My Lords, I will also speak to Amendment 84AEA. We had a very good debate in Grand Committee about orphan works, and the Minister gave some very useful assurances about how the orphan works regime would operate. However, there are one or two loose ends, and I want briefly to raise them.
Amendment 84AE is essentially a retabled amendment designed to establish definitively the nature of diligent search. I was slightly disconcerted by the way the Minister replied to this amendment last time. Surely diligent search must cover each work involved, and I hope the Minister can demonstrate how such search should be undertaken. There is no amendment to this effect, but I should say in passing that many of those who have debated this subject believe that it is very important that orphan works cannot be sublicensed. The argument is clear that to permit sublicensing would risk the distortion of the market through, for example, enterprises that sought orphan works licences and then resold them to all comers, circumventing the safeguards promised in the regulations. I do not know whether that is a loophole or simply a fear that will not be realised.
"The regulations may apply to a work although it is not known whether copyright subsists in it, and references to a missing owner ... are to be read as including references to a supposed owner and a supposed right or interest".
The objection to this is that if copyright does not subsist, the work or performance is in fact in the public domain and there is no rights owner who could reappear.
It seems rather unsatisfactory to introduce what I believe is called the domaine public payant in this surreptitious way. If there is going to be an orphan works licensing scheme it should surely be confined to orphans. If it cannot be determined whether a work is still in copyright, surely an orphan licence should not be available. It should be plain in the Bill that this should not extend to works that may be in the public domain. It would be helpful to have a ministerial assurance on this point. I beg to move.
My Lords, I speak to Amendment 84AE only. The noble Lord, Lord Clement-Jones, referred to it as a loose end. It is an issue of fundamental importance. The effect of the amendment would be to require that a diligent search should be made for each individual orphan work. It is true that the European Union orphan works directive requires the same. We have not yet incorporated the directive in our own law, nor should we. It is unfit for purpose in this and in other respects. We had some discussion about aspects of it last Wednesday and previously in Committee. The requirement that there should be a diligent search for each individual orphaned work is totally and utterly unrealistic. If it were to be legislated it would scupper the Government's orphan works project.
The success of the project depends upon the regulations being proportionate and manageable. They should, of course, have a proper regard for the legitimate interests of all rights holders, and certainly for the interests of the publishing and entertainment industries. Equally, however, they should have regard for the wider public interest in enabling as full access as possible-for educational, research and cultural reasons and reasons of public enjoyment by the mass of our people-to the enormous collections of orphan works in our great public cultural institutions.
Carrying out a diligent search to establish the intellectual property rights in orphan works is a time-consuming and laborious business. It is significantly easier when we are speaking of commercially published books. Reference was made in an earlier debate to the British Library's study, the results of which were published under the title Seeking New Landscapes, which demonstrated that it took on average about four hours and cost some £80 to establish where the intellectual property rights lay in the case of a single book. The noble Lord, Lord Clement-Jones, says that you cannot generalise from that study, but it does demonstrate that this is a laborious, arduous and expensive process.
In the case of a single postcard, perhaps sent in 1916 by someone who simply signed herself "Betty", copyright resides in the design of the postcard, in the design of the postage stamp on the postcard, and in the words Betty inscribed on the postcard. If you were to be required to investigate to establish where the intellectual property in each aspect of that particular picture postcard now lies, you would spend a lot of time.
There are vast quantities of such items in our public archives and collections. The impact assessment at pages 7 to 11 gives some indication of the scale of orphan works in our public institutional collections. It mentions, for instance, that the BBC has some 5 million photographs and the British Library has 112.5 million newspapers. Inevitably, in an age of mass digitisation we have to think of how we can satisfactorily legitimise digitising en masse this kind of material in public collections.
Extended collective licences already provide for the mass licensing of the use of large numbers of works where it has been recognised that individual negotiations would be impossible because of the volume of the material: for example, in the fields of educational photocopying or musical broadcasting. Extended collected licences are provided for in the other directive-the European copyright directive-so there is some tension between the two directives.
Where market failure means that it would otherwise not happen, public access will be lost unless we have streamlined procedures for rights clearance, so a generic approach is essential. The licensing authority will need to verify that the approach to the search by the cultural institution and its methodology have been appropriate: that it has been reasonable in regard to the nature of the works, whether for example they were originally commercially published or unpublished. It should have regard to the proposed use of these orphan works; to whether access to them would be provided free of charge for educational or cultural research purposes and for the benefit of the general public, or whether they would be charged for; what the risks might be to rights holders in this particular category of works; and the feasibility of tracing the present rights holders.
We need to establish under the regulations that the generic approach has been diligent. If we were to insist that there should be a diligent search, item by item, for every orphan work, it would be impossible, and access would continue to be denied to great swathes of our public collections in the Bodleian Library, Cambridge University Library, the British Library, the BBC, the British Film Institute, and many other institutions. If modern copyright law is to be respected, people must feel that it is proportional and rational and sensibly balances the private and public interest.
My Lords, I, too, oppose these two amendments and support the points that the noble Lord, Lord Howarth of Newport, has made, to which I briefly add two further points.
The rights holders of apparently orphan works very rarely come forward at a later date. This makes court action unlikely in most cases, particularly where use of the works was manifestly for the purposes of teaching or research. However, using works in these ways would require institutions such as universities and libraries to operate outside the law in order to make legitimate use of this material. This is not a satisfactory long-term solution.
It is important that what constitutes a diligent search is sensitive to the intended use and the kind of material. Searching for the author of a commercially published book, where the intention is to republish for commercial gain, should require a higher level of diligence than for the digitisation for preservation purposes of an archive of non-commercial material. It is very important that the Bill is flexible enough to allow regulations to account for these differences. Unfortunately, these two amendments would take it in the opposite direction.
My Lords, I begin by thanking my noble friends for their amendments. They raise important issues.
Turning first to Amendment 84AE, in Grand Committee there was a full and productive debate, as has been mentioned, on the issues around diligent search. I have also subsequently written to the noble Lords who spoke in that debate. I can confirm that, before a work qualifies as an orphan, a diligent search for the all the rights holders in the work must be undertaken. If as a result of an initial UK search there are indications that the rights holders may be overseas, there will be a requirement to expand the diligent search to include relevant overseas territories. However, a balance must be struck between protecting rights holders and making the system cost-effective for users. That is why the orphan works working group is undertaking detailed work to ensure that diligent search requirements reflect current best practice across all sectors. These requirements will be set out in regulations that will be subject to both consultation and the affirmative procedure.
I will answer some questions raised by my noble friend Lord Clement-Jones and the noble Lord, Lord Howarth, about the provision of more detail on the requirements for diligent search, although I am not sure how far I can reassure the noble Lord, Lord Howarth. Diligent search should find rights holders when works are not really orphaned, and it is important to find the right balance between protecting rights holders and making the system cost-effective. Extensive thought has already been given to what should be done in a diligent search for different sectors, including by the European digital libraries initiative. Existing industry databases and registries and bibliographic publications are just a couple of examples of sources of information that could be searched. It is likely that searches would differ across the various sectors, and therefore sector-specific guidance may need to be developed. To that extent, this may help to answer some of the concerns of the noble Lord, Lord Howarth.
Diligent search is being considered with stakeholders through the orphan works and ECL working group. Diligent search guidance will cover the scenario where the work may have originated outside the UK. The noble Lord, Lord Howarth, may know that the Canadian orphan work scheme licenses works, provided that they have a strong connection with Canada. They may be of foreign origin, but with an orphan work this will not necessarily be known.
In relation to Amendment 84AE, my noble friend Lord Clement-Jones was concerned that there might be a loophole regarding sublicensing. The answer to this is that the Bill does not permit sublicensing, if that is a help to my noble friend.
I may well have touched on this earlier, but for clarity, the noble Lord, Lord Howarth, again raised the issue of diligent search and made a fair point about the need to cover every orphan. I believe that he used the analogy of the postcard. I do not think that we can avoid the need to look for a legal owner, but we do not want a search regime that is too obtrusive and costly. This is a matter of achieving balance, and that is why these matters are best dealt with in regulations, where the needs in different sectors can be properly addressed.
Amendment 84AEA would remove the option of licensing a work under the orphan works scheme where it was not known whether copyright subsists. Establishing whether a work is still in copyright will of course be a key part of the diligent search process. Indeed, it is in the applicant's interest to establish this fact, because if the work is out of copyright they will be free to use it and will not need to apply for an orphan works licence. However, it may not always be possible to establish definitively whether a work is still in copyright. This will particularly be the case with unpublished works, where often key information such as the date of creation or the date of the creator's death is not known. Having to establish definitively whether a work is still in copyright could, therefore, exclude very many works.
This practice of allowing a licence where there is uncertainty about whether copyright subsists is followed in Canada, which I mentioned earlier, where a scheme has been running for nearly 25 years. In doing so, it provides legal certainty for the user of the work. If we do not include such works within the scope of the orphan works scheme, we could exacerbate the very problem that the proposals are designed to address. I hope that in the light of the assurances that I have provided, my noble friend will not press his amendment.
My Lords, I thank the Minister for that reply. I am reassured by his statement in at least three respects. He made the distinction between the requirement to have an individual search and the requirement to be proportionate in the way the diligent search is carried out. That is the distinction that I would make. I found the statements of the noble Lord, Lord Howarth, rather bloodcurdling in many respects. The proportionality lies not in whether each individual work is looked at but in the nature of the search. I hope that the regulations focus very much on that.
I of course agree that if one is to have an orphan works scheme, it has to be economically viable and has to work for all those taking part in it, but at the same time it must protect genuine rights holders and make sure that searches uncover works that are not orphan but may appear on the face of it to be so. Therefore, I look slightly askance at measures that say "streamline procedures" when individual rights holders, if they exist, are to be ignored. I think that we have common ground on proportionality, but the question is where that lies. It will be useful to refer to the Minister's words generally when the regulations are drawn up. We may have a chance to debate them in this House in future. I very much welcomed what he had to say on the sublicensing point; that was a very helpful statement. Those who are concerned about Amendment 84AEA will also be reassured. I beg leave to withdraw the amendment.
Amendment 84AE withdrawn.
Amendment 84AEA not moved.
Moved by Lord Clement-Jones
84AEB: Clause 69, page 65, line 13, after "a" insert "qualifying"
In moving Amendment 84AEB, I wish to speak also to Amendments 84AEC to 84AEG and Amendment 84AF.
I will speak first to Amendment 84AF as it falls outside the scope of the other amendments. Clause 69 as drafted does not factor into the opt-out of ECL the situation where the rights holder is not the creator. A firmer commitment from the Government in the Bill is necessary to give more reassurance to rights holders on the ECL provisions in Clause 69 before the legislation completes its passage. This amendment was tabled as Amendment 28X in Gland Committee. An opt-out is available to copyright owners in the Bill as it stands. The amendment would extend this opt-out to exclusive licensees and authorised representatives.
In Grand Committee, the Minister committed the orphan works and extended collective licensing working group to look into this issue as part of its deliberations. While this commitment is welcome, there needs to be certainty that any regulations for extended collective licensing will include such provision. Since ECL has the effect of exercising property rights, potentially against the will of the rights owner, the ability to opt-out under subsection (3) of what will be the new Section 116B must be as straightforward and easy to implement as possible. To effectively administer the repertoire they have invested in, music publishers will need to make catalogue-wide arrangements applicable to hundreds, thousands, or potentially, millions of separate works. The grant of rights and arrangements between creators and music publishers are very often not exclusive assignments of copyright; grants can also be made by way of licences, both exclusive and non-exclusive.
It will be unworkable to have an opt-out which is exercisable only by the copyright owner or exclusive licensee. This would require a publisher to go contract by contract, checking the nature of each grant of rights and, where necessary, asking composers to sign opt-out documentation to be sent to the body seeking to operate the scheme. If the opt-out could be operated by the composer's authorised representative, this would give a publisher or other representative the right to seek the permission from its composers to exercise an opt-out on their behalf, which could then comprise one repertoire-wide opt-out from a rights owner in a manageable way.
Practical experience abroad is that, in the absence of this possibility, ECL provisions can be manipulated by bodies operating schemes to make it impossible for right owners to opt out in any manageable way. I am informed by representatives from music publishing that one example of this is the operation of the extended collective licensing provisions enshrined in Hungarian copyright law in relation to the performing right. In Hungary, one reason for the failure of being able to rely on the opt-out came from the requirement of Artisjus that the rights owner-not any representative-provide due diligence evidencing ownership of each title in question. In relation to a repertoire of many thousands of works, this represents a huge barrier to successfully exercising the opt-out in terms of tracing the title back to its source. It is often via a complicated chain, redacting and copying documents to comply with confidentiality restrictions and then shipping these across to Hungary.
This example of abuse of proprietary rights provides ample evidence that, in the context of ECL, the burden of challenging any opt-out must sit with the entity operating the scheme and not with the individual rights owner. I believe that it is not the intention of this legislation to create such problems but it is important to guard against potential abuse. Can the Minister give assurances on this?
At the end of the day, I cannot see any downside to giving composers a choice in being able to elect to have their trusted authorised representative act on their behalf in this context. I am also not aware of a prevailing view that would be opposed to creating such a modest requirement. Indeed, in Grand Committee, the Minister stated that the Bill does not rule out such a provision.
With the experiences of ECL in other territories in mind, I hope that Report stage is an opportunity for the Minister to clarify responsibility for overseeing due diligence in an opt-out process. I hope that the Government will use this stage of the Bill to clarify that regulations will be clear that the burden of proof for the due diligence in an opt-out will be on the body applying for ECL.
On Amendment 84AEB, copyright licensing bodies are indispensible in many circumstances. For example, no composer could keep track of all the playings of his or her song on television, radio, the internet and in concerts, pubs, hairdressers, department stores and so on; PRS for music does this collectively. However, this kind of licensing is voluntary, meaning that the rights owner gave his or her permission to PRS to license his or her works for use in broadcasts and public performances. Extended collective licensing means that the licensing body can also license works whose authors have not given permission.
Therefore, ECL-and we have debated this in Grand Committee-is potentially dangerous to rights owners. A rights owner may not know about extended collective licensing and find that his or her work has been licensed without their permission. Perhaps they would not have wanted it in that particular publication, or perhaps they had given another publication an exclusive deal. Perhaps they would have charged a different fee; if they had given permission direct, their fee would not have suffered deduction of the licensing body's commission. Foreign composers in particular may not be aware of the licence at all and may grant conflicting rights or may not collect their fee.
The Government's explanations always described ECL as "voluntary extended collective licensing", but the fact is that ECL allows the licensing body to license its rights without their prior authorisation. It is government policy that the author can opt out, but this acknowledges that the licensing body has permission to license his or her rights in the first place. This permission is ultimately given by the Government by authorising the organisation to license rights that it does not in fact hold, not by the author who must withdraw by opting out.
