you could not get more modest than what we are talking about here. We are not going to make extravagant claims or paint extravagant pictures of the income distribution in this country now resembling a church steeple, rather than a more traditional structure—although, come to think of it, that would not be a bad metaphor.

It is quite difficult if you are a government Back Bencher to strike the right note. I have some experience as a government Back Bencher, and I am delighted to be joined by my noble friend Lord Whitty, who has less. We are feeling our way as to how on earth you can ever do anything useful from the government Back Benches. We are told that we are too early, that we are too late, that we are attacking the Government or that we are saying nothing useful at all, and so on. It is very difficult.

Anyway, we have raised the matter in Grand Committee and have now refined our amendment to the extraordinarily modest proposal before noble Lords today. We think that these ratios will be seen by more and more people for what they are—namely, ratios that are not in the main justified by economic performance. There are many countries in Europe that do not have this growth. I gave detailed figures in a debate that we had recently about globalisation and income distribution. The fact is that countries such as Holland, which are at least as open market as Britain—the noble Lord, Lord Sharman, is shaking his head. Maybe he would like to intervene and tell me why.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, I apologise. I thought that the noble Lord was going to say "as open in their remuneration reporting as we are in this country". I got ahead of him, because they are not.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, I am talking about open-market economies. Some people say that of course we cannot compare ourselves with Sweden because Sweden's openness to international trade in the global sense is not the same as ours. However, as regards exposure to world trade, Holland—the Netherlands—has exactly the same structure as we do. Therefore, the justification is not to do with the rise of globalisation. Incidentally, if it were, noble Lords who argue that way would contradict themselves. On the one hand, we are supposed to think that globalisation demands that there is greater inequality. But when the point is put explicitly, people say that that is not true. There would be a huge political backlash in Britain on the question of globalisation if people thought that it led to greater inequality. The consequence of that assertion would be the growth of protectionism. We are not advocating protectionism; those people who are doing nothing about that image of globalisation are encouraging protectionism.

That was a necessary digression, as it would constitute the only argument one could put—if there were an argument—for not accepting the degree of transparency that we are discussing. The measure does not demand justification, although people will have to analyse the figures themselves. It would give people the opportunity to observe the totality of the company's remuneration policy. I trust that my noble friend the Minister will have no difficulty in accepting the amendment. I beg to move.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, I wish to make a couple of comments on what the noble Lord, Lord Lea, has said. He chose the Netherlands as his comparator. I know that country well; I lived and worked there for the best part of 10 years and I sit on the supervisory board of two Dutch companies. My two observations are as follows. First, the oft quoted justification regarding international business concerns the movement of executives, particularly between here and the United States, and around the world. Very few senior executives in major companies in the Netherlands are not Dutch, whereas a considerable number of executives in the US are Dutch. That shows us that there has been movement out of the Netherlands. The problem of executive drain is becoming apparent. Secondly, it is always argued that further transparency is needed to keep remuneration under control. There is far less transparency on remuneration in the Netherlands than there is in this country.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, in that case I should have thought that the noble Lord would say that we ought to become the 52nd state. Obviously, Holland needs to become the 51st state and we ought to become the 52nd.

Photo of Lord Whitty Lord Whitty Labour

My Lords, while my noble friend has characteristically moved the amendment in a somewhat wide context, and the noble Lord, Lord Sharman, has responded in kind, I would like to point out that the amendment is, in fact, quite limited. It is not like the groups of amendments that we discussed last night and earlier today which would significantly have changed the duties of directors. I had some sympathy with some of those amendments, and my name was attached to some of them. For example, I regret the withdrawal of OFR. On the other hand, I appreciate that the Government have moved some way to recognise the concerns that the noble Earl, Lord Sandwich—who is no longer present—emphasised today.

However, the issue that we are discussing is much narrower and falls within the existing legal requirements for directors' duties. There is a requirement to report on remuneration and to have remuneration committees dealing with certain matters. As the noble Lord, Lord Sharman, said, this matter is subject to regulation by the FSA. It is also subject to codes of practice of the FSA and of various City and other institutions. The problem is that even with that degree of attention and a significant amount of transparency—indeed, one could argue that there is too much transparency in some remuneration committee reports, at least in the sense of their being far too detailed for anyone to comprehend—the report does not convey how those directors' remunerations have been determined in relation to what else is going on within their company.

The House will recognise that both my noble friend Lord Lea and I come from a trade union background, so in a sense we represent the view of the employees within the individual company. They would like to know how their bosses determine their own pay and to what extent they take into account the pay that they are giving to their employees, both in the main company and in subsidiaries. However, the point is actually wider than that, as my noble friend Lord Lea said. If it is the case that the executives of leading companies are going way ahead of the general level of remuneration in the rest of the economy, let alone in the rest of their company, that is damaging to social cohesion and leads to a degree of suspicion and accusations of corruption from the rest of the population.

We should be humble enough to recognise that occasionally similar doubts and accusations arise in relation to politicians; namely, that effectively we are a cabal of people who are paying one another large sums of money for not very obvious performance-related outcomes. That case can be made in relation to directors and the way in which remuneration committees have turned out. We have had committee after committee looking at this, but none of them has specified that there should be in the remuneration report a requirement that the directors set out how they have taken into account everyone else's wages and how they determined them, and that they have at least attempted to justify the level of remuneration for the directors in the light of that information.

This is a fairly simple point, but it goes to the heart of how you sustain both a degree of coherence and loyalty within a particular company and a degree of social coherence, respect, understanding and equity in society as a whole. While this is a narrow point, which builds on what is already there, it is very important for the reputation of our larger joint stock companies and limited liability companies. I strongly support the amendment that has been moved by my noble friend, and I hope that the Government will take into account our arguments, if not today, at least in further stages of the Bill.

Photo of Lord Judd Lord Judd Labour 5:30 pm, 10th May 2006

My Lords, for anyone who has not participated in the Grand Committee on a Bill, there should be a good deal of caution about intervening on Report, because an immense amount of work has been done by those noble Lords who were able to participate in Grand Committee. However, I found that my strength of association, feeling and support for what my noble friend Lord Lea is endeavouring to achieve in this amendment was so strong that it could make a nonsense of the Report stage if I were not simply to put on record how warmly I feel towards his argument.

My noble friend Lord Whitty has referred to social cohesion and he has referred to respect. This is not just a matter of cohesion within a particular enterprise and the spirit of a particular enterprise. I do not understand how in the long run a successful enterprise can be sustained unless there is a feeling of fairness and reasonableness and a basis for respect coming from the leadership of that enterprise. I have been a chief executive, albeit not in a company in the normal sense; my role has been in the sphere of social responsibility and social policy. It seems to me that it is crucial for stability and success within an enterprise for fairness not only to be present, but to be manifestly present.

There is a wider social context. We are spending a great deal of time at the moment talking about the need for more respect in society. We are being cautious in our deliberations about reflecting some of the feelings present in society as a whole. Those feelings may be fair or unfair, but there is a strong feeling about greed and opportunism. The very reasonable terms in which this amendment has been tabled are irresistible. If there is a sound basis for the way in which remuneration decisions emerge, and if there has been proper consideration of what that remuneration should be and it is clear to everyone that there has been a process that stands up to scrutiny and reflects what should happen not only for the success of the company but in relation to the responsibility of the company to society as a whole, that is great. But if that is not the case, there is a problem.

All that the amendment does is request that what should happen should manifestly be seen to happen for all. I really cannot see how the logic of that position can be resisted.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, I welcome my noble friend's amendment, as it gives me an opportunity to put on record the Government's strong support for the principle that companies should be sensitive to pay and employment conditions elsewhere in the group when taking decisions about directors' remuneration.

It has long been accepted that companies should—I quote from the Greenbury code of best practice of July 1995—

"be sensitive to the wider scene, including pay and employment conditions elsewhere in the company".

The Greenbury report explained why that is so important. It stated:

"Paying over the odds is incompatible with the fiduciary duty of directors to act in the company's best interests. It can spread through normal differentials to other levels in the company, thus increasing the cost base and impairing the company's ability to compete. It can cause resentment among staff and damage the company's reputation".

Those points are as valid and important in 2006 as they were in 1995. That is why the combined code has a supporting principle that the remuneration committee should,

"be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases".

I entirely agree with my noble friends about the significance of that principle. It should certainly not be seen by companies as window dressing. It is important that companies analyse the general pattern of remuneration in the enterprise and take that into account in determining directors' remuneration.

It is also worth making the point that many investors share that view. Indeed, the National Association of Pension Funds guidelines state that it is,

"good practice for boards to disclose in their annual report the average total annual remuneration of executive directors and the average total annual remuneration of non-board employees in the financial year".

While we do not accept the amendment, the Government will be consulting on all reporting regulations, including those relating to the directors' remuneration report, at the end of this year. I am happy to give a commitment that, in doing so, we will consult on how companies might report more effectively on the way in which they take pay and employment conditions elsewhere in the group into account in deciding directors' remuneration.

Photo of Lord Lea of Crondall Lord Lea of Crondall Labour

My Lords, I thank noble Lords who have taken part in this debate, in particular my noble friend Lord Judd. The final remarks of the Minister have inched us forward—or pushed us forward a few millimetres. Perhaps my noble friend's comments can be explained further when the Bill reaches the other end of the Corridor, as they were helpful. Of course, he has not made a commitment. He has said that the Government will consult on the desirability of this matter being part of the revised structure of secondary legislation. At least, I understand that that is the position. If I am right in that, we will think more about what we will say to our friends on our side of the House and in the other place. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Baroness Turner of Camden Baroness Turner of Camden Labour

moved Amendment No. 203A:

After Clause 402, insert the following new clause—

"CONSULTATION ABOUT DIRECTORS' REMUNERATION WITH SOCIAL REPRESENTATIVES

(1) The Secretary of State may by regulations make provision for the board of directors of a relevant company to give notice to its members of his proposal that two or more social representatives shall be consulted by its remuneration committee on matters falling within this section, in good time before the directors' remuneration for the financial year is proposed.