To their credit, the Government have acknowledged the dangers inherent in ECL, and in Grand Committee on
My amendments are essentially translations of the Nordic statutory provisions, adapted to the Copyright, Designs and Patents Act. The safeguards usefully include a requirement on licensing bodies to qualify, the need to explain the type of licence being granted, the need for the authorised body to be representative, the adoption of a code of conduct, the ability to refer to the Copyright Tribunal where a claim is being made that the body is not representative or that licences go beyond scope of existing copyright licences, a limitation on the term of authorisation to five years, and clear provisions about the ability to give notice of exclusion of a work.
The Minister has said that there must be flexibility, but he has been fairly detailed in his description of what the secondary legislation will consist of. Flexibility is not therefore necessarily an argument for excluding safeguards for rights holders from the Bill, and there can be no reasonable argument against including those safeguards. I beg to move.
My Lords, I should like to speak to Amendment 84AF, to which I have added my name. I spoke at some length in Committee on the extended collective licensing measures in Clause 69, and I made it clear then that I do not like the principle of ECL. I cannot see how it materially benefits the UK and it will bring uncertainty by not being truly voluntary.
I believe-and I have said so previously-that such a scheme should be opt-in, rather than opt-out, whereby rights holders who want to license their content through others can do so. However, I welcome the Minister's assurances thus far that safeguards to such a scheme are vital, but-I echo the words of my noble friend Lord Clement-Jones-the safeguards should be included in the Bill, not left to secondary legislation. If the Government are backing ECL because it works in the Nordic countries, then why not follow the Nordic lead and put the necessary safeguards in the primary legislation? Whoever may benefit from such a scheme can then benefit, and whoever feels threatened by it will have some comfort in knowing that the Government have protected the rights of rights holders.
As I said on an amendment on Report last week, China has just announced that it will implement ECL in its copyright law and has said that the details will be in regulations yet to be published. Where have we heard that before? The UK Government will not be in a position to demand appropriate safeguards for licensing of UK copyrights by ECL in China if we do not have them in our own legislation, as the Nordic countries do, nor will UK rights holders or their representative bodies be in a strong position to safeguard UK rights abused by ECLs in foreign countries if the UK's own statute lacks the necessary safeguards. My noble friend Lord Clement-Jones and I have tabled a series of amendments to this clause which does just that, putting into statute the very safeguards that the Minister himself has articulated.
Again, I urge my noble friend the Minister to accept these amendments, and avoid a situation in which companies can seize the intellectual property of others and license it on their own terms.
My Lords, this group of amendments is designed to incorporate in legislation a series of safeguards regarding extended collective licensing. The Government have publicly committed to many of these safeguards in some form or other. I thank my noble friend for his continued positive engagement with ensuring ECL is a fair system. The Government share those aims, and I seek to reassure my noble friend that we have met them.
As there are a large number of amendments in this group, I will respond to them by reference to a set of themes. Amendments 84AFA, 84AFB, 84AGA, 84AGB, 84AGC and 84AGD are essentially consequential in nature, and so I will not deal with them directly. Amendments 84AEB, 84AEC, 84AED, 84AEE and 84AEF seek to provide clear safeguards against an unwanted extension of the scope of collective licensing, and to define the characteristics of a body which can be authorised to operate ECL schemes.
The need for safeguards is absolutely beyond dispute. A working group which includes creators of photographic, audiovisual, literary and musical works is helping us to develop these safeguards into draft regulations. I gave commitments during Grand Committee on some of the issues the working group would be asked to consider, such as those raised by Amendment 84AED. The Government will consult on these draft regulations before asking Parliament to approve them. The Government feel that regulations can more easily be adapted to keep safeguards effective in the light of market changes. Such adaptability ensures that the scheme continues to protect creators' interests. Regulations can also more easily be adapted to emerging best practice; this better prevents abuses. The Government's approach will still allow for a comparable level of safeguards to those found in primary legislation in other jurisdictions.
My noble friend Lord Clement-Jones raised the issue of the Nordic protections which are in primary legislation, a topic also alluded to by my noble friend Lady Buscombe. The UK proposals include similar safeguards, such as the right to opt out and a test of representation, and a different legislative route that has been used to provide future-proofing. However, not all Nordic ECL provision is for specific uses. For example, the Danish Act includes provision for a "general" ECL. Some vital safeguards are on the face of the Bill: the right to opt out and the requirement that ECL can be authorised only for specific types of works and rights. Applications to operate ECL would be authorised only on the basis of significant, demonstrable support for collective management in relation to the specific licence. This would need to include evidence that the applicant-a significantly representative licensing body-has the consent of its members to apply for the authorisation.
My noble friend Lord Clement-Jones raised the issue of ECL. If I have him correctly, he described ECL as potentially dangerous and questioned the description of it as voluntary. Noble Lords have queried our description of our proposals as voluntary, but they are voluntary because the Government will have no power to impose ECL on a sector. This is not compulsory collective licensing; it will be for a relevant licensing body which will require the explicit consent of its members to choose whether to apply. For non-member rights holders, I accept that ECL, where it applies, shifts collective management from opt-in to opt-out. This is why the Government are committed to a series of safeguards to ensure ECL is authorised only when there is a demonstrable case for it, and to make sure that rights holders have the opportunity to exercise their opt-out.
In relation to the advertisement of ECL schemes prior to authorisation, the Government have proposed that an application should be publicised to allow comments from interested parties before a decision is taken. The Government do not propose that new regulations should be laid in relation to each proposed authorisation. With regard to Amendment 84AEF, I confirm that authorisations will apply specifically and solely to the licensing scheme which was the basis of the application.
In relation to Amendments 84AEE and 84AEG, the Secretary of State will decide whether to grant or reject an application and to set the conditions of any authorisation. We therefore consider it appropriate to provide in the regulations that the Secretary of State should also have the power to revoke an authorisation, should that prove necessary. The Government believe that this may be a more efficient process than a referral to the Copyright Tribunal. Following discussions with the working group, I can confirm that the Government intend to make ECL authorisations subject to renewal.
I turn now to the question of the opt-out, and I hope that my subsequent comments on the subject of exclusive licensees will be helpful to my noble friend Lord Clement-Jones. Amendment 84AF focuses on the right to opt out of ECL schemes. In Grand Committee, I made a commitment that the working group on extended collective licensing would be asked to consider whether the right to opt out should be extended to exclusive licensees and their representatives. The Government take the opt-out protection seriously. If it becomes clear that an extension of the provisions to cover exclusive licensees and representatives is necessary, the Government will act on that basis. However, I do not want to pre-empt the work of the working group, given my Grand Committee commitment.
I know that my noble friend Lord Clement-Jones also has concerns regarding due diligence in relation to opt-out. I can confirm that the Government's intention is that the burden of proof should favour the party seeking to opt out. That seems to us the right and fair thing to do.
My noble friend Lord Clement-Jones raised his concern that the opt-out would be too burdensome for rights holders. However, the responses to the consultation make it clear that rights holders expect to be able to opt out entire collections of work or individual works quickly and with minimal or no cost. It will be the responsibility of the collecting society to operate opt-out schemes which meet the needs of effective rights holders. They will need to demonstrate how they intend to do this when they apply to operate an ECL scheme.
On Amendment 84AEH, the Government believe that licensing bodies rather than users, who may be individuals or small businesses, should accept and process opt-outs. Licensing bodies will be required to publicise any ECL scheme before it comes into effect, giving rights holders every opportunity to opt out in advance.
Subsection (b) of the amendment presents some practical difficulties. "Reasons to believe", for example, could prove to be a very subjective judgment. It would seem more practical for licensing bodies to address issues of exploitation that the "author would oppose" on a scheme-by-scheme basis through, for example, licence conditions.
On fair treatment and remuneration for non-members, I reiterate my support for the principle. However, I do not feel that it would be appropriate to give non-members of licensing bodies recourse to the Copyright Tribunal that members do not have. I also feel that it is unlikely to be cost-effective.
Codes of practice will require fair treatment for non-members, and ECL will not be authorised unless a suitable code is shown to be in place. If a dispute fell within the scope of a code, a non-member would be able to use the licensing body's complaints procedure, with appeals going to an independent ombudsman. The Secretary of State would have the power to revoke an ECL authorisation if a code was not complied with. This is in addition to the proposed wider backstop powers and code review system, which includes the ability to impose other sanctions.
Amendment 84AGE would mandate that the regulations provide for a creator's moral rights to have been assumed to have been asserted. I am happy to confirm that the orphan works regulations will indeed provide for this.
In relation to ECL, the principle is that the licence conditions applicable to the use of member's works would also apply to the works of non-members. Amendment 84AGE would, however, also remove references to other safeguards. These include the various rights and obligations once a work ceases to be orphan, and the right to withdraw from an ECL scheme once it is up and running. The fact that these matters are specifically referenced in the Bill is an indication of their importance.
My noble friend Lord Clement-Jones and others have made some valuable points, but I can reassure the House that the Government understand the importance of getting the detail right. Fixing the detail in regulations will allow for expert input from the working group, further consultation and parliamentary scrutiny via the affirmative procedure, and will help the Government to keep safeguards up to date and effective. While I appreciate the intention of these amendments, I am concerned that they would hinder us in getting the detail right now and in the future. I therefore ask my noble friend to withdraw his amendment.
My Lords, the Minister has been so forthcoming that I almost do not know where to start in thanking him for the assurances that he has given about the nature and content of the regulations in terms of the safeguards that will be similar to those in most of the Nordic legislation-that is, the way in which licensing bodies will need to demonstrate significant support, the way in which the Secretary of State will set out the requirements, and the powers of the Secretary of State in relation to codes of conduct. These schemes will be subject to renewal, which is extremely important. The way in which the Minister expressed these assurances was extremely important, first, in terms of meeting the expectations of rights holders, which is crucial in meeting some of the concerns. Secondly, even more important is what the Minister said about the onus of proof in terms of the ability of rights holders to withdraw from collective licensing schemes. Above all, that will provide more assurance than almost anything else.
I shudder to think how long some of the regulations following on from Part 6 of this Bill will be, since we are putting huge emphasis on secondary legislation following on from the clauses that we are agreeing. However, the Minister has given a very useful route map of what those regulations relating to extended collective licensing are, and to that extent it is extremely welcome. I beg leave to withdraw the amendment.
Amendment 84AEB withdrawn.
Amendments 84AEC to 84AFB not moved.
Moved by Lord Howarth of Newport
84AG: Clause 69, page 65, line 41, after "paid" insert "if deemed required"
My Lords, this amendment arises from conversations that I have held with the British Library, with Universities UK and with the Wellcome Trust. They all endorse this amendment, as do the Chartered Institute of Library and Information Professionals-CILIP-the National Museum Directors' Conference and the British Broadcasting Corporation. The issues at stake are important for our universities, our libraries, our archives, our museums, our galleries and our broadcasters, as well as for our culture and economy.
The purpose of the amendment is to create some flexibility in respect of a requirement that fees should be paid up front for the use of certain in-copyright works, known as orphan works. Orphan works are works whose rights holders, following a diligent search, remain unidentified or untraceable. The amendment would ensure that there is no absolute requirement in the statute that fees for the use of orphan works should be paid up front.
Let us remind ourselves of the benefits of being able to license the use of orphan works, provided that it is done with appropriate safeguards. I strongly support the Government's policy of making orphan works accessible.
The great cultural institutions of our country hold tens of millions of orphan works in their collections. The Joint Information Systems Committee of the Universities Funding Councils estimated that there might be some 25 million orphan works in its sector. The National Museums Directors' Conference estimates 50 million in its sector. The British Library considers that perhaps 40% of its in-copyright collections consists of orphan works. As the law now is, there is no way that this great wealth of resources can be licensed for use. Orphan works remain quarantined. In the words of the National Museums Directors' Conference, they are underused, understudied and undercelebrated. So Clause 69 and Schedule 21 are essential.
What sort of material are we speaking of? In the first instance, we are talking about books. The British Library's exercise, the results of which were published in Seeking new Landscapes, found when it took a representative set of titles published between 1870 and 2010 that 43% were potentially in-copyright orphan works. There is unpublished material in vast quantities. Take, for example, material relating to World War I, the centenary of which we are about to start to commemorate. There are personal photographs, letters and diaries. There is more recent material; the Wellcome Trust has a collection of posters about HIV and AIDS. Of the 3,674 posters, 2,601-71%-were found to be orphans. These orphan works represent resources on an extraordinary scale and of extraordinary potential cultural, educational and economic value. They have the potential to stimulate new research, extend knowledge and excite new creativity and innovation. If they were made available to the public there would be enhanced public interest and enjoyment of the contents of our national collections.
However, none of those benefits is possible now. Orphan works remain in limbo. Under the current law, if institutions digitise this material and exhibit it, they are acting illegally. It happens to an extent for the good reasons that I have suggested. It is absurd and wrong that a law that is unfit for purpose should criminalise academics, curators and professional people who are scrupulous about copyright. They are active users and generators of copyright themselves, and their whole ethos is to use these public collections for the public good. I emphasise that everyone agrees that it is essential to protect the legitimate interests of rights holders. Where we see that certain rights holders may have genuine grounds for being anxious about their interests, we must acknowledge and accommodate their concerns in the regulations.
Take digital photographers, for example; it is too easy at the moment to create a fraudulent orphan work by stripping from a digital photograph the metadata that provide the attribution of intellectual property. This happens-not in the great public cultural institutions to which I have been referring, but it does happen. Until a solution is found for this particular problem, probably a technological solution, it would be appropriate to exclude digital photography that originated as digital photography from the scope of licensing of orphan works. The British Library and CILIP would be content if that were done. Meanwhile, vast quantities of analogue material from the 20th century are in archives which, if they could be brought into public exposure and use, would constitute no genuine threat to modern photographers. They would not undercut the market. The Government should, of course, not be stampeded by private commercial interests, expressing vague and unsubstantiated fears about scams and unfair competition.
Without this amendment, we will lose the benefits of Clause 69 and Schedule 21-the benefits of releasing these orphans into the world. A requirement that royalties and licence fees should be paid upfront for the use of orphan works would be unnecessary and damaging. There will be, absolutely rightly, a requirement that a diligent search should be made before application is made to the licensing authority. If, as a result of the diligent search to find the rights holder they have still not been found, there is a strong probability-indeed, a virtual certainty-that the work is orphan. The institutions testify and can demonstrate that it is very rare that a rights holder appears. If a rights holder does appear, where we are speaking of digital library projects which would provide free access to students, scholars, and the general public, it is very unlikely that the holder would require payment: they recognise the educational and public benefit of sharing their property.
Of the 3,674 posters in the Wellcome Collection, responses were received from 108 rights holders. Of those, all but 12 agreed to allow publication online with a non-commercial licence. It is the practice of the National Portrait Gallery to list orphan works on its website when it places images of them online. Over 10 years, fewer than 10 rights holders have appeared, and all have been content that the images remain online. CILIP confirms that this is normal.
To pay people who cannot be identified while not paying those who can be does not make sense, yet that would be the effect of the policy. A requirement to pay upfront is therefore unnecessary. Only modest sums would be needed to requite the rights holders, and those sums can be found from the cash flow of the institutions, and certainly from their reserves. The argument that upfront payment is a necessary insurance is wrong. It would be using a sledgehammer to crack a nut; it would be an unnecessary, bureaucratic, costly diversion of funds from our cultural institutions; and it would be very damaging. Fees required to be placed in an escrow account with the licensing authority would be sterilised. There would be no benefit for the phantom rights holders, but the money would be lost to the institutions as it would be confiscated for years, probably for ever.
We have to envisage substantial sums because of the quantity of orphan works in the public collections. Even a minimal charge per item would be cumulatively prohibitive. The BBC has 950,000 TV and radio programmes in its archive, 5 million photographs and 2 million sundry items in its collections. The British Library has 112 million newspapers and 18.5 million sundry items. Even a minimal fee on each of those would tot up to an impossible level of charging.
What would the licensing authority do with the money? The impact assessment tells us:
"Should the rightful owner not re-appear within say, six years of a permission being issued, the deposited fee would be treated as a Bona Vacantia case (where assets have no owner) ... and would thus default to the Crown ... The Crown could then use these funds in a variety of ways".
Let me emphasise that the cultural institutions are entirely happy to contribute to necessary administrative costs of a licensing authority. Let me also say again that they are more than happy to pay royalties due to rights holders who want to be paid. However, it would be outrageous to require that licence fees be paid not for the benefit of rights holders-who will not appear, or, if they do, will not want to paid-but to default to the Crown. This would be a tax on publicly funded institutions. Indeed, it would be a double tax: it would be taxing grant-in-aid that had already been provided by the taxpayer. Where charitable funds are in question, it would be a levy on those.
It would be an impossible, as well as an inappropriate, burden. Public funds have already been substantially cut to our public cultural institutions, which are struggling to cope with their depleted finances. An upfront licence fee would be an impost on the top of other substantial costs that are appropriate and necessary: for example, diligent search, which we have already spoken about, is very expensive. A diligent search carried out by the Wellcome Trust on the AIDS posters required 132 days of staff time-this is just one instance. The costs of diligent search, digitisation, curation online, maintaining online services and of the contribution for the administration of the licensing authority would all already be there. We must not add unnecessarily to them.
This is the main part of the answer to the Government's argument about unfair competition and the need for minimal market distortion. They say that it should not be cheaper to use an orphan than a non-orphan work. It would not be, as I have explained. The cultural institutions already face major financial hurdles and costs. If extra, unnecessary, costs are added through the requirement to pay upfront royalties, the institutions will conclude that the game is not worth the candle, the orphan works will stay in limbo and the Government's highly desirable policy will be aborted.
As the noble Lord, Lord Clement-Jones, said earlier, an orphan work scheme must be economically viable. Do not take my word for it that the scheme would cease to be economically viable. The Wellcome Trust, a great charity to which all of us owe an immense amount, states that to,
"tie up precious public and charitable funds in an escrow account that would, in reality, rarely be used ... could act as a significant barrier to institutions taking up the scheme".
Universities UK states similarly:
"An up-front payment system, with a large number of payments being made to escrow accounts which are never collected, would have a significant negative impact on the ability of universities and others to make legitimate use of orphan works".
The British Library adds that if, after all this, the licence is to be issued for only five years, leaving uncertainty as to what would happen after that and, presumably, a requirement to keep repeating that laborious process, in all the circumstances, it would not engage with the process. So the Government would be defeating their own purpose.
There is also a moral point. A high proportion of orphan works never originated as commercial. I speak of religious texts or ethnographic material documenting endangered or minority cultures, personal photographs, and the papers of local societies. We should not introduce an assumption that all should be commercialised, that a market price should be attached to everything that is personal, communal or sacred. I wonder whether the rights holders of non-commercial material would really want a government agency or the Government themselves to be paid for the use of that material. Why should the norms that may be appropriate in the commercial entertainment or publishing sectors be applied everywhere else? We must seek a workable and balanced system for copyright which balances public benefit against legitimate private rights and serves each equitably while facilitating the dissemination of information and knowledge to the broadest public.
The world's first copyright legislation was passed in this country in 1710 and was known as an Act for the Encouragement of Learning. In 1836, Antonio Panizzi, the great librarian, the creator of the Round Reading Room in the British Museum, wrote:
"I want a poor student to have the same means of indulging his learned curiosity, of following his rational pursuits, of consulting the same authorities, of fathoming the most intricate enquiry as the richest man in the kingdom, as far as books go, and I contend that the Government is bound to give him the most liberal and unlimited assistance in this respect".
We should legislate in that spirit.
Does the Minister accept that the concerns of the museums, libraries, archives, universities and broadcasters are valid in this matter? Of course we should have sensible flexibility and phasing in how the policy is introduced and developed, but there needs to be a presumption that there will not be a requirement to pay upfront for orphan works. At the very least, we need flexibility in the statute. I beg to move.
My Lords, I support my noble friend Lord Howarth of Newport. In doing so, I declare an interest as chairman of the board of the British Library. I will not repeat all my noble friend's arguments, which were made at some length and extremely cogently. Nobody could have made the case better. However, on behalf of the great cultural institutions, of which the British Library is one, I want to say how important this amendment is. As my noble friend said, it is absolutely right that more than 40% of the in-copyright collections at the British Library are orphan works. I can confirm that.
My noble friend made a plea for flexibility and this is an example of legislation where flexibility should be built in. Clause 69 is an important clause in this Bill and I congratulate the Government on bringing it forward. However we need to make sure that it leads to the maximum use of orphan works for research, scholarship and other public uses. I fear that without this amendment, maximum use will not take place and many of the benefits of Clause 69 will we lost, as my noble friend has said. I cannot believe that the Government would want that to happen.
It will be extremely damaging if there is a requirement to pay upfront for orphan works in the way that the Bill requires. It is also quite unnecessary. I can see no downside to making this small change; otherwise it will end up-as my noble friend has said-as a tax on the very public institutions that both the Government and all parts of this House want to support. I ask the Minister to respond positively to this amendment. It is extremely important and will make a great deal of difference to this Bill.
My Lords, I support the noble Lord, Lord Howarth, in this amendment. It is extremely sensible, very simple and allows for flexibility, which is what we want. The concept of licensing for orphan works and for extended collective licensing is important if we are to disseminate things that we want to do and see. More and more programmes, books and so forth now dwell on our recent past. In this case, "recent", when it comes to copyright, means the lifetime of the author plus 70 years.
The situation gets confusing. First, if one of your Lordships were to send someone a postcard, the copyright-wherever that postcard ends up and whoever buys and sells it and owns it later-would subsist for their lifetime plus 70 years. The next confusion is the assumption that copyright resides with the person who wrote the document. Let us suppose that someone tries to produce a study of an incident that happened between the wars. Indeed, a similar issue arose the other day when someone asked whether they could use a letter from my great-grandfather and whether I would grant copyright. There is a certain technical problem. I presume that they had looked at all the wills between my great-grandfather, my grandfather, my mother and myself to find out that I was the residual legatee; or that each was the residual legatee of each will; or that the copyright in this particular case had not been assigned to someone else. How on earth would you prove that? It would be totally impossible. For things that were never designed to be commercial, the concept of trying to trace the person who owns the copyright is ridiculous and is just a non-starter.
A clampdown will mean that a whole raft of things will not be able to be published by people in public office, because one cannot say to a public servant, "Just break the law because nobody is going to sue you". You are telling them to act illegally. You can possibly do that as a private person and say, "They are not going to dare to sue me", but you cannot expect people in libraries, universities, other such public bodies and charities to break the law. It is the wrong way to treat the law. As a result, we need something more sensible. That is why this entire clause is there, to try to solve the problem. But think of the millions of pounds involved if we charge even one penny per potential orphan work. We heard the figures a moment ago from the noble Lord, Lord Howarth. I do not believe that there should be a presumption of an upfront payment unless it is a small administrative charge. There should be no payment that tries to reflect the number of orphan works that might be involved, particularly if it involves lots of little individual things going from A to Z.
I am also worried about what happens to the money. If it goes into general taxation, I am not sure that is a very good use of it. I tend to think that the great institutions probably know how to spend the money better than central government, but maybe I should not say that. I certainly feel that most taxpayers think that they know how to spend their money better, so for this to be a covert tax is not a good idea. I also find the concept of government departments taxing and fining each other absolutely ridiculous, as it just circulates money around.
I would disagree with the noble Lord only about the copyright on digital photographs. If, because there is a technical challenge with some people stripping out metadata, exclusions are made for one class of item, exceptions and exemptions will be created because there are many ways around it. What happens if you take what is an analogue photograph and digitise it? At that point, it is going out there digitally. Is it now digitised so that the copyright rule does not therefore apply to it, or whatever? We should keep it simple and include everything within the orphan works scheme. Apart from that, very soon there will not to be many photographs that are not digital, so by excluding them the law will take some time to catch up. In any event, this amendment is sensible and it would be madness to refuse it. Please will the Minister look on it kindly?
My Lords, I want to make a very brief observation with regard to orphan works. The existing definition of an orphan work is not terribly satisfactory. The matter came before the previous Government in their last weeks-I see my noble friend Lord Young nodding over there-when I was successful in persuading them to accept a new definition of what an orphan work actually was, so that people would be in no confusion as to what they were dealing with. Unfortunately, this was the declining days of that Government and that part of the legislation disappeared in the wash-up. I wonder whether the Minister might look back to the Hansard of that period for the redefinition of orphan works and, perhaps at a later stage of this Bill, bring it back in.
My Lords, this has been a very powerful debate. In contradistinction to what have been discussing in the immediate run of amendments, this seems to be a situation where the Government are trying to be a little too definitive in primary legislation. My point would be, to support the comments made on this side, to suggest that the Minister might wish to review that.
We have heard that we are talking about hundreds of millions of works, which are-in the words that my noble friend used-underused, understudied and undercelebrated. There is no contention that the repositories in which these works lie are happy to pay for the cost of the administration of the scheme that is to be used to provide access to them. The concern is that by providing a very inflexible approach to this, these institutions will effectively have been taxed to provide funds which will go to the Crown under the bona vacantia rules. This seems extraordinarily unfair and I urge the Government to think again about this issue. I am aware that it has already been the subject of some discussion and debate but, given that we have at least another 10 days until the final stages of this Bill, perhaps there is still time for the meeting or discussion that I might encourage the Minister to have. We would certainly be very willing to meet his timetable in order to progress this.
The point must surely be that there ought to be a way round this that would accept the overall architecture of the structure of the orphan fees arrangement but would not penalise or tax those who have to operate it for the benefit of the public good. We have already had some suggestions that would perhaps include something to do with digital photography, which will always be a difficulty in this area. That might be a step too far. However, there are other ideas around, such as that the escrow account might be not returned to the Crown but made available for cultural work or, more particularly, returned to the original institution if the money is not claimed by a bone fide rights holder.
There might be a case for trying a pilot scheme, which would allow us to test out a number of options. Whatever there is, there is certainly a willingness on our side to see if we can get this right. This scheme is a good scheme. It is one that we on this side want to support, but we find it very difficult to see the right way forward if the Government insist on the present wording of the Bill.
My Lords, I begin by thanking the noble Lord, Lord Howarth, for his amendment. I do not underestimate the strength of his views on this particular issue and the remuneration for orphan works. I have listened very carefully today to his argument. As he well knows, I listened carefully in Grand Committee and, indeed, outside the Chamber to his views, which are well known.
It is one of the core principles of the Government's proposals that remuneration is payable for the use of an orphan work. Making payment discretionary would risk undercutting the market. It would also risk rights holders not receiving the remuneration that they would otherwise be due. Therefore, to avoid unfair competition, it should not be cheaper to use an orphan work than a non-orphan work. Where cultural institutions are acting commercially, it seems only fair that they do not receive preferential treatment to other parties licensing in the market.
I can assure the noble Lord that in setting the tariff of remuneration the Government will ensure that, as far as possible, it reflects the appropriate tariff for the same type of use of a similar non-orphan work. Where an orphan work is not being used commercially the licence fee will reflect that. In such cases, the fee could be minimal. My officials are consulting the competition authorities about how tariffs are determined.
I will address a number of questions raised by noble Lords, in particular the noble Lord, Lord Howarth. First, he suggested that excluding digital photographs from the orphan works scheme might be a possibility. A stakeholder working group will be considering the possibility, at least initially, of excluding from the scheme photographs without an analogue context-so photographs merely taken from the internet would not qualify for an orphan works licence.
The noble Lord, Lord Howarth, suggested removing the principle of upfront payment and his views were very clear on that basis. We cannot, however, expect cultural institutions to ride over the rights of creators even in the interests of the public good. Of course we hope that there will not be returning rights holders. We hope that diligent search will identify any such people. However, the principle of upfront payment is an important one. Abandoning the principle of upfront payment is a guarantee to creators that even if their works are missed in the search, they will not be deprived of an income. The fact that rights holders may be content to allow their works to be used is not a reason for trying to reduce their legal rights. In many cases, the payments may be minimal, indeed nominal.
The noble Lord, Lord Howarth, also raised unclaimed licence fees-an issue alluded to by the noble Earl, Lord Erroll. The authorising body will hold unclaimed licence fees in an escrow account. Unclaimed fees could be used to subsidise the cost of running the orphan works scheme, or to pay for preservation costs in public institutions or industry training. There will be further consideration of these options with the input of stakeholders.
The noble Lord, Lord Howarth, raised the issue of a renewable term and the fact that he was not in favour of it. To allow for business certainty, there will need to be some limit on how long an orphan work can be used before a new authorisation would be required. Any returning rights holder would receive remuneration for this period of time and would be able to stop further use at the end of the period if they so wished. The metrics for determining the durations of licences have yet to be decided. In some cases, it might be a period of time, in others it might be something else such as a print run. Therefore, there will be further consideration of how charges are determined but licence fees will be appropriate to the type of work and use proposed. I hope that, with those reassurances, the noble Lord will not press his amendment.