(2) After discussion with such persons as appear to him to be appropriate, the Secretary of State may propose, in a form prescribed by the regulations (either by name, description or otherwise), two or more social representatives, with whom the relevant company's remuneration committee should consult concerning its directors' proposed remuneration, having regard to such directors' duties and to the company's social responsibilities (including environmental matters and the interests of local communities) and to the interests of social stakeholders (including the company's employees) other than issues covered by collective bargaining with an independent trade union.

(3) In this section—

"a relevant company" means—

(a) a quoted company; and

(b) any other company which employs, or is a parent undertaking in a group of companies which together employ, 500 or more employees;

"remuneration" has the same meaning as in section 402; and

"remuneration committee" means—

(a) any committee of or body in a relevant company which has among its functions the task of proposing the directors' remuneration for the report mentioned in section 401 above, or any similar body in a non-quoted company; but

(b) where no such committee exists, it means the board of directors.

(4) The regulations shall include provision concerning the right of access of social representatives to papers and information which are directly relevant to the setting of the directors' remuneration and other benefits.

(5) Where a company rejects a proposal to engage in such consultation, it shall notify the Secretary of State, giving its reasons, and taking account of those reasons he may thereafter make new proposals to the company.

(6) The Secretary of State may, after discussion with the company and such other persons as he considers appropriate, publish his proposals and (where appropriate) the reasons for their rejection, and any new proposals, taking such account, as he considers appropriate, of the company's claims that particular matters should not be published which might seriously prejudice its interests by reason of their confidentiality."

Photo of Baroness Turner of Camden Baroness Turner of Camden Labour

My Lords, this amendment, standing in my name and those of my noble friends Lord Wedderburn of Charlton and Lord Judd, has in fact been drafted by my noble friend Lord Wedderburn. He is unfortunately not well enough to come to the House, but he has been following the progress of the Bill with considerable interest. If he were well enough he would certainly be here to move it. In his absence I shall do my best to present what I think are the main arguments in favour of it on the basis of a briefing that he has supplied.

Many may feel that much of the ground covered by the amendment has been dealt with adequately in the debate that we had yesterday on Amendment No. 79, which your Lordships approved. My noble friend Lord Wedderburn has devised another way which in effect endeavours to take the argument a stage further. The aim is also to produce a debate on the remuneration of directors, both executive and non-executive, in large companies.

The amendment departs from adjusting directors' duties so as to be enforceable by legal machinery and aims at intervention at another point of central interest to directors—in other words, their remuneration. The amendment would apply to all quoted companies and to large companies of economic significance, a formula that the Company Law Review group applied to some disclosure requirements. The precise definitions could be changed, but some quoted companies have proposed to withdraw from listing in order to evade disclosure provisions. It would require company directors' remuneration committees to take account of the views of social representatives, or have the company explain why it cannot do so. In the past few decades, as we have already heard in the discussion on Amendment No. 203, the remuneration of directors of large companies has increased enormously. A joint statement by the British, German and Dutch trade unions on 29 May 2003 states:

"Excessive executive pay is now an issue pressing at the very heart of European capitalism".

The setting of directors' remuneration by committees that include directors of other companies has, despite legal requirements for independent and non-executive directors after the Higgs report, given rise to a classic case, as my noble friend Lord Lea has said, where mutual back-scratching occurs. The process has given rise to a growing gap between executive salaries and average incomes of others in society. My noble friends Lord Lea and Lord Whitty have already covered that very adequately on Amendment No. 203. Nothing has been done about the scandal of directors being paid six times the pay of other people. The current Bill does not do anything about that either.

My noble friend Lord Wedderburn suggested in 2004 that directors' remuneration committees should include employees' representatives. But he has now been persuaded that that is not necessarily the right way to proceed to get the debate going to encourage support for greater transparency and social responsibility on the issue. The amendment gives a wide discretion to the Secretary of State to nominate persons or organisations with whom the DRC should consult before proposing to the board of directors the directors' remuneration for the year.

That would, for example, allow the Minister to nominate bodies interested in environmental issues, such as the Friends of the Earth, to intervene with questions about each director's record on such issues before the remuneration committee reached its decision on proposed remuneration. So, too, consultees could be proposed from among experts in social groups, such as unions and other bodies, to consult on the director's record on safety at work. It would be a mechanism through which various types of social representatives could raise other issues perhaps relating to the pay structure of the company except where such matters are already covered by collective bargaining.

The amendment, however, is mild in its terms. It does not involve civil sanctions: it makes use of two mechanisms. First, the company must comply or explain. That is the chosen method of the City in respect of its combined code of good practice on corporate governance. It is difficult to see any objection to that. No legal remedies are attempted—only the pressure of social groups, the media and so on.

Secondly, greater transparency on the so-called rent extraction by executives in their pay and benefits would be achieved, beyond the existing director's report and other required disclosure provisions, by way of the publications of the Secretary of State, where the company rejects consultation with the proposed social representatives. Provision could, of course, also be made for the publication of a report after consultation.

I believe that the feeling behind the amendment is in full accord with the views of the Government and also that of the Conservative Party under its new leaders particularly as far as the environmental issues are concerned. Social and community issues are also important to all the major parties, as indicated in the discussions that we have already had throughout the consideration of this Bill. Here is a way of ensuring that these concerns are met, and continue to be met, by large companies which will actually have to engage with the issues.

Large globalised companies arguably have more effect on the lives of us all than sometimes even governments. It therefore seems appropriate that there should be more accountability and more transparency. The aim of this amendment is to try to achieve those objectives. I beg to move.

Photo of Lord Judd Lord Judd Labour 5:45 pm, 10th May 2006

My Lords, I would like to put in a word of support for my noble friend Lady Turner. I, too, know how disappointed and frustrated our noble friend Lord Wedderburn is in not being able to participate in these deliberations. Indeed, it is difficult to think of deliberations of this kind without the presence of my noble friend Lord Wedderburn. Whatever one feels about his views, I am sure that all would put on record our admiration for his expertise and dedication to the importance of legislation in this sphere.

In supporting my noble friend Lady Turner I would like to make just a couple of observations. First, I am one of those who believes that socially responsible capitalism has a dynamic and positive role to play in the future of humanity. I do not have an ideological position dismissing that possibility. I strongly believe that there is great potential there. I also recognise that both the Opposition and the Government frequently put forward their support for that principle, and they believe that a great deal of the social policy necessary for a healthy society—not only nationally, but internationally—can come from the way in which companies conduct themselves. I have always believed, however, that it is not good enough simply to wish the end; one must ensure that the means are there. It seems to me that the amendment is endeavouring to ensure that there is a proper consultation about the wider responsibilities of industry when remuneration is being fixed.

As I argued on the previous amendment, if that is happening then there is nothing to be feared in an amendment of this kind. If it is not happening, then there is everything to be feared. It is quite clear that these arrangements are very important. Our noble friend Lord Wedderburn is simply helping the Government—and, indeed, the Opposition—to fill in the substance for making a success of the rhetoric they so frequently express about the possibility of meeting social responsibility through the behaviour of the private sector.

I commend the amendment to the House. I hope that if the Minister is unable to accept it in this precise form, he will be able to say something to us suggesting that he may have practical proposals on Third Reading, according to what I know is his personal conviction, about how legislation that this House implements on these matters can be made a little firmer.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, as I said in responding to previous amendments, the Government strongly support the principle that companies should be sensitive to pay and employment conditions elsewhere in the group when taking decisions about directors' remuneration. However, this amendment would take us significantly further by involving persons from outside the company in the decision-making process. We do not believe that that is justified or desirable. The Government have consistently made it clear that directors' pay is a matter for companies and their shareholders under UK corporate governance structure. It is also for companies and their shareholders to decide on the nature and extent of any consultation with employees or their representatives.

We very much share the genuine investor concern about the need for proper accountability, transparency and performance linkage on the issue of directors' pay. That is why the Government have taken significant action in this area. Perhaps I may briefly remind noble Lords of what has been achieved. In August 2002, the Government introduced the directors' remuneration report regulations. These require quoted companies to produce a detailed annual directors' remuneration report which is put to a shareholder vote at each annual general meeting. This gives the UK a comprehensive, transparent and accountable framework for directors' pay that compares very favourably with similar market economies. As I said in reply to my noble friends Lord Lea and Lord Whitty, we will be consulting about all reporting regulations, including those relating to the directors' remuneration report, at the end of this year as part of our implementation of the Bill.

We have also consulted on the specific issue of "rewards for failure" in response to continuing investor concern about situations where directors leave companies that have performed poorly but receive excessive compensation packages when their contracts are terminated. The Government's response to that consultation included announcing the monitoring of compliance with the directors' remuneration report regulations.

In January 2005, an independent report by Deloitte & Touche underlined the effectiveness of the Government's action in making directors' remuneration subject to closer scrutiny by shareholders. In particular, it demonstrated that companies are changing their remuneration policies and practices to reflect the link between pay and performance. That point is especially important. We want companies to act responsibly and to be sensitive to the wider scene, in particular pay and employment conditions elsewhere in the group, in determining directors' remuneration. We also want British companies to be able to offer the packages required to attract, retain and motivate people of the calibre and experience they need to make their companies successful. To quote Greenbury again, we believe that the key principles should be to link rewards to performance by both company and individual and to align the interests of directors and shareholders in promoting the company's progress.