My Lords, the novelist Edith Wharton has a character in one of her early stories, a woman novelist, who discusses with her former lover what should be done with their love letters. She says:
"A keen sense of copyright is my nearest approach to an emotion".
Noble Lords may be feeling rather similar by this stage of the proceedings. I am grateful to all noble Lords who have spoken in the debate-my noble friends Lady Blackstone, Lord Howie of Troon and Lord Stevenson of Balmacara, as well as the noble Earl, Lord Erroll-for their very helpful contributions.
I am very disappointed indeed with the Minister's reply. I have appreciated his willingness to meet me formally and informally, and I am sure that he understands the arguments that I am putting forward. However, what is frustrating is that in my speech I anticipated each argument that he put forward. There is no reason to suppose that orphan works would undercut the market, whatever the market may be, for whatever apparently comparable material. He did not illustrate how that might work, and I find it hard to imagine why that should be the case. He said that the tariff needs to be equivalent, but we are talking about a multiplicity of different sorts of material. It is very hard to see how a scale of tariff can be used to match things that come up as orphan works with things that are constantly appearing anew as commercial copyright material. He said that the unclaimed fees could be used for several purposes. No doubt they would be good purposes, and it is comforting to an extent that they are not to disappear into the maw of the Treasury, or of the general Exchequer, but he did not deal with the point that the unclaimed fees would amass to a very large amount of money indeed, even if, as he assured us, the fee per item would be minimal, simply because of the volume of this material. I was entirely unpersuaded by his arguments.
I was also very disappointed that the Minister chose not to respond to the suggestion made by my noble friend Lord Stevenson of Balmacara that we might meet between now and Third Reading to see whether we can still achieve a meeting of minds and an amendment that satisfies the legitimate concerns of all those who are active and involved in this area. If the Minister is prepared to say, even now, that he will give a clear-cut commitment to hold meetings with a view to achieving an amendment that satisfies the interests and proper concerns of the great cultural institutions of this country, I will be happy not to press my amendment today. I give him the opportunity to make that commitment if he is willing to do so, but if he is not willing to try once more to see whether reasonable people can come to a sensible and practical agreement on this, I wish to test the opinion of the House.
Amendments 84AGA to 84AGE not moved.
Moved by Lord Clement-Jones
84AH: After Clause 69, insert the following new Clause-
"Greater protection for authors when assigning or licensing copyright
In paragraph 1(c) of Schedule 1 to the Unfair Contract Terms Act 1977 (scope of sections 2 to 4 and 7), omit "copyright"."
My Lords, there is currently in many cases an imbalance in economic power between the creator and those with whom they are dealing on copyright. I moved an amendment similar to this in Grand Committee, and at that time the Minister said that the Unfair Contract Terms Act is intended to regulate only business to consumer relations. Of course that is correct. The Minister has, however, agreed to see what can be done by way of review within the Department for Business, Innovation and Skills of this type of issue.
The amendment is designed to elicit from the Minister an assurance that this work will be undertaken. I have sent the Minister a paper suggesting how such a review might take place. It would be an independent review of copyright contracts for creators and would explore how copyright contracts could be made fairer to ensure that creators receive a fair share of the money that consumers pay for copyright content and that the purpose of copyright in stimulating and sustaining creativity is met.
The kinds of contracts that such a review might consider are those with publishers, broadcasters, record labels and film studios; creator's contracts with, and mandates to, collecting societies; and contracts with internet platforms such as Flickr. Some possible solutions for the review to explore-I am not going to go through them all-might include whether the doctrine of undue influence that applies when a person in a dominant position uses that position to obtain an unfair advantage for himself or herself could be codified in statute law; or whether, for instance, a right to equitable remuneration for creators is a necessary underpinning to fair contracts for creators; and whether model licences and codes of conduct could extend the benefit of collective negotiations through professional bodies to a wider range of creators, particularly new entrants to the entertainment industries and consumers-turned-creators. I very much hope that the Minister can indicate how a review might take place and who would be responsible for it. I beg to move.
My Lords, I support this amendment, to which I have added my name. I support everything my noble friend Lord Clement-Jones has already said. This amendment would go some way to mitigate risks to the individual creators, without whom there is no creative economy. We have here more risks of unintended consequences of the government proposal for extended collective licensing. Already before the passage of the Bill, there is renewed pressure on individual creators to sign away to publishers all their rights, including rights to income from extended collective licensing. While creators are vulnerable to the take-it-or-leave-it approach in contracts offered by powerful organisations, the likelihood is that creators will thus be deprived of the compensation for the use intended by the drafters. I should add that we have had so much correspondence in this regard that we are looking to my noble friend the Minister for strong reassurance.
My Lords, I support this amendment. As I understand it, there has been a presumption in some way that the Unfair Contract Terms Act applies only to dealings between business and the consumer. Of course, there are in the field of copyright-indeed, I suspect in many aspects of intellectual property-areas where there is a substantial imbalance between the negotiating power of the intellectual property owner and the prospective licensee.
I understand that the Department for Culture, Media and Sport has been impressed by this argument. I have been told that there are discussions currently going ahead with my noble friend's department to see if there is some way in which this imbalance could perhaps be recognised in the law. It might well not be possible to do it in this Bill, and on that I wait to hear my noble friend's argument. I would like to be assured that the discussions going on within government-I understand this may be between the two departments-will continue so that there can be a proper examination to see whether this extension could be made in some way. There is no doubt about it; someone has to deal with what at the moment looks, to many of the people in the creative industries, like a very unfair balance. It is part of the duty of government to see that that is put right. I hope my noble friend will be able to give us that assurance.
My Lords, we need to move somewhere in this direction, so I support this amendment. The unfairness of copyright law recently came home to me. Someone wanted to publish a book involving some of my ancestors, and asked whether they could use some material that I had at home. I replied, "Certainly, I would be delighted". Then they said, "We need a release document". They put a contract in front of me that said that they would have total rights to this material throughout the universe, known and unknown, in media not yet developed, incorporated and not incorporated-this, that and the other. The only thing it did not include was parallel universes. The contract said that I would have to defend the copyright whenever and wherever required, at my cost. I was not receiving anything for this; I was simply trying to be kind and helpful to someone who was making a documentary. I asked someone legal about it who said, "Oh, they probably couldn't enforce it because it's an unfair contract", but apparently it is not because unfair contracts do not apply to copyright. I therefore asked whether other people had signed this, and was told, "Oh yes, they've signed them. Don't worry, I'm sure nothing will happen".
It is madness for people to sign these things. Something will come home to roost. You only have to look at the chancel repairs bills that some people receive as a result of things signed long ago, which come home to roost generations later. This copyright thing would, if I had signed it, presumably have burnt my heirs and successors as well for the period of that copyright. This is potentially quite serious, which people are ignoring. They think that it will go away and that it does not matter because it is so over the top. I struck through all the relevant clauses in the contract and said, "Right, you can have whatever rights you want to it, but you defend it and look after it". I never heard any more and they never used the material, which is sad.
This is all part of the previous discussion on orphan works and collective extended licensing. So much is locked up that could help the future, help current understanding of the past and help to disseminate things, yet the big rights holders are so bullying in holding on to this material that they are preventing its dissemination. We have to open up and start being more reasonable, particularly in the digital age. On this amendment, therefore, I definitely support the noble Lord, Lord Clement-Jones.
My Lords, I start by answering a question that my noble friend Lord Clement-Jones raised at the beginning. Well, it was more of a point, really. He said that he had sent a paper to me on how the issue of unfair contracts could be addressed. I confirm at the beginning that I have received this paper and that we will consider his suggestions very carefully. It is a little early to talk about this as a formal review, but I reassure him that we will certainly discuss this and take it forward.
However, I thank my noble friends for this amendment. I understand that individual creators can be at a disadvantage when negotiating contracts with intermediaries and large organisations. However, I believe that amending the Unfair Contract Terms Act in this way, as intended by this amendment, would not address these concerns. My noble friend Lord Clement-Jones is aware that we have had discussions on this outside the Chamber. This is because the provisions of this part of the Act are limited in scope. Section 3 applies only where one of the parties is a consumer, or is on the other party's non-negotiated standard terms of business. However, we should also consider the overarching point. Successive Governments have maintained the principle that businesses should be able to contract freely with each other, and that the Government should not unduly fetter or circumscribe this freedom.
My noble friends have raised valid concerns about individual creators. Although I do not consider that the Bill needs amendment in this respect, I would be happy to meet creators to explore these issues further. I hope that in the light of what I have said my noble friends will not press their amendments.
The noble Earl raises an interesting point. This is very much a technical issue. As noble Lords will be able to imagine, a number of lawyers were involved before I was able to stand at the Dispatch Box today. On that point, I ask the noble Earl to allow me to get back to him with a specific reply.
My Lords, I thank the Minister for that reply. I also thank the noble Earl, Lord Erroll, for his comments. He rarely supports one of my amendments, and I have learnt more about his ancestors today than on many previous occasions, so I thank him for his support.
The issue is not whether or not to amend this particular Act. As the Minister says, the Unfair Contract Terms Act does not apply to copyright or business-to-business transactions. Therefore, the essence of this is that, where many of these small creators are small businesses, we need to find a mechanism that will create a more level playing field with some of the larger contractors with whom they want to do business, and to find some way in which those transactions can be reviewed in the way that I suggested.
The Minister did not go quite as far as I would have liked and commit to a review. I think he said that he would meet to discuss how a review might take place. I will take that for what it is. I very much hope that I will be able to persuade the Minister, especially with the paper I sent him, which I confess was drawn up by the Creators' Rights Alliance, which represents smaller creators and feels very strongly about these issues. I am sure that its members will be only too delighted also to meet the Minister. In the mean time, I beg leave to withdraw the amendment.
Amendment 84AH withdrawn.
Moved by Lord Clement-Jones
84AHA: After Clause 69, insert the following new Clause-
(1) The Copyright, Designs and Patents Act 1988 is amended as follows.
(2) In section 97(2)(a), after "infringement" insert ", in particular whether in respect of any work or group of works the defendant has carried out a diligent search in accordance with the requirements of inserted section 116A."
(3) In section 191J(2)(a), after "infringement" insert ", in particular whether in respect of any work or group of works the defendant has carried out a diligent search in accordance with the requirements of paragraph 1A of Schedule 2A."
My Lords, I am afraid that this House will get rather tired of my voice over the next few minutes. I beg to move Amendment 84AHA. This amendment seeks to clarify the matters to be taken into account by a court in exercising its discretion to award additional damages in certain cases of copyright infringement. The power to award such damages for copyright infringement is contained in Section 97 of the Copyright, Designs and Patents Act 1988, and Section 191J covers infringement of performers' rights. As the provisions are identical in form, I will speak only to copyright infringement.
Additional damages are a form of damages that are intended to have a punitive or deterrent effect on the infringer, and are awarded in exceptional cases, in addition to the compensatory damages based on a reasonable royalty that are the usual remedy for copyright infringement. They are often referred to as "flagrancy damages". Some kinds of copyright infringement are carried out with such flagrant disregard for the rights of the copyright owner that it is appropriate to have a sanction available to the civil courts that both contains an element of punishment of the infringer and which, more importantly, acts as a deterrent to others who might consider doing something similar. The sanction is not often used, but has been applied, for example, where the defendant has already been found to have infringed and then repeats the infringement.
This amendment will bring the provision up to date to reflect the changes being made by this Bill in relation to orphan works. Your Lordships will recollect that it is proposed that before any work can be declared an orphan it must be subject to a diligent search for its owner. There is considerable disquiet in some parts of the creative community about how conscientious all those who wish to use orphan works will be in carrying out such a search. Of course, we expect that in due course there will be some detail, which the Minister has described in detail, of the requirements set out in the relevant regulations. They will be designed to minimise the possibility that people will take inappropriate advantage of this provision.
None the less, given the enormous potential commercial benefits, it is entirely likely that some organisations will seek to test how little they have to do by way of diligent search. In particular, one of the concerns raised with me is that a potential user may argue that, as they have carried out a search in relation to one item in a group of works, they should be permitted to assume that the result will be the same for the others, and that they are relieved of the need to carry out separate searches. We debated this only a few groups ago.
The protection that this affords to people is that before their work can be declared an orphan and used without their authorisation, there must be a diligent search. This simple amendment deals with the temptation to use the orphan works provisions in a manner that is clearly not intended by the Bill. It spells out that failure to carry out a diligent search will be one of the considerations that the court takes into account when deciding whether or not to award additional damages. It will not be definitive of the question, just one factor to be taken into account.
This would send a clear message that the new freedoms provided by these provisions are not to be abused, especially not at the expense of creative individuals who do not have the resources of large corporations standing behind them to enforce their rights. This is an important aspect and one that is entirely consistent with the policy direction behind these measures. I beg to move.
My Lords, Amendment 84AHA returns to the subject of diligent search, something that was discussed in one of the earlier groupings. I understand and sympathise with the intention behind this amendment. However, the Government are not convinced that a failure to obtain an orphan works licence legally should be treated as an aggravating factor over and above any other form of copyright infringement. There are already provisions in the 1998 Act for special damages, but the general principle of law at issue is that civil redress is about compensation rather than punishment. The Government feel that the courts should be in the best place to determine damages in the light of the circumstances of each case. I hope that in this light my noble friend will not press his amendment.
My Lords, I thank the Minister for that. I will need to consider some of the points that he has made. I am not sure whether I agree that it should be a matter of pure compensation and not damages, but I am sure that his words will be worth looking over again in the light of day. In the meantime, I beg leave to withdraw the amendment.
Amendment 84AHA withdrawn.
Moved by Lord Clement-Jones
84AHAZA: After Clause 69, Insert the following new Clause-
"Right of identification
(1) The Copyright, Designs and Patents Act 1988 (the "1988 Act") is amended as follows.
(2) For section 78 (requirement that right be asserted) substitute-
"78 Moral rights
(1) The rights conferred by this Chapter (moral rights) are-
(a) exercisable without formality in unpublished works,
(b) exercisable without formality in works made available to the public after this section comes into force.
(2) There shall be no cause of action for omission of attribution in re-publication of a work that was legitimately made available before the commencement of this section, unless the rights conferred by this Chapter were asserted at the time."
(3) For section 205D (requirement that right be asserted by performers) substitute-
"205D Moral rights
(1) The rights conferred by this Chapter (moral rights) are-
(a) exercisable without formality in unpublished works,
(b) exercisable without formality in works made available to the public after this section comes into force.
(2) There shall be no cause of action for omission of attribution in re-publication of a work that was legitimately made available before the commencement of this section, unless the rights conferred by this Chapter were asserted at the time.""
My Lords, I beg to move Amendment 84AHAZA. The labelling of the amendments gets more and more complicated as time goes on.