I believe the reforms that this Government have introduced will continue to be effective in ensuring that those principles lie at the heart of decision taking on directors' remuneration in this country. I do not think that the amendment, as drafted, would be helpful. I therefore ask my noble friend to withdraw it.

Photo of Baroness Turner of Camden Baroness Turner of Camden Labour

My Lords, I thank my noble friend for that detailed response to the amendment. I appreciate hearing from him yet again his commitment to the ideals that lie behind this amendment: the social obligations that he feels that companies should accept and so on. I am sorry that it has not been possible to accept the ideas behind our amendment because it seems to me, as my noble friend Lord Judd has said, that it presents a possible way of ensuring that the objectives that everyone seems to agree on are adequately met. The idea was to produce a mechanism that has not been considered before, as far as I am aware, whereby those objectives could possibly be met. It would also mean that there would be a continuous requirement for consultation with appropriate outside organisations with some concern and some responsibility for social issues. In view of what has been said, I shall beg leave to withdraw the amendment. I shall read with some pleasure what the Minister said about the commitment at least to the objectives lying behind the amendment.

Amendment, by leave, withdrawn.

Clause 409 [Form and contents of summary financial statement: quoted companies]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendments Nos. 204 to 211:

Page 187, line 10, leave out "and operating and financial review"

Page 187, line 13, leave out from "report" to end of line 14 and insert "or the directors' report"

Page 187, line 19, leave out "or the operating and financial review"

Page 187, line 20, leave out "or review"

Page 187, line 22, leave out from "report" to end of line 23 and insert "or the directors' report"

Page 187, line 28, leave out "or the operating and financial review"

Page 187, line 29, leave out "or review"

Page 187, line 47, leave out sub-paragraph (ii).

On Question, amendments agreed to.

Clause 411 [Quoted companies: annual accounts and reports to be made available on website]:

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

moved Amendment No. 212:

Page 188, line 20, leave out from first "the" to end of line 22 and insert "end of the fourth financial year of the company following the year to which the report and accounts apply"

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, in moving Amendment No. 212 I shall speak also to Amendment No. 213. These amendments were suggested to us by the UK Shareholders Association.

The Government have, wisely in our view, introduced a requirement for quoted companies to publish certain information on their websites. The vast majority of companies already include their annual accounts and preliminary announcements on their websites. We do not believe that the requirements of Clauses 411 and 412 will cause difficulty for companies. I seek for that to be taken just a bit further in these two amendments. Amendment No. 212 requires five years of annual accounts rather than one, and Amendment No. 213 requires all other communications to shareholders—and, importantly, market announcements such as trading and interim statements, directors changes and so on—to be included on the website.

When we debated the equivalent of Amendment No. 212 in Grand Committee I was genuinely surprised to hear the Minister say that the Government thought it was fine for shareholders to have to go to Companies House, which is expensive in itself for some, to pay a £3 search fee and doubtless also some photocopying fees. Asking for a company to keep information on its website rather than remove it is virtually cost free. The benefits are so self-evident that we can only suspect that the Government are seeking to protect the income of Companies House rather than thinking of the needs of shareholders and others.

We see websites as providing a store of information for shareholders and others and not simply as a communication device for current information. We accept that websites are a powerful tool with which to communicate current information to shareholders, which is why we have sought to build on the Government's approach in Amendment No. 203 by adding some extra items which should be communicated more openly and rapidly to shareholders.

The use of websites has transformed the potential for all shareholders, not just market professionals, to have access to significant volumes of data, both current and historical. It would be a great shame if we let the Bill go by without harnessing it to produce a bigger information revolution for shareholders than is currently envisaged by Clauses 411 and 412. I beg to move.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, these two amendments would extend the requirements for quoted companies to carry information on their websites beyond the requirements of Clauses 411 and 412. Amendment No. 212 would extend the period for which quoted companies must retain their annual accounts and reports on their website from one to five years. While that is not an onerous requirement, we consider that the length of time it is appropriate to make historic accounts and reports publicly available should be a matter for the Financial Services Authority rules rather than for company law.

The transparency obligations directive, which will be implemented next year into UK law, will require the annual accounts of some issuers—including most but not all quoted companies—to be made publicly available for at least five years. Therefore, we do not need to make separate provision in the Companies Act.

The new clause proposed by Amendment No. 213 would significantly extend the amount of information a quoted company would be required to publish on a website. The Bill's new requirements in Clauses 411 and 412 for quoted companies to publish accounts and reports and preliminary results on their websites already focus on the most important financial information. The new clause would extend these requirements further to cover all communications to shareholders, prospectuses and announcements that a quoted company is obliged to make by market regulations. Again, I do not believe we should burden quoted companies with additional requirements that are properly matters for rules made by the Financial Services Authority under Part 6 of the Financial Services and Markets Act rather than for company law.

On that basis, I hope the noble Baroness will feel able not to press these amendments.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, the Minister will not be surprised to find that I am disappointed by his reply. I would like to make one point in response. He claimed that Clauses 411 and 412 already include the most important financial information. That is not true: they do not include trading updates, interim statements or profit warnings. These information requirements are seriously deficient in providing the most relevant financial information to companies.

I will read carefully what the Minister said and consult further with the UK Shareholders Association, which I know feels strongly that further information should be made available. For today I shall beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 213 not moved.]

Clause 413 [Requirements as to website availability]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip 6:00 pm, 10th May 2006

moved Amendment No. 214:

Page 189, line 22, leave out from "be" to end of line 23 and insert "—

(a) conditional on the payment of a fee, or

(b) otherwise restricted, except so far as necessary to comply with any enactment or regulatory requirement (in the United Kingdom or elsewhere)."

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I shall speak also to Amendment No. 215. We accept that there may be problems with making corporate information available on a website. Primarily, companies could run the risk of penalties due to the differences in foreign jurisdictions and regulatory requirements on communications. I thank the noble Baroness, Lady Noakes, for raising the issue in Grand Committee and hope that she will be content not to move her amendment in the light of the government amendment, which achieves the effect that she seeks. I beg to move.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, I thank the Government for considering the discussion that we had in Grand Committee and producing Amendment No. 214. I shall be delighted not to move Amendment No. 215 and to accept the government amendment.

On Question, amendment agreed to.

[Amendment No. 215 not moved.]

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

moved Amendment No. 216:

Page 189, line 32, after "wholly" insert "or mainly"

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, Amendment No. 216 amends Clause 413(5)(b). The effect of that is that if information that should be on a company's website is unavailable, the criminal offence set out in Clause 412 will not apply if the failure is wholly or mainly attributable to circumstances that it would not be reasonable for the company to prevent or avoid. The clause excuses the directors only if the failure is wholly attributable to such circumstances.

When we debated this in Grand Committee, the Minister said that the formula had been in use for more than five years since the Companies Act 1985 was amended and had caused no problems. Although it is true that the wording about electronic communication is in line with what is now Section 238 of the Companies Act 1985, that applies to a rather different situation, where members could elect to dispense with hard copy and access documents on the company's website. I do not know what take-up there has been of that provision, but I know that there is considerable shareholder resistance to relying on electronic communication alone. I suspect that the provision has hardly been used and it is therefore no surprise that no problems have emerged.

We now have a new situation with Clause 412, which requires companies to place certain information on their websites and criminalises company officers if the information is not available. Although I do not much like the extensive use of criminal offences throughout company law, if they are to be used, we need to keep a sense of proportion. The clause will encourage risk-averse behaviour by companies and thereby impose regulatory costs that are unnecessary.

Let me give the example of a terrorist attack, or, perhaps, a major fire in a fuel depot that knocks out the communications of the company's head office. The company's first priority is the safety of its staff; its second priority will be to ensure that its operating capacity is restored. Then it will move on to supply-chain issues, logistics, accounting integrity, systems availability, and so on. Some way down the line, the priority will shift to ensuring that the investor relations part of its website is back up and running. After day one, non-availability of the website is not wholly due to the attack or the fire; it is due to the company's list of priorities. Is it reasonable for the company to make that a low priority? Where on the priority list do the Government expect it to be?

The Minister said that the Institute of Chartered Secretaries and Administrators has said that companies should give serious thought to setting up a backup facility for websites. What if the company's list of priorities leads to it having backup for its customer-facing website—for example, online ordering—but not the investor relations part, because of cost? What cost do the Government think it reasonable for companies to avoid?

I hope that the Government will look at this again because, if they do not, I predict that the law of unintended consequences will spring up. Companies will be advised by their lawyers and company secretary that if they want to be sure to avoid criminal penalties—99.9 per cent of company directors care about not incurring criminal penalties—they must gold-plate their business arrangements. No more cost/benefit analysis; no more evaluation of risk; just failsafe provisions at whatever cost. I hope that the Government will agree with me that that would be an unfortunate outcome. I beg to move.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, when we debated this amendment in Grand Committee, the noble Baroness raised concerns about how Clause 413(5) might operate. She asked whether the effect of the clause will be that companies will be expected to have elaborate business continuity arrangements to cover website availability in the event of major events such as fire or terrorist attack. Specifically, she asked what would be reasonable as regards prevention or avoidance. I shall try to address those concerns in my reply. She has reiterated some of those points in moving the amendment today.

A company wishing to take advantage of paragraph (5)(b) must show that its failure to make information available on its website is wholly attributable to circumstances that it would not be reasonable to expect the company to expect or avoid. The examples given in Committee and again today are of major events such as fire or terrorist attack. They are clear examples of such circumstances. It was feared that the clause might require companies to operate on a risk-averse basis, employing elaborate business continuity arrangements that cover website availability. I must say that it would be a very risk-averse company that feared prosecution under Clauses 411 and 412 in circumstances such as the noble Baroness described.

I should have thought that in those circumstances the failure would be wholly attributable to circumstances that it would not be reasonable for the company to have addressed and avoided. Of course, there could be cases where there were questions whether the failure was completely beyond the company's reasonable control, which might be less clear-cut. However, even here, a company is unlikely to be at risk of prosecution provided that it takes action in the event of a website failure.

The effect of subsection (5) is not onerous as it requires the company only to take reasonable means to ensure that the information is available on the website. I emphasise that it is not obliged to place its reports, accounts or preliminary results on its own website in the event of a website failure. It can make the information available on another website that is maintained on its behalf. I do not think that that can be described as an elaborate business continuity arrangement.

As the noble Baroness, Lady Noakes, rightly said in Committee, we can expect rapid growing use of websites and electronic communication. Such forms of communication are increasingly important. It is quite reasonable to expect companies to arrange a form of backup facility for their websites to avoid problems when websites go down. I reiterate the point that the Institute of Chartered Secretaries and Administrators' best practice guide on electronic communication with shareholders recommends that as a matter of best practice. For all the above reasons, I regret to say that I am not persuaded of the need for the amendment. However, I will, as ever, reflect on what the noble Baroness said and read Hansard with interest.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, I am very glad that the Minister said that final sentence, because I shall now modify the tone of my closing remarks. I ask him to look again at the examples that I gave. It is not a question of whether the company could set up business continuity arrangements; it is a question of how it prioritises when major events occur. If the Minister has ever seen business continuity plans, which are usually very extensive, he will know that they carry cost—sometimes very significant cost, especially when they relate to backup IT facilities. There is no doubt about that. I am just asking the Government to reflect on whether they insist on gold-plating this requirement. However, I was pleased to hear what the Minister said at the end and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 414 [Right of member or debenture holder to copies of accounts and reports: unquoted companies]:

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

moved Amendment No. 217:

Page 189, line 42, at end insert—

"( ) A demand for the purposes of this section must be made in writing and may be delivered to the company by any generally available method, including electronic methods."

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, in moving Amendment No. 217, which would amend Clause 414, I speak also to Amendment No. 220, which is identical and would amend Clause 415.

The clauses concern the rights of members and debenture holders to demand copies of the accounts of quoted and unquoted companies respectively. The amendments would clarify that a request must be in writing. When we debated these amendments in Committee, the Minister said that there should be no reason why a simple telephone request should not be allowed for such requests for documents. That seems entirely reasonable in today's world of modern telecommunications, until one marries that informality—this is like so much of the Bill—with the fact that the company's requirement to send copies of its accounts and reports is accompanied by its very own criminal offence.

The clauses also, of course, impose costs on companies, especially smaller ones that do not have large print-runs of their accounts to keep in stock. That is why I continue to believe that, in the interests of clarity between members and the company, it would be right for there to be some formality in the request if non-compliance with the request will trigger a criminal prosecution. If this is not the case, it will, in effect, impose on companies a requirement to introduce telephone call-monitoring systems. That might be appropriate for the largest companies, but I do not believe that it would be appropriate for the hundreds of thousands of smaller companies which also fall within the clauses. I beg to move.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, shareholders or debenture holders in unquoted and quoted companies are entitled to request without charge a copy of the company's latest annual accounts and reports. The amendments would require shareholders or debenture holders to make these requests in writing, whereas Section 239 of the Companies Act 1985 allows them to make the request in any form. I maintain that this unreasonably discriminates against the person wanting to make the request who does not have access to the internet to e-mail the request. Instead of being able to speak to someone on the telephone, the person would be subject to delay in sending and receiving the request by post.

The noble Baroness, Lady Noakes, has said that the amendments, which were tabled first in Committee, were suggested by corporate lawyers in the City. I have to say that I am surprised to hear them argue that companies are running a serious risk of non-compliance when they deal with a matter as straightforward as a request on the telephone for a set of the accounts. If they cannot manage this, it is surprising that any mail-order business has ever got off the ground. Companies have been perfectly able to deal with simple telephone requests under existing law. Complaints under the current legislation—Section 239 of the Companies Act 1985—are rare and tend to arise because the company was unaware that it had any obligations to provide a copy of its accounts.

Companies House tells us that, in its experience, a company usually complies once it realises that it has this obligation. Indeed, Companies House is unaware of any cases referred for legal action in the past where a company has not complied with a demand. I therefore hope I have succeeded in persuading the noble Baroness that companies should have no major problems in fulfilling their legal obligations to respond within the given timeframe—problems that would warrant introducing this new requirement. I accept that systems must be introduced, but those could be quite low-level to cater for these situations.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, I thank the Minister for that reply, which, as usual, argues for more burdens on business by introducing systems for this and that. I put it to him that telephone call-monitoring systems are not particularly easy or cheap to introduce, but I will consider what he has said with those who suggested to us that the lack of clarity in the clause should be remedied, given that we have an opportunity to remedy it. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 415 [Right of member or debenture holder to copies of accounts and reports: quoted companies]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendments Nos. 218 and 219:

Page 190, line 19, leave out paragraph (d).

Page 190, line 21, leave out from "and" to end of line 22 and insert "on the directors' report"

On Question, amendments agreed to.

[Amendment No. 220 not moved.]

Clause 416 [Name of signatory to be stated in published copies of accounts and reports]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 221:

Page 191, line 3, leave out paragraph (d).

On Question, amendment agreed to.

Clause 425 [Period allowed for filing accounts]:

[Amendment No. 222 not moved.]

Clause 427 [Filing obligations of companies subject to small companies regime]:

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry 6:15 pm, 10th May 2006

moved Amendment No. 223:

Page 196, line 22, leave out second "accountant's" and insert "independent examiner's"

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, in moving Amendment No. 223, I also speak to Amendments Nos. 238, 295 to 300, 492 and 507, which concern Clauses 427, 437, 467, 468, 769 and Schedule 9.

We return to an issue that we discussed in Grand Committee on 7 March. I was very disappointed then, which is putting it mildly, at the Minister's initial response. He said:

"Whenever we change the conditions for the audit exemption, we believe that it is important to have a public consultation to allow any interested parties to argue the case for the existing regime. In this case too, we would prefer to consider this change in the normal way. We will consider the merits of the proposal further, with a view to consultation if appropriate. If the results of consultation were to justify it, we would be pleased to make the appropriate deregulatory changes to the legislation"—[Official Report, 7/3/06; col. GC283.]

As I said then, to talk about the need for more consultation after an eight-year gestation period is candidly absurd. The Minister was kind enough to be slightly more conciliatory in his closing remarks when he said:

"I have tried to acknowledge the issues that he has raised. If it will help, I will say more definitively that we will certainly consider this in more detail so that we may be able to respond in a way which helps him by Report; I understand that he is passionate about this. We will try to meet that in due course".—[Official Report, 7/3/06; col. GC284.]

That was a kind and generous offer. Now I see on the Marshalled List two groups of government amendments, led by Amendments Nos. 282 and 290 respectively, which, as I read it, are the Government's considered response.

I look forward to hearing from the Minister in due course but, in the mean time, we have retabled our amendments. I think that, on the last occasion, tabling one large group of amendments did not give enough focus to our discussions. We did that then because we imagined—how wrong we were—that what we were proposing was totally uncontroversial. So now we have split the group into two; the position of independent charity examiners, and the audit thresholds. This group deals with the position of independent charity examiners.

The amendments seek recognition of the specialist position of independent charity examiners in relation to the accounts of charities. We have here a clear opportunity to bring the Bill into line with the Charities Bill, which has already passed through your Lordships' House and is now in another place. Independent charity examiners fulfil the audit requirements of charities whereby, below a certain asset and turnover threshold, they are eligible for an independent examination of their accounts rather than the more costly accountant's report.

The noble Lord, Lord Phillips of Sudbury, speaking for the Liberal Democrats, the noble Lord, Lord Bassam of Brighton, speaking for the Government, and the Opposition discussed the merits of this regime in depth during the passage of the Charities Bill, and for several hours in Committee, and the Government came to the conclusion that a change was desirable. Indeed, the Government introduced amendments to this effect. It is therefore extremely frustrating to see now that the Bill does not match up to its counterpart and give the required recognition to independent examiners. It will therefore bar charities, at least for the time being, from using a specialist body that was created to fulfil exactly this purpose and that has been checked out and verified by the Minister's colleagues in the Home Office. I am sure the noble Lord, Lord Bassam of Brighton, will be happy to confirm this.

A charity is not like a commercial company. Its approach and objectives are quite different. Its supporters need different information from that required by shareholders in a commercial enterprise. This is recognised by the Charity Commission and the accounting profession, in that there is a special charities statement of recommended practice. After all this work, including the creation of a recognised professional association, the Association of Charity Independent Examiners, to control the development of the profession and to set professional standards and so forth, the Minister wants more consultation. I respectfully suggest that this would be superfluous. We have, as I said, already had eight years of a general consultation on the Bill, and much debate on this point during the passage of the Charities Bill. As the Minister said himself in Grand Committee on 7 March:

"Discussion of charities law is the right context in which to consider those thresholds".—[Official Report, 7/3/06; col. GC282.]