The requirement that the moral right be asserted is widely agreed not to be a particularly useful concept. Discovering whether a right has been asserted is in many cases, for practical purposes, impossible. It was noticeable that the Minister confirmed in our previous discussion of orphan works that it would not be necessary in certain circumstances that a right be asserted. In the case of a photograph, for example, it may be necessary to refer to the invoice for payment for the licence for first publication. A consultation held following the debate on the Digital Economy Act could find no reason to retain the requirement to assert the right of identification, and I am aware of no body that is strongly attached to retaining this requirement.
I believe that the Intellectual Property Office has indicated that it is proposed that a right shall be treated as being asserted, and this was confirmed today, in respect of orphan works in the regulations proposed under Clause 69. This amendment therefore makes an important amendment to the Copyright Act and makes the situation uniform. All authors and performers having the right to be identified is an essential precondition for measures to permit licensing of orphan works and to help to prevent the creation of new orphans. More will be required to strengthen this right and to protect the metadata that contains the identification of authors and performers, but this is an important start. It would remove a serious barrier to the ordinary citizen having a right to be identified in the first place, since they are very unlikely to be aware of the requirement to assert. I beg to move.
My Lords, I very much support this. I believe that it is a very worthwhile amendment. I cannot understand why somebody who is claiming the right to be the copyright owner of an orphan work should have to assert his right from the beginning. He will not know about this, as it is a requirement that will be hidden in the legislation. I cannot for the life of me understand why he has to do this in advance, as it were. It is an unnecessary restriction and requirement to be placed on the shoulders of an individual, perhaps an artist, writer or musician, who says that they are the author and owner of an intellectual property, only to be told that they have not asserted their right from the beginning. I do not believe that that is right.
I hope that my noble friend will look on this amendment sympathetically and, even if he cannot accept the words, undertake to have a good look at the issue and perhaps meet some of the people concerned, with a view to having something put into the Bill at Third Reading. I think that my noble friend Lord Clement-Jones has made a very sound point in moving this amendment.
My Lords, the noble Lord's proposed amendment would make automatic the right to be identified as the author of a work. Currently Section 78 of the Copyright, Designs and Patents Act 1988 provides that moral rights, including the right to be identified or attributed, must be asserted to take effect. The Government appreciate that there is a legitimate debate around the issue of moral rights, particularly the right to attribution. Some stakeholders would like to see the moral rights of creators strengthened further. The Government acknowledge that there are creators who would like to see the right of attribution become automatic and some who would also like it to be unwaivable. We are also aware, however, that other creators take the view that moral rights, such as the right of attribution, can have an economic value. These creators argue that they should be free to decide whether to exploit that value.
As can be seen, this is a complex area on which creators hold strong and often differing views. The economic question of the cost of using works is an important one. Changing the law on moral rights would affect many groups in different ways. It is not an insignificant question and would require a full consultation. I hope that these words help to answer some of the questions raised by my noble friend Lord Jenkin and that, in the light of what I have just said, my noble friend Lord Clement-Jones feels able to withdraw his amendment.
My Lords, I thank the Minister for that response, and I thank the noble Lord, Lord Jenkin, for his very valuable support. I appreciate the Minister saying that there is a legitimate debate. There are, of course, a number of aspects of moral rights that are debatable, not only the automatic right stated in this amendment but also the issue of waiver, the question of the economic value of moral rights and so on. This amendment was a way of putting a marker down that this is an area that is somewhat archaic. If we are going to move on, especially when the new exceptions come into play, we must look at further aspects of reform of copyright law, such as the way in which contracts are made with creators, aspects of moral rights and metadata. This is an area that the IPO could very usefully focus on and, in the next round of legislation, look and see whether we can get rid of something that I believe is now not required and is rather out of date and unnecessary. In the mean time, however, I beg leave to withdraw the amendment.
Amendment 84AHAZA withdrawn.
Clause 71 : Members' approval of directors' remuneration policy
Moved by Lord Mitchell
84AHAZB: Clause 71, Page 67, line 9, at end insert "for the purpose of providing for inter alia, in the case of quoted companies, the policy's approval by means of an annual resolution under section 439A"
My Lords, in moving Amendment 84AHAZB, I will also speak to Amendment 84AHBA, which is consequential. These would give shareholders an annual binding vote on executive remuneration.
Last year, my noble and very dear friend Lord Gavron tabled a Private Member's Bill on the subject of executive pay. Sadly, he cannot be with us today. In the next few days, he is due to have a very serious operation. I know that I speak for the whole House when I wish him a very safe and speedy recovery. It was the noble Lord who first stimulated my interest on this issue when he asked me to support his Bill. Of course, I was pleased to do so. Since then, I now find myself on the Front Bench and fortuitously in a position to lead the opposition position on this issue. It must also be said that the noble Lord, Lord Gavron, is also a generous supporter of the High Pay Centre, which has conducted a great deal of important research on this subject. Based on discussions that the noble Lord had with the noble Lord, Lord Marland, and others, he felt that the Government had taken his points on board and in consequence he withdrew the Bill. To their credit, the Government have indeed incorporated some of the points made in the Gavron Bill, but I believe that this Bill can still be improved on. That is what we are seeking to do.
At the heart of the matter lies the empowerment of shareholders. Just in case noble Lords question my position in speaking on this subject, I add a little personal background. From 1972 to 2006, I set up numerous businesses. Some were very successful, some were total disasters. I will make no further reference to the Soho restaurant that vanished without trace. I lost a packet and there were several others like that. On the other hand, I have had my notable successes. I have been in the IT services business most of my adult life. I created three businesses from scratch, built each of them over 10 or more years and then sold them. Each company became a market leader and two of them were international operators. Not surprisingly, I dwell upon my successes these days although it must be said that the failures made me a better man. I learnt one golden rule: stick to what you know.
I am a senior entrepreneur in tooth and claw. I know that success is wonderful and failure is painful. I understand the rules of the game. I have made this personal statement to put it all in context because the series of amendments I have tabled, and which we are about to discuss, centre around the rights and powers of the shareholder, with whom I have a strong personal sympathy. The shareholders are the owners. If the company does well, their share price goes up. If it fails, they can lose the lot. Executives can move on; shareholders are left with a loss. The board of directors is accountable to the shareholders and the management reports to the board of directors.
In many small private companies, the management, the board and the shareholders are often one and the same, but in quoted companies this is seldom the case. That is one of the reasons why these amendments refer solely to quoted companies. There are, of course, other stakeholders in all companies, first and foremost, the employees, but also the customers, the suppliers and the community where the company is located. They are important but just for now we are concentrating on the shareholders and their rights to know and to control. When we address executive pay, we are saying that this subject is so important that the shareholders of a publicly listed company should not only be consulted but should also vote on the policy and the actuality of the pay packages that senior executives are to receive.
Much today is said about the shareholder spring-the hope that shareholders will assert themselves more and, of course, we agreed wholeheartedly with this. If we look around the world, shareholders are flexing their muscles in all sorts of ways. In the United States, the Dodd-Frank enactment of 2010 has significantly tightened shareholder scrutiny on executive compensation. This is referred to as "say on pay". In the EU a couple of weeks ago, strong recommendations were announced with respect to bankers' pay and bonuses. It will not have escaped noble Lords that just over a week ago, the Swiss, of all people, held a referendum on curtailing bankers' bonuses. The proposal received 67% support among Swiss voters; 1.6 million of them turned out to vote; and all 26 cantons approved it. Were we to have such a referendum here, one wonders what the result would be, although we can get some idea by looking at the attitudes of the British public. Only 7% of those polled say that they think that the CEO of a large company should receive compensation of more than £1 million and only 1% think that they should be paid more than £4 million a year. Is that any wonder when profits for failure feature so heavily in the news? For example, last week, HSBC announced that 204 of its global staff were to receive £1 million in bonuses and compensation-this in a year that has seen the bank fined £1.2 billion for laundering Mexican drug money. RBS has made it clear that a £5.2 billion loss was no barrier to paying out more than £600 million in bonuses.
Before going any further, I want to scotch one of the more pervasive arguments against taking firm action, which is that in a global market any such moves will lead to CEOs leaving for countries which do not have to show any restraint-the so-called "pay 'em or lose 'em" line. There is no evidence to show that this is true; indeed, there are contrary data. Of the Fortune 500 companies, only four have CEOs who were recruited while being CEOs in another country. That is 0.8%. The number of CEOs who were poached from their roles as CEOs at other companies moves up to 6.5%. Therefore, it is disingenuous to suggest that any restraint leads to an exodus for the facts are obvious: no matter how superb a CEO may be, taking him or her from one company and plonking them down in another is not always a successful ploy. Furthermore, this blackmail scenario of, "Either you give me a whacking increase or else I am off to another company" or, in this case, another country, is often a bluff that deserves to be called. My advice to anyone who is faced with this gun to their head is to show the person the door. This applies just as much to bankers as it does to non-banking companies, as illustrated by the annual saga of Sir Martin Sorrell's salary, which has come to light this weekend.
Shareholder power is increasingly becoming a hot political issue. We agree with this week's edition of the Economist, the leading article of which is headed, "Power to the Owners". Some people resent encroaching shareholder power, but we welcome it. When the good folks in Switzerland seek to ensure that executive pay is subject to shareholder approval, we can only applaud. In the United States, shareholders in successful companies such as Disney and Apple are becoming very assertive. In days gone by, the only shareholder activism was the occasional nutter or the predatory raider, but, most of all, the Wall Street walk pervaded: that is, if you do not like the management, you can sell your shares. However, I think the times are a-changing. The mood is also changing here. Our laws need to keep pace with the change and that is what we are seeking to do.
As I said in my opening remarks, the Government have taken on board some of the recommendations made in the Private Member's Bill of the noble Lord, Lord Gavron. The Government propose in Clause 71, headed, "Members' approval of directors' remuneration policy" that a resolution on this issue should be moved at an accounts or other general meeting no later than every three financial years. Something is better than nothing but we believe that this requirement would be much more powerful if it were an annual requirement, as proposed in Amendments 84AHAZB and 84AHBA. This is crucial. It means that executive pay is not an issue that is engaged with occasionally but is forced on at every AGM, in much the same way as approval of the accounts or the selection of the company's auditors-it is that important. The triennial approach for which the Government have opted seems too casual for this critical shareholder approval. When most newspapers carried the news that Swiss shareholders were to receive a vote on pay, they did not say how often that would occur because it was obvious. Like so many company accounting requirements, it will be annual.
I quoted the FT editorial on the matter in Grand Committee, but will do so again because I think that it neatly summarises the key point. It said of directors that annual binding votes,
"would at least put them firmly on the spot. Mr Cable's triennial polls, however well-meaning and thoughtful, may not".
The annual vote was what the Government consulted on and gave the appearance that they would opt for. We believe that it is the better option when it comes to holding boards to account. This should not, however, be equated with a policy of short-termism in British companies. It is our belief that companies should plan over the long-term basis. The Cox review commissioned by the Labour Party reported last week and included some admirable recommendations about how companies can ensure that the pay of their directors reflects the long-term aspirations of the company. One is that a third of executive remuneration could be paid in the form of shares held back over five years. The Government believe that having a triennial vote on pay will encourage long-term thinking, and this is an important goal. However, reviewing a policy annually is not the same as making short-term plans. A successful company will produce a plan that stretches many years into the future, but shareholders should have the right to challenge, enquire and ultimately hold them to account at every annual general meeting. That is exactly what an annual binding vote would allow them to do.
There appears to have been some element of confusion from Ministers about why the vote is not to be annual after they consulted on it. At Second Reading, the noble Lord, Lord Marland, said that he imagined that there would be enormous shareholder pressure on companies that continue their policies unchanged, whereas in Committee, the Minister suggested that investors were in favour of the triennial vote, saying that the Government had considered that carefully, and that investors and companies had welcomed the option of a three-year policy.
The Government have chosen to retain the annual advisory-as oppose to the binding-vote, but if shareholders choose to reject a company's pay policy at this advisory vote, I understand that they will not get the chance to have a binding vote until the following year. Having an annual binding vote would be simpler, clearer and would ensure that boards remain conscious of the need for realism on their pay.
Now we come to the special resolution. Amendments 84AHAB, 84AHBB and 84AHCA would require a special resolution, rather than an ordinary one, to be passed by shareholders in order to approve a change to executive pay; in effect, 75% of the shareholders voting. This amendment has been tabled as, under the rules being proposed, it would still be possible for companies to ignore significant minorities of shareholders against their remuneration package. We want to strengthen shareholder power. In Committee the Minister said that the Government were looking to the Finance Reporting Council-the relevant regulatory body-to follow through with a commitment made to look at whether or not a company should have a duty to formally respond should such a significant minority of shareholders vote against pay. However, I am given to understand that it is unlikely to look at the matter this year. We can, therefore, be fairly certain that no action will be taken on this in the near future, despite the other moves, both within this legislation and elsewhere in Europe, to look at the relationship between companies and their shareholders when it comes to pay.
This is an important matter, which I would like to address today. Company shareholders are a more disparate group than they were in the past. The Kay review pointed out that the effect of increases in the number of UK shareholders that live in other countries is to make it harder for them to organise and collaborate to ensure that they get the outcome that they want. The percentage of shares in UK-listed companies which were held outside of the UK in 1981 was 3.6%; by 2008, that figure had risen to 41.5%.
Another issue, on which both the Kay review and the Cox review have made important comments, is on the nature of shareholding today. In 2011, Mr Andrew Haldane from the Bank of England noted:
"there is evidence of the balance of shareholding having become increasingly short-term over recent years...Average holding periods for US and UK banks fell from around 3 years in 1998 to around 3 months by 2008".
Furthermore, he said of the banking sector:
"Banking became, quite literally, quarterly capitalism. Today, the average bank is owned by an investor with a time-horizon considerably less than a year".
These factors were among those that have made it increasingly difficult for long-term shareholders in a company to hold its board to account. Again, the Government recognised this problem in their consultation. They said:
"Although shareholder activism on pay appears to be strong amongst institutional investors, the increasingly diverse and fragmented nature of shareholders in the UK means that the likelihood of seeing 50% or more votes cast against any resolution can be reasonably expected to remain extremely low".
"For example, the future pay policy might require approval by 75% of the votes cast".
In 2012, during what has become known as the shareholder spring, there were undoubtedly some significant votes against pay packages-again, I refer to Sir Martin Sorrell and his 30% increase. Here we are in 2013 and the very same issue is back on the agenda. However, there was still an overall increase of 12% in executive pay from 2011 to 2012-a year when increase for everyone else averaged out at 2.8%. A mere 12% of the population received a pay rise of more than 4%. Widespread discontent can be covered up under the current rules; companies do not even have to respond. In 2009, for example, one in five FTSE 100 companies had more than 20% of their shareholders withhold support for their remuneration reports in an advisory vote.