So, we have already discussed this issue in a charity forum, and the Government have decided that now is the time to link the Bill to the results of that debate. The amendments would allow small charities, for which provision is made in the Charities Bill for independent examination instead of an accountant's report, to have the same eligibility in this Bill, thus avoiding the confusion and expense of overlapping authorities in this important area.

Finally, when the Minister comes to reply, I hope that he will not rely on government Amendment No. 282. Please let us have not yet another general power which may or may not ever be used. Today is the day for joined-up government between the Home Office, on the one hand, for the charities and the DTI, on the other hand. This is a day for action. I beg to move.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, the names of my noble friend Lord Razzall and myself are on all the amendments in this group. I shall be brief. The noble Lord, Lord Hodgson, has explained graphically and enthusiastically the rationale behind these amendments. From these Benches, we support them also.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I am conscious that I disappointed the noble Lord, Lord Hodgson, in Grand Committee. I hope that I will not disappoint him so much on this occasion, although I am not sure that he will be happy with the totality of what I have to say. We have considered carefully the raft of amendments that the noble Lord brought forward in Grand Committee on the audit of charities. On some, we have brought forward amendments at this stage, but that should not be seen as our total response to the points that the noble Lord has raised. We have already debated the amendments that make the Bill refer to the Charity Commission, not the Charity Commissioners, consistent with the Charities Bill. In Part 16, we have amendments to bring the thresholds applying to charitable companies into line with those for charitable companies in the Charities Bill.

The amendments to which the noble Lord has spoken go much further, together with the degrouped list which we will discuss subsequently, and would move in the direction of subjecting small charitable companies to the same rules on scrutiny of financial accounts as unincorporated charities are subject to under the Charities Acts. Overall, we have sympathy with that proposal and are willing to consider it. However, we need to consider it carefully, taking into account the interests and views of the charities and those who contribute to and work with charities.

If we conclude that it is right that small charitable companies should be subject to a charity law audit regime rather than a company law one, it would probably be best to remove small charitable companies from the audit rules in company law altogether. That way charity law would determine the appropriate regime for audit of all charities, whether companies or not. I think that that is a point on which the noble Lord would agree.

We agree that it would be clearer for charities if we were able to apply a single set of rules set out in charity law to all small charities for purposes of audit, but we are not in a position yet to amend the Bill in the way proposed. We have, however, following Grand Committee, discussed this with the Home Office and others. There will be a consultation with a view to our bringing forward appropriate amendments, probably in another place, if this is the outcome of the consultation.

In summary, I agree to consider these amendments. We are minded to remove the special rules for scrutiny of the financial accounts of small charitable companies from company law and there will be a brief consultation on that. I hope that the noble Lord will see that as at least half a loaf and that our earnest intention is to move down the path which he would support and accept.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, as I said to the noble Lord, Lord Sainsbury, at an earlier stage, "Fine words butter no parsnips". I am grateful to the noble Lord, Lord Sharman, for his support. The Government talk about the changes that they have made to bring this Bill into line with the Charities Bill. To say, "Well, we changed the words Charity Commissioners to Charity Commission" is what I might call a small change.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I just itemised that, along with a couple of other amendments before us today, as something which is on account. But I thought that I had made clear the substance of what we want to achieve.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, we then have to consult the charities. Perhaps I may say that we sat through eight days in Grand Committee on the Charities Bill and there was an enormous amount of consultation. There is really nothing more to be said about this. To have a consultation and then to say, "We might bring something in if this is the outcome in another place" I am afraid is not good enough. I wish to test the opinion of the House.

On Question, Whether the said amendment (No. 223) shall be agreed to?

Their Lordships divided: Contents, 142; Not-Contents, 120.

Division number 1 Private Parking: Ports and Trading Estates — Company Law Reform Bill [HL]

Aye: 140 Members of the House of Lords

No: 118 Members of the House of Lords

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Resolved in the affirmative, and amendment agreed to accordingly.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip 6:34 pm, 10th May 2006

moved Amendment No. 224:

Page 197, line 3, at end insert—

"( ) The copy of the auditor's report delivered to the registrar under this section must—

(a) state the name of the auditor and (where the auditor is a firm) the name of the person who signed it as senior statutory auditor, or

(b) if the conditions in section (Circumstances in which names may be omitted) (circumstances in which names may be omitted) are met, state that a resolution has been passed and notified to the Secretary of State in accordance with that section."

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I beg to move Amendment No. 224 and speak to Amendments Nos. 225, 226, 230, 231, 236, 327 and 328. These are technical amendments to ensure that the rules on inclusion of auditors' names in published audit reports also apply to the copies of audit reports that are filed at Companies House. For companies subject to the small companies regime, Amendment No. 224 inserts an obligation to include the auditor's name and the senior statutory auditor if the auditor is not an individual, in the copy of the audit report filed with the registrar. This largely restates the requirement in the Companies Act 1985.

Amendments Nos. 225, 226 and 230 do the same thing for companies that are respectively medium-sized, unquoted and quoted. Amendment No. 231 is simply consequential.

Amendments Nos. 327 and 328 replace Clause 497 with two new clauses. The first restates the obligation currently in Clause 497 to include the auditors' names in published copies of audit reports. The second restates the exception where there is a risk of violence or intimidation but now applies both to published and to filed copies of the audit report. I beg to move.

On Question, amendment agreed to.

Clause 428 [Filing obligations of medium-sized companies]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 225:

Page 197, line 27, at end insert—

"( ) The copy of the auditor's report delivered to the registrar under this section must—

(a) state the name of the auditor and (where the auditor is a firm) the name of the person who signed it as senior statutory auditor, or

(b) if the conditions in section (Circumstances in which names may be omitted) (circumstances in which names may be omitted) are met, state that a resolution has been passed and notified to the Secretary of State in accordance with that section."

On Question, amendment agreed to.

Clause 429 [Filing obligations of unquoted companies]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 226:

Page 197, line 39, at end insert—

"( ) The copy of the auditor's report delivered to the registrar under this section must—

(a) state the name of the auditor and (where the auditor is a firm) the name of the person who signed it as senior statutory auditor, or

(b) if the conditions in section (Circumstances in which names may be omitted) (circumstances in which names may be omitted) are met, state that a resolution has been passed and notified to the Secretary of State in accordance with that section."

On Question, amendment agreed to.

Clause 430 [Filing obligations of quoted companies]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 227 to 230:

Page 198, line 7, leave out paragraph (d).

Page 198, line 9, leave out from first "report" to end of line 10 and insert "and the directors' report"

Page 198, line 11, leave out from "report" to "delivered" in line 12 and insert "and the directors' report"

Page 198, line 14, at end insert—

"( ) The copy of the auditor's report delivered to the registrar under this section must—

(a) state the name of the auditor and (where the auditor is a firm) the name of the person who signed it as senior statutory auditor, or

(b) if the conditions in section (Circumstances in which names may be omitted) (circumstances in which names may be omitted) are met, state that a resolution has been passed and notified to the Secretary of State in accordance with that section."

On Question, amendments agreed to.

Clause 432 [Special auditor's report where abbreviated accounts delivered]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 231:

Page 199, line 32, leave out "to 497 (signature of auditor's report)" and insert ", 496, (Names to be stated in published copies of auditor's report), and (Circumstances in which names may be omitted) (signature of auditor's report etc)"

On Question, amendment agreed to.

Clause 437 [Voluntary revision of accounts etc]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 232 to 237:

Page 201, line 26, leave out from first "report" to "or" in line 27 and insert "or the directors' report"

Page 201, line 31, leave out ", review"

Page 201, line 32, leave out ", report or review" and insert "or report"

Page 201, line 35, leave out ", report or review" and insert "or report"

Page 202, line 1, leave out from first "report" to "or" in line 2 and insert "or directors' report,"

Page 202, line 6, leave out ", review"

On Question, amendments agreed to.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

moved Amendment No. 238:

Page 202, line 9, leave out "reporting accountant" and insert "independent examiner"

On Question, amendment agreed to.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 239 to 241:

Page 202, line 10, leave out ", review"

Page 202, line 12, leave out ", report or review" and insert "or report"

Page 202, line 17, leave out ", report or review" and insert "or report"

On Question, amendments agreed to.

Clause 438 [Secretary of State's notice in respect of accounts or reports]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 242 to 251:

Page 202, line 26, leave out from "accounts" to "have" in line 27 and insert "or directors' report"

Page 202, line 28, leave out from "accounts" to "has" in line 29 and insert "or directors' report"

Page 202, line 32, leave out ", report or review" and insert "or report"

Page 202, line 38, leave out ", report or review" and insert "or report"

Page 202, line 39, leave out "or review"

Page 202, line 43, leave out ", report or review" and insert "or report"

Page 202, line 44, leave out ", report or review" and insert "or report"

Page 203, line 2, leave out from "accounts" to ", in" in line 3 and insert "and revised directors' reports"

Page 203, line 4, leave out ", reports or reviews" and insert "or reports"

Page 203, line 5, leave out ", reports or reviews" and insert "or reports"

On Question, amendments agreed to.

Clause 439 [Application to court in respect of defective accounts or reports]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 252 to 266:

Page 203, line 13, leave out "or operating and financial review"

Page 203, line 16, leave out "or review"

Page 203, line 29, leave out from "report" to "it" in line 30.

Page 203, line 31, leave out "directors' report or operating and financial review" and insert "report"

Page 203, line 33, leave out from "any" to "summary" in line 34.

Page 203, line 36, leave out "or review"

Page 203, line 38, leave out ", report or review" and insert "or report"

Page 203, line 45, leave out "or review"

Page 204, line 2, leave out ", report or review" and insert "or report"

Page 204, line 4, leave out ", report or review" and insert "or report"

Page 204, line 8, leave out ", report or review" and insert "or report"

Page 204, line 9, leave out ", report or review" and insert "or report"

Page 204, line 17, leave out from "accounts" to ", in" in line 18 and insert "and revised directors' reports"

Page 204, line 19, leave out ", reports or reviews" and insert "or reports"

Page 204, line 20, leave out ", reports or reviews" and insert "or reports"

On Question, amendments agreed to.

Clause 440 [Other persons authorised to apply to the court]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 267 and 268:

Page 204, line 27, leave out "directors' reports and operating and financial reviews" and insert "and directors' reports"

Page 204, line 29, leave out "directors' reports and operating and financial reviews" and insert "and directors' reports"

On Question, amendments agreed to.

Clause 441 [Disclosure of information by tax authorities]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 269:

Page 205, line 41, leave out "three" and insert "six"

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, Clause 441 concerns disclosure of information by the tax authorities. This amendment increases the term of imprisonment from three months to six months for a person convicted on summary conviction in Scotland or Northern Ireland of an offence of unlawful further disclosure. This is to bring it into line with other offences. I beg to move.

On Question, amendment agreed to.

Clause 442 [Power of authorised person to require documents, information and explanations]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 270:

Page 206, line 6, leave out "directors' report or operating and financial review" and insert "or directors' report"

On Question, amendment agreed to.

Clause 443 [Restrictions on disclosure of information obtained under compulsory powers]:

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, here we come to the first of a series of amendments to chapter 12 of Part 15 and to chapter 1 of Part 22. These amendments concern the use of confidential information and in general seek to establish that proper restraints are in place on the use of confidential information. There is a balance to be struck between the needs of effective government on behalf of citizens as a whole and the rights of individuals and businesses, and I do not pretend that getting it right is easy. But the role of your Lordships' House is to challenge legislation when it takes rights away—in this case, the right to have confidential information kept that way.

With those introductory remarks, I turn to Amendment No. 271, which would delete the word "private" from Clause 443(1). The clause relates to information obtained by the Financial Reporting Review Panel and provides restrictions on what may be done with information relating to the private affairs of an individual. Clause 630 is in similar form, but applies to the Takeover Panel; Amendment No. 450 seeks to delete the word "private" from that clause. These are probing amendments.

So far as I can ascertain, no definition of the word "private" is given in the Bill, and it is important to be precise about it because private information is protected in some measure by Clause 443, but non-private information is not. I invite the Minister to tell us what private information means for these two clauses, and I hope that he will give examples of information that is both private and non-private. I beg to move.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, as the noble Baroness has said, this is the first of a number of amendments relating to the restrictions on forward disclosure of information obtained by the Financial Reporting Review Panel under its statutory powers. A parallel amendment relates to Part 22 and information held by the Takeover Panel. Before addressing the particular amendments tabled by the Opposition, it might be helpful if I made a general point about the FRRP's operations. The panel's operating procedures require it to treat all information received from companies as if it had been received following the exercise of its statutory power. The panel would want to rely on its statutory power to require information only in the rare circumstances where a request for information to be provided voluntarily was not met.

Clause 443 concerns restrictions on the disclosure of information obtained under the panel's compulsory powers. It allows for onward disclosure to be made through gateways specified in Clause 444, but otherwise makes onward disclosure of information about the "private" affairs of an individual or about any particular business subject to the consent of the individual or business concerned unless the information is available to the public from another source. Amendment No. 271 would extend the restriction on the forward disclosure of information relating to the private affairs of an individual to include information about that individual's business affairs. However, the business affairs of the individual are already subject to the restriction in subsection (1) because it covers information relating to a business. This would include any business, whether it is a company, a partnership or run by an individual as a sole proprietor. We do not, therefore, see the need for the amendment. Furthermore, if the amendment were accepted, in cases where information related to the business affairs of both the individual and the business, separate consent would be required. That seems unnecessary. It should be for the individual to exercise consent where the information relates to his private affairs. Similarly, it should be for the business to consider the necessary consent where the information relates to the business.

There are some differences between the gateways provisions as they apply in relation to the Takeover Panel. For instance, those provisions apply irrespective of whether the panel obtained the information under its compulsory powers or otherwise. Nevertheless, I consider that the arguments rehearsed above apply equally in relation to the effect on Clause 630 of the parallel amendment proposed to the disclosure provisions concerning the panel.

Specifically in response to the question put by the noble Baroness on what the term "private affairs" means, in this context I think that it means non-business matters. As she says, we do not have a specific definition, but an example of what perhaps might be private in this context would be matters under inquiry such as information relating to an individual's remuneration, share options or related party transactions which fall to be disclosed within accounts in accordance with reporting standards. That could be information which came before the Financial Reporting Review Panel. So I think that the distinction between private and business is that private matters are those which are non-business. I hope that that deals with the point made by the noble Baroness. If not, she may wish to look at the record. Obviously, I shall do so as well, and will follow up this response in writing if I have not dealt with it in sufficient detail.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions 6:45 pm, 10th May 2006

My Lords, I thank the Minister for his response and I am grateful for the illumination, which I had not fully appreciated, that the provisions relating to the FRRP apply only to information that it obtains compulsorily; I shall reflect on that. However, I believe that the word "private" is used elsewhere in clauses dealing with information going through gateways and that it is a general problem because it has not been defined. I am not sure whether the Minister's answer is necessarily correct—not that I seek to suggest that he has given the wrong answer with any deliberate intent. I shall certainly consider his reply with my advisers and I hope that he, too, will look at this again. It is important that there should be a general understanding, because we are talking about the rights of individuals. For today, however, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 444 [Permitted disclosure of information obtained under compulsory powers]:

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

moved Amendment No. 272:

Page 207, line 23, leave out "following exceptions" and insert "provisions of this section"

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, in moving Amendment No. 272, I shall speak also to the amendments grouped with it. Amendments Nos. 272 and 273 amend Clause 444, which deals with the permitted disclosure of information obtained by the FRRP under its compulsory powers—as we have just heard—while Amendment No. 451 amends Clause 630, which deals with the Takeover Panel. The scheme of disclosure adopted in this Bill is first to empower an organisation, the FRRP or the Takeover Panel, to get information; to create an offence of disclosing it unless permitted to do so; and then to set out what is permitted. We have no particular problem with that. Our concerns arise over the way in which individual disclosures then take place.

Clause 444 allows the disclosure of information obtained by the FRRP for a wide number of purposes to a wide number of persons. I shall come to that aspect in a later group of amendments. Schedule 1, together with Clause 630, does the same for the Takeover Panel. What none of these parts of the Bill does is set out whether any controls exist on the disclosure of information by individuals working in the FRRP or the Takeover Panel. The Bill says nothing about who within those organisations may authorise the release of confidential information or whether any controls have to be in place within the organisations.

I contrast that with a formulation found in other legislation dealing with the release of confidential information. For example, the Commissioners for Revenue and Customs Act, passed last year, is in a rather different form. Apart from a disclosure for HMRC purposes or for certain criminal purposes, information may be disclosed to various persons only if it is made on the instructions of the commissioners and if they believe that it is in the public interest. That is set out in Sections 17 to 21 of the Act. I have taken the essence of that Act—authorisation by the commissioners in the public interest—and applied it to the permitted disclosures made by the FRRP as set out in Clause 444. That would be the effect of Amendments Nos. 272 and 273. For the Takeover Panel, I have included authorisation only in Amendment No. 451, but I want to reserve my position as to whether the public interest ought also to be included as a prerequisite test when the panel is involved.

I shall listen carefully to what the Minister says about the public interest test, in particular why there is one for HMRC but none in this legislation for the FRRP or the Takeover Panel. I shall also listen carefully to what the Minister says about why there was a need for the commissioners to issue instructions in the case of their legislation, but no equivalent procedure, authorisation or instructions in this Bill.

I want to make it plain that Members on these Benches do not wish to restrict the use of information when there is a genuine public interest case for it. What we seek to ensure is that proper safeguards are in place within the organisations before information, which prima facie should be regarded as confidential to the individuals or the businesses concerned, is allowed to be passed on for other purposes. I have confidence in the individuals who serve on the FRRP and the Takeover Panel and I think that they would be proper guardians of the balance between the public interest and the rights of the individual, which is why we have drafted the amendments as we have. I beg to move.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, I support these amendments. The noble Baroness, Lady Noakes, has spoken eloquently about the need for balance, and, again, that is what the issue is about. We have spoken on many occasions in these debates, both in Committee and on Report, about how the Bill must strive to get the right balance between the public interest and the rights of the individual. I should not like to see us heading down the route where, for example—as happens in a certain place on the other side of the Atlantic—you can be absolutely confident that if information is required by one agency it will flow, almost as a matter of course, around the agency circuit without any control at all. It is important that we strike the right balance, and for that reason I support the amendments.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, currently the Financial Reporting Review Panel may disclose information obtained under its compulsory powers only in a limited range of circumstances. It may make disclosures to the bodies listed in subsection (3) and for the purposes listed in subsection (4), as well as, in circumstances specified in subsections (5) and (6), to public bodies outside the UK. The new subsection introduced by Amendment No. 273 would impose additional requirements on the panel that would involve it expending considerably more resources in order to meet the higher thresholds that the amendment proposes. First, it would have to authorise each and every onward disclosure of information by the body to which it had previously disclosed that information; and, secondly, it would have to be satisfied that it would be in the public interest to make the onward disclosure.