It is harder than it was in the past for shareholders to organise effectively, but when a significant minority of them do, it is still possible for a company to ignore them. This amendment would remedy that, and I hope that the Government will consider it carefully. I beg to move.
I am very grateful for that, but I just hoped that before my noble friend sat down he could address one particular issue that is of concern to me. He has put forward a compelling case for these amendments, and I hope that the Government will consider them extremely carefully. In his closing remarks he put his finger on one of the main problems with this whole area; it is not just that shareholders find it difficult to hold companies to account for their remuneration policies but that those shareholders are for the most part, as he has identified, large financial institutions. They are not as accountable as they perhaps should be to those whose savings they manage. Has my noble friend given any thought to making those institutions give an account of their policies on remuneration to those whose savings they manage, and why they have taken a particular stance on a company's remuneration policy-to making those institutions more accountable-which might make them even more activist than they already are?
I thank my noble friend for that comment. I think it is a really good idea. They should be accountable. They manage so much money, and I think it is a very important factor.
My Lords, I am sure that all of us who are directors of public companies agree with the spirit of the Bill: that directors have an obligation to carry shareholders with them and to win their support for policies on remuneration as on other matters. However, the noble Lord's particular point about having a special resolution to approve remuneration policy I found very difficult to follow. I am not sure that that argument was well made.
The special resolution requiring a 75% vote to approve a remuneration policy in effect biases any vote of shareholders against approving the director's recommendations. I do not quite follow why, if 51% of voter shareholders believe that the remuneration policy is to the advantage of shareholders and 49 % believe it is against, the 49% should hold sway over the 51% who agree with directors. I could argue that there might be a case for biasing the vote the other way: that there ought to be presumption that the director is acting in the interest of shareholders and not necessarily that the majority voted the other way. However, I am perfectly happy to go along with a majority vote one way or the other. I just do not think that the noble Lord made any case for requiring a special resolution.
My Lords, I would like to address the noble Lord's point about annual approval. I spoke in favour of annual approval on Second Reading, and I am a little surprised to be speaking on it again on Report. I gained the very clear impression from the wind-up speech of the then Minister the noble Lord, Lord Marland, that there would be annual approval. In referring to the noble Lord, Lord Gavron, Lord Marland said:
"He also asked me the frequency of the new binding vote on remuneration policy. The binding vote on future pay policy will happen annually, unless companies choose to leave their pay policy totally unchanged. I think there will enormous shareholder pressure on companies that continue to leave their policy unchanged".-[Hansard, 14/11/12; col. 1608.]
I strongly agree with the noble Lord, Lord Mitchell, that this matter, like other important issues that come before the AGM, should be dealt with annually. Indeed, it would be eccentric to suggest that any other proposition be put forward. If the Minister really wants us to agree to triennial agreements, he will have to make a powerful case that has not yet been made in this Chamber.
It would be preferable if the Minister cast some light on how he interprets the undertaking of the noble Lord, Lord Marland. If the Minister is saying that any change whatever in executive remuneration is subject to a vote, we will, in practice, have annual votes because it is inconceivable that you would have a group of executive directors whose pay would remain completely unchanged for three years. Indeed, it is pretty unlikely that you would have a group of executive directors who themselves remained completely unchanged for three years. The overwhelming likelihood is that there would be changes in the pay packages and the composition of the executive group. If the Minister can assure me that any change whatever, either in an individual package or in incorporating the arrival of a new executive director, will mean that the matter has to come before an annual vote, I would be able to follow my noble friend. However, if he cannot do that and if he is saying that unlike the report and accounts and all kinds of other things, executive pay should be given special status and subjected only to triennial review, he is diminishing the value of the Bill.
I said on Second Reading that I commend the Government for tackling this issue, and I hold to that position. It was not tackled under the previous Government and it is good that it should happen now. The Government have established the principle that the issue is a matter of public interest, but if that is the case, as is the case in other important areas such as the appointment of auditors and the annual report and accounts, why on earth should it not be dealt with on an annual basis? Or is the Minister going to suggest that the appointment of auditors should be made triennial, quinquennial or at some other interval? He must either try carefully to explain why he puts executive pay into a special category-not just tell us about investors saying something but actually make a reasoned case-or he must convince us that any change whatever will trigger an annual approval.
My Lords, I wish first to follow on from the comments of the noble Lord, Lord Mitchell, concerning the noble Lord, Lord Gavron. I am sure that everyone on this side of the Chamber would agree that we wish him a speedy recovery. Secondly, I take this opportunity to acknowledge the considerable experience of the noble Lord, Lord Mitchell, in the management of companies and on the ups and downs of fortune. It was helpful to hear about his background.
As noble Lords will know, the Government's comprehensive reforms in this area address concerns that the link between directors' pay and performance has grown weak. This is damaging for the long-term interests of business. It is right that the Government act to address this market failure by ensuring that shareholders have adequate information and power to hold companies to account. This contributes to the Government's wider aim of establishing a corporate governance system that supports long-term sustainable growth.
I note the comments of the noble Lord, Lord Mitchell, concerning the Swiss pay reforms. It is interesting that the result in Switzerland shows that there is widespread global concern about the disconnect between top pay and company performance. Much of what is proposed is already a feature of the UK system or part of planned reforms such as annual votes on the re-election of directors and binding shareholder votes on executive pay. However, the Swiss Government now have the challenge of turning the result into law. We will be watching closely to see how this works out in practice.
Noble Lords have proposed amendments to both the frequency and the type of binding vote. Once again, I thank them for their input on this important issue. However, the Government continue to have reservations about the reforms that noble Lords propose. Amendments 84AHAB, 84AHBB and 84AHCA would require the vote on remuneration policy to be a special resolution that would require companies to secure the support of 75% of shareholders to pass. The Government have consulted stakeholders extensively on the level of support that should be required for remuneration resolutions. Investors agree that the vote on pay policy should remain an ordinary resolution. They have expressed concern that in cases where turnout is low, a special resolution would allow a small number of activist investors unfairly to overturn the views of a majority. There are cases that I can cite that fit into this category, such as ex-majority owners who remain owners but with a minority shareholding.
A special resolution could also cause significant disruption for companies where a single hostile investor holds a large block of shares. Special resolutions should be reserved for rare issues that have a major impact on shareholder rights or company value, such as recapitalisation or changing the articles of the company. The Government, however, agree that when a large minority of shareholders rejects a remuneration resolution, companies should have to respond. The Financial Reporting Council will look at whether such a requirement should be included in the corporate governance code.
The noble Lord, Lord Mitchell, asked when the Financial Reporting Council will consult on changes to the code. The council has said that it will consider potential changes to the code in the light of government reforms, including: first, how companies should formally respond when a significant minority of shareholders oppose a pay vote; secondly, the requirement that all companies adopt clawback mechanisms; and, thirdly, the extent to which the executive should serve on remuneration committees in other companies. The FRC will consult once the Government's legislative reforms are finalised and we have seen how behaviour has evolved. However, having recently amended the code, the FRC does not anticipate making any further changes during 2013. I remind the House that the FRC is independent and it is right that it should decide on when it thinks is the right time to consider this matter.
Amendment 84AHBA would remove the requirement for companies to put their remuneration policy to a shareholder resolution at least every three years and instead require that this be done annually. I thank the noble Lord, Lord Mitchell, for the opportunity to explain further the Government's position on this important matter. Shareholders are fully supportive of the fact that companies can put forward a three-year pay policy because this will promote a longer-term approach to pay. The option of a three-year pay policy is also welcomed by the many smaller quoted companies that offer less complex pay packages and that are confident that they could use their good relations with shareholders to agree a three-year policy. At the other end of the scale, some larger companies with more complex pay arrangements will be likely to want to amend their remuneration policy more frequently to ensure that targets and rewards remain challenging and aligned with company strategy-along the lines of the comments of the noble Lord, Lord Mitchell. In any case, we expect that where companies have a poor track record on pay, shareholders will choose to keep a tighter rein through an annual vote on the policy.
I should also remind noble Lords that shareholders have a wide range of other tools to hold companies to account on an annual basis. Opposing the annual implementation report will trigger a binding vote on the pay policy at the next AGM. Shareholders also have the existing right to force a resolution at an EGM and have annual votes on the re-election of directors. The Government remain convinced that giving companies the option of a three-year policy remains the best way forward.
I thank noble Lords for their contributions on these important issues and understand that their intention is to ensure that these reforms genuinely empower shareholders.
I am grateful to the noble Viscount for giving way. I would like to check that I have understood. He referred to the words "pay policy", and an amendment is coming up shortly on the question of top to bottom ratios. If this is now an acceptable form of words, why do the Government not think there is now a need for a top to bottom pay policy, which we will come to in a minute?
I will come to this in a minute. If the noble Lord will forgive me, I think it is best that we continue with this rather than move on to that particular subject. We can then focus on the noble Lord's comment during the debate on the next amendment.
I should reiterate that throughout our consultation shareholders with considerable experience in investments research and analysis consistently expressed concerns about the downside effects of annual votes and special resolutions. This was acknowledged by my noble friend Lord Tugendhat. It is a fact, and it is the main point I want to make. Stakeholders have expressed their support for the Government's proposals. For example, the Association of British Insurers stated that it is,
"pleased the Government has decided to proceed with this with a 50% voting threshold".
The noble Lord, Lord Mitchell, raised some questions. First, he asked to which year a policy would relate if it were renewed annually. Well, he did not raise precisely this question, but it was alluded to. It is important to provide companies with the flexibility to decide themselves how the timing of the pay proposals will best work for them. Whether a pay policy relates to the current financial year or the following one is a decision for companies and shareholders to take together.
The noble Lord, Lord Mitchell, also raised the issue of the Cox review. I acknowledge this review, and the Government welcome its publication. The review raises some key issues about directors' pay. I reassure the House that we will consider the recommendations made in the Cox review in the context of the Kay report. The Kay report provides a framework to restore relationships of trust and confidence, and to realign incentives throughout the investment chain. I remind noble Lords that the Government are fully committed to taking forward the recommendations made in Professor Kay's review that investment in equity markets supports UK companies to deliver sustainable growth.
To conclude, my noble friend Lord Tugendhat raised the matter of annual votes, on which some fairly strong comments were made. I stress that in the end this is about giving companies and shareholders the flexibility to do what is best for them. However, the noble Lord is correct that a vote would be required in the event of any change in policy, so annual changes would lead to an annual vote.
The noble Viscount used the words "any change in policy". Am I right to understand him to mean that if there was a change in the remuneration of two or three directors, or even of just one director, during the course of 12 months, the total pay package would have to be put to the AGM that year and could not be held over for two or three years, or whatever was left? Would it have to be voted on immediately or at the next AGM?
I can confirm that it would have to be voted on immediately, because the change had happened in that particular year, so there would be that trigger for year two, in effect. If I have failed to do so already, I ask the noble Lord to withdraw his amendment.
I thank the Minister for his comments and all other noble Lords for their contributions. I will deal first with the 75% special resolution issue, which was raised by the noble Lord, Lord Blackwell. As my noble friend Lord Wills was saying, it is important for the shareholders to hold the executives' feet to the fire in some respects. This is a crucial issue. I know there is a difference in this between the ordinary and the special resolution, but that was why we went for the 75%.
The main issue is the annual point. You only have to read any newspaper in this country, and indeed around the world, to see what a vexatious issue this is at the moment. The population is disturbed, and the financial press is disturbed. Not only the popular press but leading newspapers in this country and throughout the world bring up this issue of executive pay. It has got out of kilter. We are going for the annual situation rather than the triennial situation because it should be an automatic consequence and is just as important as the selection of auditors and the approval of the accounts. Three years just seems to us to be too long for such an important issue. I have listened to what the noble Lord has said, but I would like to test the opinion of the House.
My Lords, Amendment 84AHAA speeds right to the heart of the matter in hand. The disparity in pay between top and bottom earners has informed much of the public outrage about remuneration, and it no doubt lies behind the polling figures that I mentioned previously. Had the minimum wage kept track with executive pay since it was introduced, it would now be worth in the region of £19 per hour. Instead, we see a very pronounced wage discrepancy. It is felt particularly acutely here in London, where many FTSE 100 companies and our financial sector are based. In 2010, the top percentile here received 16.5% more than the bottom percentile. The ratio between top and bottom pay has gradually grown over the past 30 years to the point that in both the Lloyds Banking Group and Barclays top pay was 75 times that of the average employee in 2011. By way of comparison, in 1979 the difference was only 14.5 times.
Put simply, too many are being left behind. This is certainly not the one-nation economy that this country needs. Therefore, shareholders should have more power to hold to account the companies they invest in, as we argued with regard to the previous amendment. Greater transparency about levels of pay at the top and bottom of the company would give shareholders the tools they need to make informed decisions on how they vote. This amendment gives shareholders those tools by requiring companies to disclose the top and bottom 10 earners outside the boardroom.
There are corresponding moves to increase transparency on pay, so it is worth going over why we consider there to be a need for this amendment. Most of the moves to get companies to release more information on pay to their shareholders cover only banking. The Treasury's current consultation proposal is that the top eight highest-paid earners beneath boardroom level in banks are to have their salaries disclosed. Although it is difficult to know the details at present, it appears as though the European capital requirements directive IV will opt for a different disclosure proposal, whereby the figures for those earning more than €1 million a year are to be collated and sent to the EBA, which will then produce the numbers in a common format. It is possible that in some institutions this could produce less information than the Treasury proposal.
Both these proposals from the Treasury and in the European capital requirements directive IV differ from ours in several important ways. First, they concern only the banking sector, but this issue is not limited to that industry. Let us consider the top pay at BP. In 2011, it was 63 times that of average employee pay, whereas in 1979 the difference was only 16.5 times. However, these proposals had nothing to say about the severe problem of low pay, which, as my noble friend Lady Turner of Camden pointed out in Grand Committee, produces many difficulties in our society. I think we could all agree that pay at the bottom of a company should be considered when pay at the top is set.
"A company's annual report must prominently feature details of the remuneration ratio between the highest remunerated director or employee and the average remuneration of the lowest remunerated 10% of employees".
This amendment is slightly different but would have the same effect, introducing a measure of transparency as to the ratio between the highest and lowest paid workers.
Yesterday, Secretary of State Vince Cable pledged to support a push for openness about what tax businesses pay in different countries. This amendment is a similar push for transparency. I hope that the Government will find that they are able to support it. I beg to move.