But what is the logical reason for asking the panel to judge whether or not, say, the Financial Services Authority should be making an onward disclosure to the Secretary of State for Trade and Industry in the public interest? Moreover, the regulators exercising these functions may not have a reciprocal gateway with the panel, which would then be precluded from considering the very information that it would need to have in order to determine whether or not disclosure could be in the public interest in the particular circumstances. Such decisions should properly be for the bodies concerned, which are in the best position to have regard to all relevant factors in determining whether onward disclosure would be appropriate.

Similar considerations of resources and regulatory authority and practice apply to Amendment No. 451, which would apply where the Takeover Panel disclosed information to another person or body under the relevant gateways provided for by Clause 630. It would require the panel to authorise any onward disclosure of such information by that person or body. For the authorisation process to be meaningful, the panel would need to consider the merits of any such onward disclosure. The amendment would therefore impose additional burdens on the panel.

Moreover, the panel might not be best placed to make a decision as to whether, for instance, the Treasury should make a disclosure to the Director of Public Prosecutions. As in the case of the Financial Reporting Review Panel, the Takeover Panel might not even be in possession of all the necessary information on which to base such a decision. This might depend, for instance, on the contents of documents which were not available to the panel and, unless reciprocal gateways were in place, could not be supplied to the panel. It does not seem to us that there is an overriding public interest justification in requiring either the FRRP or the Takeover Panel to authorise further disclosures that would outweigh these obstacles.

I emphasise that in the case of both the FRRP and the Takeover Panel there are already restrictions on the onward disclosure of information by the bodies to which they have previously disclosed that information. In the case of the FRRP, those bodies may only disclose this information further, except to each other, for the purposes set out in subsection (4). As for the Takeover Panel, with the exception of information supplied to other EEA regulators in accordance with the requirements of the takeovers directive, the disclosure restrictions that apply to the panel will continue to apply to the recipient of information from the panel. So the information could be further disclosed only in accordance with the provisions of Clause 630. The criminal sanction at Clause 631 will also apply to unlawful disclosure of such information by any person to whom it is passed by the panel. I think that the noble Baroness will see that we are not able to support the amendments she has tabled.

The noble Baroness asked about the commissioners of the Inland Revenue. There has always been a higher control of Revenue information. Individuals dealing with the Revenue have to be completely open about their private affairs. In contrast, in dealing with the FRRP or the Takeover Panel when they are under investigation—or at least potentially under investigation—the range of information is much less. We are not saying that their rights have to be disregarded, but the circumstances are different. The specific circumstances in which information would come before the FRRP and the Takeover Panel are different from those in which information would come to the Revenue. I have perhaps not put it very succinctly, but that is the thrust of why there is a difference. I hope that the noble Baroness will understand why the amendments she has tabled—unless, perhaps, they are probing in nature—would create great difficulties and would be impractical.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, I am extremely disappointed with the Minister's response. He referred to burdens on the FRRP and on the Takeover Panel—but we are talking about protecting the confidentiality of information. It may be that these bodies have obtained the information because the organisations or individuals are under investigation in some way, but that does not authorise onward circulation of that information. We are very clear about this. I do not believe that the HMRC Act is completely sui generis; it is there for the purpose of putting in controls. Indeed, we debated those controls very extensively during the passage of that Act, which I had the privilege of taking through with the noble and learned Lord the Attorney-General only last year. I am not satisfied with the Minister's response. I beg leave to test the opinion of the House.

On Question, Whether the said amendment (No. 272) shall be agreed to?

Their Lordships divided: Contents, 123; Not-Contents, 117.

Division number 2 Private Parking: Ports and Trading Estates — Company Law Reform Bill [HL]

Aye: 121 Members of the House of Lords

No: 115 Members of the House of Lords

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Resolved in the affirmative, and amendment agreed to accordingly.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions 7:07 pm, 10th May 2006

moved Amendment No. 273:

Page 207, line 24, at end insert—

"( ) It does not apply to the disclosure of information which has been—

(a) authorised by the person authorised under section 440;

(b) satisfies one or more of subsections (3) to (6) of this section; and

(c) is considered by the person authorised under section 440 to be in the public interest."

On Question, amendment agreed to.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

moved Amendment No. 274:

Page 207, line 27, leave out subsection (3).

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, in moving Amendment No. 274, I shall speak to the other amendments in the group as well. As with the previous groups, I shall be dealing with similar issues that arise in connection with the FRRP in Part 15 and the Takeover Panel in Part 22.

The scheme of disclosure for both bodies is that disclosure may be made to specified bodies or for specified purposes. In Clause 444, information may be disclosed to six named bodies under subsection (3) or for a much larger number of specified purposes, some of which overlap, set out in subsection (4).

In Part 22, Clause 630(3) allows disclosure to the 12 persons listed in Part 1 of Schedule 2 or for the 70 specified purposes in Part 2 of that schedule. Amendment No. 274 would delete subsection (3) of Clause 444 so that disclosure of the FRRP's information must be for a specified purpose, as set out in subsection (4). It seems to us that the persons listed in subsection (3) are adequately covered by subsection (4) and that no diminution of disclosure would be involved.

Amendment No. 454 is very similar in that it would amend Clause 630 so that disclosure of Takeover Panel information may be made only for the listed purposes set out in Part 2 of Schedule 2 and not to the persons listed in Part 1. Amendment No. 453 is a further possible approach which would require the disclosure to be made to one of the 12 persons only if it satisfied one of the 70 specified purposes. We will not be moving Amendment No. 452.

The Minister will note that the disclosure route adopted by Amendments Nos. 274 and 454 are not intended to be unduly restrictive since they give way to the longer lists of permitted disclosures in either case. Will the noble Lord explain why the Government feel they need disclosure by person and by purpose because we cannot see any value in the current drafting? Indeed, we are concerned that any disclosure of confidential information could be made to the specified persons regardless of whether that disclosure relates to the appropriate functions of those persons.

Will the Minister also comment on the different approaches taken to disclosure by the FRRP and the Takeover Panel or, rather, this Bill in relation to the FRRP and the Takeover Panel? It is evident that a different drafting hand is at work, but the differences go beyond language and structure of clauses. It appears that the Takeover Panel has far greater disclosure opportunities than the FRRP. Let me take one example: item 60 in Part 2 of Schedule 2 allows disclosure by the Takeover Panel,

"with a view to the institution of, or otherwise for the purposes of, criminal proceedings".

We think that that is rather important, and a good reason for the disclosure of information, but we cannot see why the FRRP cannot do so. Will the Minister explain that?

We debated the disclosure gateways in Grand Committee, but we have not yet heard a coherent account of the way in which they should operate. We do not understand the overlap between persons and purposes; we do not understand why different approaches apply in different parts of the Bill. We are fairly sure that the Bill needs to be amended. This group of amendments provides some possibilities, though I am sure that there are others. I beg to move.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, the Financial Reporting Review Panel—we touched on this previously—may disclose information obtained under its compulsory powers only in a limited range of circumstances. It may make disclosures to the bodies listed in subsection (3) and for the purposes listed in subsection (4), and, in circumstances specified in subsections (5) and (6), to public bodies outside the UK. Similarly, if a body listed in subsection (3) wishes to disclose information which it has received from the panel, it can do so only to one of the other bodies listed or for the purposes listed in subsection (4).

The effect of Amendment No. 274, which would delete Clause 444(3), would be that the Financial Reporting Review Panel would not have a stand-alone power to disclose information to the bodies listed in Clause 444(3). Those bodies could obtain information from the panel only if it was for a purpose specified in subsection (4).

We oppose the amendment. It is impractical to foresee every legitimate purpose for which the panel might want to pass on information that it has obtained and provide an exhaustive list in primary legislation. The bodies specified in subsection (3) might be given functions in future in respect of which disclosure would be appropriate. Does the noble Baroness intend that these functions should be added piecemeal to subsection (4) as they were introduced? Subsection (4) was not designed to capture all the functions in respect of which the panel might wish to transfer information. It instead acts as a narrower, secondary gateway to restrict the onward transmission of information passed by the panel to one of the specified bodies in subsection (3).

Perhaps I can give some specific examples of information which the panel would be precluded from passing on under this amendment. The Financial Services Authority has a power under the Enterprise Act 2002 to apply to the courts to stop traders infringing a wide range of consumer protection legislation. Under the Unfair Terms in Consumer Contracts Regulations, it can prevent the unfair use of a contract term which was drawn up for a general use in a financial services contract. It can take action against persons responsible for breaching specified contracts under the Financial Services (Distance Marketing) Regulations 2004. If the proposed amendment were to be approved, the panel would be precluded from disclosing relevant information to the FSA that could help it discharge any of those responsibilities, because not one of these functions is included in the permitted purposes that are specified in subsection (4).

As these examples show, it is desirable to retain the flexibility of the current gateway arrangements because there could be many such legitimate reasons for the panel to disclose information to any of the bodies in subsection (3) that would fall outside the specified purposes in subsection (4). In light particularly of the recent extension of the panel's remit to make a proactive selection of accounts for review, such a restriction would be inappropriate and unhelpful as it could prevent a joined-up approach to the regulation of financial information and audit and accountancy in the UK. Both the panel and the bodies listed in subsection (3) are public bodies that are accountable for the exercise of their functions. We would not want to narrow these already restrictive gateways in ways that could hamper them in sharing information in the public interest.