My Lords, I strongly back this amendment. I know that it is not for here and now with the present Government, but in two years' time it will be very interesting to see how a Labour Government get the architecture together to relate the income distribution of the rest of the enterprise to the incomes at board level. That is what they have in the most successful European societies-I include Germany, Holland and Scandinavia, and I do not think that anyone would draw up a very different list. In answer to the notion that these economies are not competitive, their place in growing world market share is far superior to that of Europe generally and certainly to that of Britain.
The point has just been made that the banking sector is a rather special sector. I can tell you one respect in which it is very special: people get paid enormously more at the top than in any other sector. That is what is special about it. It is not special in the sense that there has not been a huge growth in the disparities in all the rest of the sectors. Anybody close to industry will know that two things happen when pay at the top gets to 30, 40 or 50 times that at the bottom. The first is that there is a crossover effect in the rest of the sectors-in construction, mining or any other sector. Banking does not live in a world of its own, although in some respects, of course, it does. Some people say that the banking industry is Britain's biggest industry. When we were young, to say that banking was Britain's biggest industry would have been thought a rather risible thing to say. Yet that is infecting the rest of the economy. A lot of the best talent used to go into the Civil Service. Now, not as much of the best talent is going into the Civil Service. Not as much of the best talent is going to many of the sectors that had their share of the best available talent years ago.
While we are on the subject of top people and talent-and what you might call inherited wealth, which is part of this question-the fact is that we are failing to bring out the best of the talents and opportunities of everybody else in society. So when one talks about 1%, one immediately says, "What about the 99%?". I think that for this Government to ally themselves ideologically with the interests of the 1% at the top is going to prove a fatal mistake.
The clock is ticking, and those of us who now believe what this side of the House believes, in the challenges that we will face in two years' time there must be some connection between our policy of worker representation on boards and what is happening in the rest of the company. You do not need to be Einstein to figure out that if there is some new structure of boards, there has to be some substructure. You cannot have a superstructure without a substructure. Whether it is through information and consultation bodies or any other way, it will be a major challenge to get it right this time under the next Labour Government. It is rather academic from the point of view of Members opposite in the Conservative Party, but it is a very interesting pointer to the future that this is one of the elements in the architecture that will be built.
My Lords, I have listened very carefully to the speeches of the noble Lords, Lord Mitchell and Lord Lea of Crondall. While they made some interesting points, I did not find that either of them had any compelling rationale for this particular amendment.
We have all agreed that the remuneration policy for those at the top of companies has to be transparent and has to be voted on and agreed by shareholders; that is only proper. As for the low-skilled workers on the minimum wage, that is a matter which is voted on by Parliament in setting the minimum wage. However, I am not sure that to juxtapose those two thing in a company's annual report provides any useful information. Let us consider company A, which, we hope, does a great job for the community in employing lots of people, including low-skilled workers, on relatively low wages. Offering them employment helps them to come off benefits and thus creates a great benefit to society. Company B, operating in the same sector, decides to ship all those jobs off to India. Which company would shareholders-or, indeed, society as a whole-think is doing a better job? I do not think that juxtaposing how many people a company successfully employs at the lower end of the skill level compared to the top end, and comparing that with other companies, gives any useful information about whether those at the top of the company are being rewarded appropriately.
The noble Lord asked a direct question about the connection, because of the minimum wage, between the bottom and the top. One phrase that gives a clue to the connection is, "We are all in it together". Does that not give any sort of clue to the noble Lord?
That is precisely my point. I would have thought that the company that successfully employs lots of people at all skill levels, including those on the minimum wage or at a low-skill level, is helping society and helping us all to prosper together.
Another example is a company in a consultancy that employs only PhDs. The ratio between the top and the bottom in that company may be relatively small. Is that a better company than one that employs lots of people on the minimum wage? I think that this information is almost entirely irrelevant to any judgment about whether the pay at the top of the company is appropriate. That is a relevant question, but this information is potentially misleading and potentially encourages those viewing the annual report to take a misguided view of the appropriateness of the pay policy within the company. I do not think a case is being made for it.
My Lords, I understand the general points made the noble Lord, Lord Mitchell, and I have considerable sympathy for them. However, I do not understand their relevance to Clause 71, which is about remuneration reports. The problem with remuneration reports is that the degree of detail now required in them means that they have become rather long and complex. An additional requirement to include a comparison between payments made to two categories of staff, neither of which is within the scope of the remuneration report, would add further complexity without the justification of relevance. Remuneration reports are about the remuneration of directors and senior executives. The amendment calls for the inclusion of factual material on individuals who are neither directors nor senior executives.
Such complexities have costs. Take two plcs with 70 and 100,000 employees across the world in, say, 50 to 85 countries. I am thinking of two examples which I know well. Is it really necessary, for the purposes of the remuneration report, to require them to establish with each of their businesses in each country where they operate which are the lowest pay rates paid, presumably to the most junior, temporary staff of that country, then take appropriate exchange rates and try to work out the unluckiest 10 in any of their operations anywhere across the world? The remuneration report is about the directors and senior executives. The purpose of a remuneration report must surely be to explain to shareholders the company's remuneration policy and the result that it has produced for the senior individuals that the report is required to cover, and to do so as simply and clearly as possible. Would this amendment assist that? I do not think so.
Amendment 84AHAA seeks to require that companies report on high and low pay outside the board. Taking high pay first, the issue of high pay outside the boardroom is most relevant in the financial services industry, as was mentioned earlier, where poorly designed remuneration structures can incentivise excessive risk-taking. We remain committed to having the most transparent financial centre in the world and we have already taken significant steps forward. During ongoing negotiations with Europe over new regulations for the banking sector, we have argued strongly for further improvements to the disclosure of pay below board level. As a result, the current EU proposals would require banks to disclose the aggregate pay of senior managers and material risk takers in bands, as well as further information about how much is paid in total in fixed and variable pay. We await the outcome of these discussions before deciding whether additional UK regulation is necessary.
The noble Lord, Lord Mitchell, raised the issue of disclosure of pay below board level in banks and asked why the UK does not regulate. We argue that it does not make sense to proceed with UK regulations until we know the precise details of the European rules. Once this is confirmed, we will decide whether we need to go further. It is not a major issue in other sectors. In our consultation on this, shareholders were clear that requiring all companies to report on high pay below board level would create an unnecessary regulatory burden and so we will not pursue this. The noble Lord raised the issue of pay below board level in non-banking sectors, which we acknowledge is an issue. In the end, pay reports are produced for shareholders, so they should be designed to include information that they want. We should not clutter them with information that they do not find useful. Shareholders and the Government share the view, however, that high pay below board level is not a major issue in other sectors. In our consultation, shareholders were clear that requiring all companies to report on high pay below board level would create an unnecessary regulatory burden, so we will not be pursuing it. That point was made eloquently by the noble Lord, Lord Kerr of Kinlochard.
One matter that shareholders are increasingly interested in is how board pay relates to that of the wider workforce. That is why companies will have to say more about how they have considered pay across the whole of the company workforce. They will also be required to publish the percentage increase in pay of the chief executive officer compared to that of the workforce. I can directly answer the question raised under the previous amendment by the noble Lord, Lord Lea of Crondall. It is something that investors are asking for and is comparable across companies, but we have no plans to mandate that companies adopt a standardised ratio for top to median pay because it is clear that this measure has limitations. It is difficult to compare between different companies and sectors. For example, an investment bank with many highly paid staff will have a much lower pay ratio than a supermarket.
New regulations will implement these proposals. Noble Lords will have the opportunity to debate these regulations later in the year. I conclude by making an overarching general point about trends in pay. It is pleasing to note, although I acknowledge that there is still much work to do, that in 2012 several firms, including Aviva, WPP, Centamin, Pendragon and Trinity Mirror failed to win majority backing for their pay reports, with several senior executives stepping down in the face of shareholder opposition. Voting results from AGMs in 2012 suggest that the average vote against the remuneration report was 8.9%, up from 6% in 2011. So, there is more work to be done but the trends are going in the right direction. I therefore ask the noble Lord to withdraw his amendment.
My Lords, I shall come first to the Minister's final point. These are good pointers that he draws to our attention. Much of what we have been trying to do is accelerate the process, to encourage shareholders to become much more involved so that we get even further results on this.
My noble friend Lord Lea of Crondall made an eloquent speech about working people working for companies and the fact that it is useful to see these disparities in black and white. Indeed, it is usual for countries in the north of Europe to do it, and they seem to be doing very well in the world economy. The noble Lord, Lord Blackwell, again made a useful contribution. I am not sure that I agree with his position but it was useful and not dissimilar to that of the noble Lord, Lord Kerr of Kinlochard. Our position is that it is information that some investors would like to know about companies: what is the disparity in those companies? I say to the noble Lord, Lord Kerr, that I had not really thought about it, but it must refer only to the United Kingdom. It had not occurred to me that we could be looking at the pay that somebody in a call centre in India gets compared with the senior executive of, say, a bank in this country. I have listened closely to everything that has been said, and I beg leave to withdraw the amendment.
Amendment 84AHAA withdrawn.
Amendment 84AHAB not moved.
Moved by Viscount Younger of Leckie
84AHB: Clause 71, page 67, line 36, leave out from "which" to ", and" in line 38 and insert "the company becomes a quoted company".
My Lords, the majority of these amendments are minor and technical and designed to improve the clarity of the legislation. Amendment 84AHH is substantive and I shall make the case for it first. It amends new Section 226E of the Companies Act 2006, which would be inserted by Clause 72. New Section 226E imposes a potential liability on directors who authorise an unapproved remuneration or loss of office payment. This amendment will ensure that, as is consistent with other provisions in the Companies Act 2006, a director who acts honestly and reasonably may be relieved of this liability if a court, taking into account all the circumstances, decides that it is appropriate to do so.
Noble Lords will understand the need for there to be legal consequences in the event of a company making a payment to a director which has not been approved by shareholders. In the first instance, the company may seek to recover the unauthorised payment from the director who received it. However, if this is unsuccessful, the directors who authorised the payment can be held liable for any losses incurred as a result. The company or its shareholders may take action to recover these losses from them. These consequences will act as a deterrent to the minority of directors who might deliberately try to pay more than shareholders have approved. However, the Government recognise that directors may make honest and reasonable mistakes, either through misinformation or misinterpretation of the remuneration policy. This is recognised in other parts of the Companies Act, which deal with unauthorised payments and under which directors who act honestly, or take reasonable steps to ensure compliance, are not subject to liability.
Unless we make a similar provision with respect to remuneration payments the risk of liability could hang over remuneration committees and affect the pay-setting process. This risks making remuneration committees heavily dependent on lawyers and overly keen to agree broad, vague policies. More worryingly, there is a real risk that this could deter good people from taking up important and challenging roles on remuneration committees. Case law shows that the courts apply a rigorous test when assessing whether a director has acted honestly and reasonably, particularly when the director concerned is one of a large public company. As such, we are confident that this provision will ensure that those directors who should rightly be relieved may be, while ensuring that those who should be held liable, are not.
We have also proposed a handful of minor and technical amendments which will clarify the legal drafting of the Bill on three issues, which I will speak to in turn. Amendments 84AHB, 84AHC and 84AHK clarify how and when Clauses 71 to 74 affect companies that become quoted after these provisions come into force. Amendments 84AHE, 84AHF and 84AHK make clear the different procedures that should be followed in the event of unapproved payments in the form of shares, property and other undertakings of the company. Finally, Amendments 84AHD, 84AHJ, 84AHL, 84AHM and 84AHN tidy up the drafting by moving some of the provisions in Clause 74 into other clauses so that they may appear alongside the sections to which they apply. I hope that noble Lords will support this. I beg to move Amendment 84AHB.
My Lords, we are very supportive of this amendment. It is clearly needed. I have only one question about whether the words "reasonably" and "honestly" are strong enough. A lot of lawyers would have a field day with this. I just ask the Minister to go away and think about whether we can perhaps have something a little more assertive, which would leave less latitude for a lot of lawyers to make lots of fees.
I thank the noble Lord, Lord Mitchell, for that, and also for his contribution on this important issue. The proposed amendment to Section 226E ensures that those who should be rightly relieved of liability can be, while those who should be held liable will be. To answer his question about how one can define or further improve on the definition of "reasonable", the concept of reasonableness has been thoroughly tested by the courts, which are very rigorous in judging directors. A court might take into account what advice a director had sought, what conversations had taken place, and what records were kept. Of course, it remains up to the court to decide and it will vary in each case. The court will take into account, for example, the full context of the situation. Therefore, the expectations of a "reasonable" director of a FTSE100 company with a strong compliance function and ease of access to professional advisers will be much higher than those of a director of a smaller quoted company. I hope that that takes matters forward and helps answer the noble Lord's question. I also thank noble Lords for their understanding of the need for various minor and technical amendments.
Amendment 84AHB agreed.
Amendments 84AHBA and 84AHBB not moved.
Moved by Viscount Younger of Leckie
84AHC: Clause 71, page 68, line 8, at end insert-
"( ) Subsection (2) does not apply in relation to a quoted company before the first meeting in relation to which it gives notice under subsection (1)."
Amendment 84AHC agreed.
Amendment 84AHCA not moved.
Amendment 84AHCB had been withdrawn from the Marshalled List.
Clause 72 : Restrictions on payments to directors
Amendments 84AHD to 84AHH
Moved by Viscount Younger of Leckie
84AHD: Clause 72, page 71, line 23, at end insert-
"(5A) Nothing in section 226B or 226C applies in relation to a remuneration payment or (as the case may be) a payment for loss of office made to a person who is, or is to be or has been, a director of a quoted company before the earlier of-
(a) the end of the first financial year of the company to begin on or after the day on which it becomes a quoted company, and
(b) the date from which the company's first directors' remuneration policy to be approved under section 439A takes effect."
84AHE: Clause 72, page 71, line 30, leave out "Subject to subsections (3) and (4),"
84AHF: Clause 72, page 71, line 41, leave out "it" and insert "-
(a) subsection (2) does not apply, and
(b) the payment"
84AHG: Clause 72, page 72, line 2, leave out from end of line to "is" in line 3 and insert-
"( ) subsection (2) does not apply, and
( ) the payment"
84AHH: Clause 72, page 72, line 7, at end insert-
"(5) If in proceedings against a director for the enforcement of a liability under subsection (2)(b)-
(a) the director shows that he or she has acted honestly and reasonably, and
(b) the court considers that, having regard to all the circumstances of the case, the director ought to be relieved of liability, the court may relieve the director, either wholly or in part, from liability on such terms as the court thinks fit."
Amendments 84AHD to 84AHH agreed.