In responding to Amendments Nos. 452 to 454, I would like to be clear about the matters that the disclosure provisions in relation to the Takeover Panel in Part 22 were designed to facilitate and the constraints on them. Clauses 630 and 631 serve to implement Article 4.3 of the takeovers directive. The directive expressly states that confidential information held by takeover supervisory authorities may be disclosed by such authorities only in accordance with provisions set out in the law. Otherwise, if the provisions of Part 22 do not allow the panel to disclose the information, it cannot disclose the information.

Amendment No. 452 would therefore stop the panel disclosing information to facilitate the carrying-out of its functions unless an alternative and express disclosure gateway existed. We have two important practical circumstances in mind when considering the disclosure avenue available to the panel under Clause 630(3)(a). They are appeals against panel decisions and applications by the panel to court to enforce its rulings. Following implementation of the takeovers directive, there will be a takeover appeal board, which will be separate and distinct from the panel. The appeal board will consider appeals against panel decisions. To do so, it will need to be put in possession of the necessary information by the panel. Equally, the panel is given a new power under the Bill to apply to court for enforcement of its rulings. To facilitate consideration of such applications, the panel will need to supply the court with relevant information. In neither case would disclosure be possible without the provisions in Clause 630(3)(a). These are very real, practical, regulatory matters. That is why the provision should remain.

Amendment No. 453 would appear to lead to the result that the panel's power to disclose information for the purpose of facilitating the carrying-out of its functions would apply only in respect of the persons listed in Part 1 of Schedule 2. This is a very limited list and it does not reflect the range of persons to whom the panel will need to disclose the information in the exercise of its functions. We assume that the intent behind the amendment, as with Amendment No. 454, is to examine the distinction that we make between disclosures to specified persons under Part 1 of Schedule 2 and specified purposes under Part 2 of that schedule. In legal terms, the distinction is simple. The panel need not consider the purpose for which it discloses information in deciding to disclose to the small number of specified persons listed in Part 1 of the schedule. This should remain the case for very good regulatory reasons.

The panel needs to work extremely closely with other regulators such as the Department for Trade and Industry and the Financial Services Authority. It would be extremely difficult to devise an exhaustive list of all the regulatory functions with which such bodies are involved for inclusion in Part 2 of the schedule. It is simpler and more straightforward for the panel to be able to disclose to such bodies without having to analyse on each occasion the purpose for which such disclosure is being made. Accordingly, in the absence of evidence of problems with the operation of gateways in equivalent legislation, we would not wish to impose additional burdens on the panel or restraints on its ability to share information with the specified persons, each of whom has a key interest in ensuring proper regulation and enforcement in the market place. I am not therefore able to support any of the amendments.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, before the Minister sits down, will he explain two things? First, I think he said that the purposes set out in Clause 444(4) applied to onward transmission. I do not understand the distinction between primary transmission, if that is the correct term, and onward transmission. I would be grateful if he explained that.

Secondly, I drew his attention to differences in drafting between Schedule 2 and Clause 444, particularly the fact that the takeover panel could make disclosure,

"with a view to the institution of, or otherwise for the purposes of, disciplinary proceedings relating to the performance by an accountant or auditor of his professional duties".

I expressed approval of that, but could not understand why there was not a similar purpose in Clause 444. I was questioning whether Clause 444 has been correctly drafted.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, perhaps I might revert to the noble Baroness on that latter point, as I will need to look at it in some detail so that she has a complete response. With regard to onward transmission, that deals with the fact that the FRRP might pass information to a body that may or may not have the opportunity to pass it onwards to one of the other persons listed in these provisions. I think that is the thrust of the point on which she is seeking information. If not, again, I will follow up.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, I am completely mystified by that because the Minister made a clear distinction about onward transmission, but I cannot see any such distinction within Clause 444, all of which is making me even more uncomfortable about the structure of these disclosure powers. The Minister has made a case for having "persons" as well as "purposes", and I will certainly read that in some detail, but if the only purpose is to avoid the Government having to specify things in detail—given that we are talking about exceptions to the principle that information remains confidential—I am not sure I have a huge amount of sympathy.

Nor do I have any sympathy for the fact that purposes may change in the future. It seems to me that there is always a legislative opportunity, when dealing with a new function, to let Parliament determine whether an associated gateway is appropriate at the time a new function or body is created. It seems to us that that is the right time to consider that.

The Minister gave a long and detailed reply, and we need to look at that carefully in order to clarify what the remaining issues are. I suggest to him that some issues remain in these clauses and schedules, but for today I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

moved Amendment No. 275:

Page 208, line 29, leave out "sufficiently important" and insert "necessary and proportionate"

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, in moving Amendment No. 275 I shall also speak to the other three amendments in this group. As with the earlier groups, these amendments deal with both the FRRP in Part 15 and the Takeover Panel in Part 22, and they are in similar form.

Under Clause 444 the FRRP may disclose information to an overseas body, but subsection (6) requires the FRRP to have regard to whether the likely use made by the overseas body is "sufficiently important" to justify making the disclosure. Amendment No. 275 replaces the words "sufficiently important" with "necessary and proportionate". Amendment No. 460 does the same thing with regard to the Takeover Panel's disclosures.

The words "necessary and proportionate" have the immense virtue of creating equivalence and read-across to the Human Rights Act and the Data Protection Act, Acts of which we know the Government are inordinately proud. Those words are now a part of our law, and we feel it is important to have common tests applying to substantially similar situations where we are dealing with the rights of individuals potentially being removed, in this case in relation to confidential information. Furthermore, I understand that the word "necessary" would offer additional safeguards for individuals or businesses, because they would then have the option of applying for judicial review of any disclosures of information that would be made.

I have put Amendments Nos. 276 and 461 with this group for the convenience of the House, though they are on a rather different point. When the FRRP considers disclosure to an overseas authority, it also has to consider whether the overseas body has adequate arrangements to prevent further improper disclosure. Amendment No. 276 adds the words "and effective". Amendment No. 461 seeks to achieve the same effect with a similar provision in Schedule 2 for the Takeover Panel.

In our view the FRRP or the Takeover Panel should go beyond adequacy and focus on effectiveness. For example, the procedures may appear adequate on paper, but the way in which they are interpreted or operated may fall far short of the standards we regard as important. There is no point in pretending that bribery and corruption do not feature in the practical way of life in several important countries. It is important to look beyond the mere adequacy of the paper arrangements and consider how things work in practice. I beg to move.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, both Amendments Nos. 275 and 276 would require the Financial Reporting Review Panel to have a greater oversight of the way the information it passes on to an overseas body through one of its gateways would be used and safeguarded. The first amendment would require the panel to consider whether the use that the body is likely to make of the information is "necessary and proportionate". Currently the panel needs to consider whether the use to which the body is likely to put the information is "sufficiently important" to justify disclosure.

The proposed change to "necessary and proportionate" would require the panel to have a deeper understanding of the matters being considered by the overseas regulator to know whether disclosure would be critical to the exercising of its functions. The test of necessity would require a level of knowledge that the panel might not have about the relevance of the information in any particular case.

Similar considerations apply to the proportionate test. The panel could meet particular difficulties in that regard if the overseas regulator was unwilling or unable to disclose to the panel the detailed information it would need in order to make an assessment about proportionality. The second amendment would require the panel to apply a double test. It would have to consider, as now, whether the overseas body had adequate arrangements to prevent the misuse or inappropriate further disclosure of the information. It would further have to determine whether those arrangements were effective.

That second test would impose a significantly heavier burden on the panel than at present. It would be required to check the effectiveness of arrangements in practice as well as whether there were suitable processes there in the first place. The panel would need to expend considerably more resources to make this judgment, and I am not persuaded that it would deliver sufficient benefits justifying diverting the panel's resources in that way. The effect of these two amendments would be to restrict and delay the free flow of regulatory information between the panel and the overseas regulatory bodies, and to divert the panel's resources into lengthy consideration of the value of such exchange of information. I believe it would be unhelpful in a global marketplace, where regulators may need to exchange information quickly in the public interest.

Amendments Nos. 460 and 461 replicate the intentions and consequences I have just described in relation to the Takeover Panel. They are undesirable for the same reasons. I hope I have made it clear I cannot support any of these proposed amendments.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, we are disappointed that the Minister cannot support these amendments. They were designed to set higher tests because we are talking about the confidential information of individuals and businesses. To say that the FRRP or the Takeover Panel should not make inquiries about how the overseas bodies will handle the information in practice, or whether they have sufficient need for the information, or whether it is proportionate, seems to be putting the additional resources that are needed way over and above the rights of individuals, which are what we should be seeking to protect in dealing with information that is going to go to overseas bodies. Going to such bodies must place a higher duty than passing information through gateways within the UK.

I will consider carefully the points the Minister has made and see if there is further clarification that can be had on this point. I will seek between now and Third Reading to understand why the Government regard resource requirements in these bodies as more important than the rights of individuals. I beg leave—

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, before the noble Baroness formally withdraws the amendment, I did not say that there would not be a request or that information would not be sought. I was trying to explain that to satisfy the necessary and proportionate test could involve a significant engagement with significant resource issues. In some instances it may not be possible to gain the information necessary to make that judgment, if that were the key judgment which had to be made.

Amendment, by leave, withdrawn.

[Amendment No. 276 not moved.]

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, I beg to move that further consideration on Report be now adjourned. In moving this Motion, may I suggest that the Report stage begins again not before 8.30 pm?

Moved accordingly, and, on Question, Motion agreed to.