Clause 73 : Payments to directors: minor and consequential amendments
Moved by Viscount Younger of Leckie
84AHJ: Clause 73, page 72, line 31, after "company" insert "other than a payment to which section 226C does not apply by virtue of section 226D(5A)"
Amendment 84AHJ agreed.
Clause 74 : Payments to directors: supplemental
Amendments 84AHK to 84AHN
Moved by Viscount Younger of Leckie
84AHK: Clause 74, page 74, line 7, at end insert-
"( ) In relation to a company that is a quoted company immediately before the day on which section 71 of this Act comes into force, section 439A(1)(a) of the Companies Act 2006 (as inserted by section 71(4) of this Act) applies as if-
(a) the reference to the day on which the company becomes a quoted company were a reference to the day on which section 71 of this Act comes into force, and
(b) at the end of the paragraph (but before the ", and") there were inserted "or at an earlier general meeting".
( ) In relation to a company that is a quoted company immediately before the day on which section 71 of this Act comes into force, section 226D(5A)(a) of the Companies Act 2006 (as inserted by section 72 of this Act) applies as if the reference to the day on which the company becomes a quoted company were a reference to the day on which section 71 of this Act comes into force."
84AHL: Clause 74, page 74, line 8, leave out subsection (1)
84AHM: Clause 74, page 74, line 12, leave out subsection (2)
84AHN: Clause 74, page 74, line 29, leave out "(2) or"
Amendments 84AHK to 84AHN agreed.
Moved by Lord Mitchell
84AHNZA: After Clause 74, Insert the following new Clause-
(1) The Secretary of State shall commission an independent review into pre-pack administration.
(2) Such a review shall report on but not be limited to the following-
(a) the adequacy of existing requirements in relation to transparency of arrangements;
(b) compliance with existing requirements by pre-packs including Statements of Insolvency Practice;
(c) adequacy of existing enforcement mechanisms in relation to compliance;
(d) rules relating to the continuation of supply to businesses on insolvency.
(3) A review under this section shall report to the Secretary of State no later than 12 months following the day on which this section comes into force.
(4) A copy of the report under subsection (2) shall be laid before both Houses of Parliament."
My Lords, I speak to Amendment 84AHNZA, which calls for the Government to commission an independent review into pre-pack administrations. Noble Lords will see that this amendment represents the recommendations of the BIS Select Committee report to the Insolvency Service, released on
It might be helpful if I attempt to define a pre-pack administration. I find many people do not know what it is, and I am not surprised. It is where the directors of a failing company seek to preserve its continuing existence after administration by lining up replacement owners and finance before the administration takes place-in effect, relaunching the company with many of its creditors and minority shareholders stripped out, while effectively continuing the existing business in another name. It gives the business a second chance, but often at the expense of these creditors and shareholders. My contention is that it is often unprincipled and unfair. Usually, there is no creditors meeting and no consultation with the court before this takes place. The sale may be to individuals who were directors of the firm before the pre-pack administration, and the new firm may have a similar name. As I say, the only difference is that the new company is shorn of its debt and maybe its smaller shareholders. Effectively, it is cooking the books. Such firms have sometimes been known as phoenix companies, having risen from the ashes of the old insolvent company.
My interest in pre-packs arose when a company in which I had a minority shareholding interest wanted to restructure its financing to my detriment. To do this, it needed me to sign off on a revised deal. I refused. It threatened me with a pre-pack, a term that I had not heard of before, but about which I learned pretty quickly. I still refused and, fortunately, it backed down. However, I saw how that could be used as a negotiating tactic. More to the point, I saw how the small people can get hurt. Despite that, I am prepared to concede that pre-packs can have a very important function. They can allow a company to continue and the administrator to move quickly to preserve the business and, most importantly, jobs. That is what all of us want.
A few weeks ago, I went to see the BIS Minister responsible for this issue, Jo Swinson MP. I cannot say that it was a particularly helpful meeting. Her approach was that pre-packs are good because they preserve jobs and the company. My view is that they can be bad when creditors such as SMEs are cast adrift and where employees are similarly left in the lurch in a very much weaker position. We beg to differ.
I believe that the time has come to have a comprehensive and independent review into that practice to see where improvements can be made and safeguards can be added. My purpose in introducing the amendment is to oblige the Secretary of State to look seriously at how those abuses can be addressed. They tell me that this is a hugely complex area and that it will be hard to draw up appropriate legislation. Indeed, the Government have tried and failed in this Parliament. My response is, "Since when did we turn our backs on something just because it is too hard?". That should make us more determined.
I recognise the complexities, and I do not introduce the amendment today claiming to know all the answers. Let me outline some of the areas that need to be addressed. The first is consistent with what I have been arguing with regard to levels of remuneration in a company: the need for transparency. To cite the Association of British Insurers in its evidence to the BIS Select Committee in December 2011:
"We think that the heart of the problem lies in the serious conflict of interest inherent in an insolvency practitioner devising a pre-pack sale in secret in conjunction with the directors and secured lenders of a failing company, and then immediately implementing that transaction as administrator with a duty to act in the best interests of all creditors".
The question that many small businesses find themselves asking after a pre-pack insolvency is: to whose benefit is this insolvency? They find that the answer is: those who drew up the insolvency plan and called in the administrator. It is there that the problem lies. When parties connected to the old company are involved in the new company, that compounds the frustration felt by unsecured creditors. The percentage of pre-packs which are sold to connected parties is higher than for business sale administrations.
There have also been some egregious abuses. My honourable friend Luciana Berger MP tabled a Private Member's Bill in the other place to amend the Health and Safety Acts to prevent companies avoiding fines by being in administration. A construction worker, Mr Mark Thornton, had been killed by a steel column on a building site in my honourable friend's constituency. A judge said that he was unable to award a £300,000 fine because the company was in administration. The company responsible was later bought out by its directors in a pre-pack deal and continues to trade. That shows at the extreme level the potential for abuse of pre-packs by connected parties. I am proud that the Labour Party has committed to fixing the health and safety loophole that allowed that and other such cases to happen.
I acknowledge that there are strong arguments for pre-packs. To my mind, the strongest of those is the rate of job preservation. Figures from one study suggest that pre-packs preserve the entire workforce 92% of the time, as opposed to 65% of the time in other administrations. So clearly, they are not a bad thing. However, a few factors need to be considered alongside that. Pre-packs have a higher rate of failure than companies restructured in other ways. Another is that those jobs could continue in other companies. Also, the effect on jobs in small companies needs to be considered, as they could be vulnerable to losing out on large payments owed when a company goes into administration. By way of example, the Federation of Small Businesses has told me about a publishing company in London which had to lose a member of staff after it was not paid £100,000 owed to them by a company that went into pre-pack administration.
What possible solutions could the review consider? I know, for a start, that the Government are currently looking to strengthen and clarify the guidelines under SIP 16, which is the Insolvency Service guideline. I welcome that. However, what other safeguards could a review consider in detail? One that has been considered is that when an administrator has been advising a company about a pre-pack administration, before that pre-pack could be sold, an independent administrator would have to inspect the deal. It is true that that would add to the cost of the administration, but it would reassure creditors and remove what some argue is one of the clearest potential conflict of interest when pre-packs are put together: that of the administrator brought in by the management to organise a pre-pack insolvency.
That potential conflict of interest was recognised in 2010 by the judge in the case of Johnson Machine Tool Company Limited, when the court did not allow the administrator to charge his fees for pre-administration work on the pre-pack as an administration expense. That was because the people gaining from the work were not the management or the creditors-exactly what the critics of pre-packs argue.
Clearly, this is a difficult question, not least because there is no set definition of pre-pack in law. That very fact is a sign that some of its abuses were not envisaged by policymakers in the past and that we need a review to see whether improvements can be made and safeguards added. I beg to move.
Noble Lords will be aware that the administration procedure is the primary mechanism for effecting business rescues. It is important to recognise that the objective of administration, if the rescue of the company is not feasible, is to provide the best return for creditors. A pre-pack sale is merely a means of achieving that outcome and should therefore always be in the interests of creditors. I am most grateful to the noble Lord, Lord Mitchell, for his helpful description of pre-packs for the benefit of the House.
As the noble Lord said, pre-packs can be an effective way to the best outcome for creditors, enabling businesses to be rescued and preserving jobs, but we recognise that there can be scope for abuse. That scope is greatest where pre-pack sales are to connected parties, such as the directors or their families. Again, I am grateful for the anecdotal evidence given tonight by the noble Lord, Lord Mitchell. That is when most concerns are expressed, and it is vital that everyone involved has confidence that such sales are at fair value. We have been listening carefully to concerns expressed about the use of pre-packs, and Ministers have met with stakeholders to discuss the issue. I am aware that, as the noble Lord, Lord Mitchell, mentioned this evening, he recently met with the Minister for Employment Relations and Business Affairs, Jo Swinson, to discuss the issue. We have also invited those who have complained about the procedure to provide evidence of abuse, so that that can also be pursued.
I reassure noble Lords that work is already under way to improve the transparency about pre-pack sales. There is a statement of insolvency practice, SIP 16, setting out the information that has to be provided to creditors by insolvency practitioners. That is being strengthened to ensure that more information will be disclosed and that creditors will receive that information at an earlier stage. Insolvency practitioners will also have to confirm that a pre-pack sale is in the best interests of creditors. That should provide greater confidence that the pre-pack sale is justified. The Insolvency Service is proactively monitoring information disclosed under SIP 16 reports to establish whether there has been any abuse. Where there is evidence to suggest abuse, it is reported to be relevant regulatory body for action to be taken. Such action can include fines, sanctions and, ultimately, loss of the insolvency practitioner's licence. The Insolvency Service will report on its findings in this regard.
We therefore already have measures in place to protect against abuse, and continue to monitor the pre-pack process to ensure that it is being used appropriately. However, I share many of the concerns raised by the noble Lord, Lord Mitchell, which I know have been expressed on other occasions in both this House and the other place.
I agree that an independent review into the issue would be beneficial. For that reason, I confirm that we will commission an independent review into pre-pack sales in late spring, once the strengthened SIP 16 is in place and after the Insolvency Service has reported on the findings from its monitoring.
On the review issue surrounding continuation of supply to insolvent businesses, this is now the subject of a Government amendment being debated shortly. We propose to consult on the issue prior to implementing reforms and I am satisfied that this will address the concerns in this area. In view of this assurance to commission an independent review into pre-pack sales, I hope that the noble Lord will agree that it would be unnecessary to introduce a statutory requirement to do so, and will therefore withdraw his amendment. I conclude by thanking the noble Lord, Lord Mitchell, for raising this important issue.
My Lords, I thank the Minister for his words. I remember when we were in Grand Committee, he too had an anecdote on this same subject. I suspect that many other people have as well. I thank him for what he has said and for the Government's plans for a review of this area. I beg leave to withdraw the amendment.
Amendment 84AHNZA withdrawn.
Clause 75: Supply of customer data
Moved by Lord Stevenson of Balmacara
84AHNA: Clause 75, page 75, line 15, at end insert-
"( ) Regulations under subsection (1)-
(a) must make provision requiring all regulated persons to be members of an approved redress scheme for dealing with complaints in connection with the supply of customer data under this section, and
(b) may also require a person authorised to receive data under subsection (1)(b) to be a member of such a scheme."
In moving this amendment, I apologise that my noble friend Lady Hayter is unable to be present and has asked me to speak on her behalf. I will also speak to Amendments 84AHNB, 84AHNC and 84AHND. I start by making it clear that we on this side support the broad thrust and intent of Midata, which is to give consumers increased access to their personal data in a portable, electronic format so that they can use this data to gain insights into their own behaviour, and make more informed choices about products and services. However, to make Midata work and to build consumer confidence in it, there are concerns which we raised in Committee and which our amendments seek to address.
Confidence is key, here as in many other places, and a smart way to ensure that users can trust the use and care of their data is through a redress scheme. Not only does this give comfort in itself-people know where to go if they have a complaint about the provision, cost or use of their data-but it serves two other functions. One is that any regulated person using the logo of a particular redress scheme also signifies some assurance of quality and regulation to the user. The second, more significant function, is that a body of evidence accrues via such a complaints scheme of the sorts of problems or the particular regulated persons which are causing concerns. Given that the Information Commissioner uses a risk and evidence based approach to his work, he is highly reliant on evidence-both of the extent and detriment of any problems-and these are best captured by an accessible and effective complaint or ombudsman scheme.
I start with Amendment 84AHNA, which would require regulated and possibly authorised persons to join a redress scheme. This would not entail setting up a whole new redress body, as there are plenty of other high-quality ombudsmen covering a range of sectors who could be approved under this Bill. Without our amendment, the Bill covers high-level enforcement, but with customers able to bring an action for breach of regulations only before a court or tribunal or, under Section 13 of the Data Protection Act, to claim compensation through the courts. That is a pretty unrealistic hurdle for individual consumers. Hence our call for a redress scheme for individual complaints. Knowing a redress scheme is available if things go wrong would give consumers the confidence to harness the empowering potential of Midata.
Amendment 84AHNB deals with the costs of complying with requests. At present, the charges reflect costs to the data supplier. Our amendment is about costs to consumers: after all it is their personal data that they want released. Charges must not dissuade consumers from engaging in the Midata programme. The EU data protection directive uses the phrase "without excessive ... expense", but given that not everyone is familiar with that directive, it should be added to the Bill.
Amendment 84AHNC deals with strengthened consumer protections. There are risks from Midata, especially as combining datasets into a whole-person view, poses risks to privacy and identity. Secondly, because Midata will see multiple parties including the consumer assume responsibility for data at different points, liability becomes complex, with the risk that consumers will be left exposed. Thirdly, legitimate businesses offering third party services could incentivise consumers to provide data which might otherwise not be accessible.
Fourthly, there is the risk of misuse of data. Businesses and third parties might, for example, sell on and share data with their affiliates or engage in uninvited cross-selling and marketing. Finally and pervasively, there is security. ID fraud is a real risk as it would be easy to build a picture of an individual, drawing on different information sources. Given that data protection is already of huge concern for consumers, an assurance of security is essential for Midata to succeed and benefit consumers, who will need to be confident they are sharing their data only with trustworthy service providers. We ask the Secretary of State to consult widely to develop protections to ensure that the consumer interest is represented alongside those of regulated and authorised persons. We know that the Information Commissioner would welcome being included on this list.
Amendment 84AHND, seeks to protect customer data. This arises from specific concerns that the Bill does not reflect the security risks inherent in providing third parties with access to customers' banking details. The aim of Midata is to help consumers to effectively shop around by greater access to charges and fees on services provided, in this case, by a bank. However information in bank and credit card statements already reveals a vast amount of personal information, far beyond the data from mobile phones or energy providers. While customers might be able to use such data to make informed decisions, there could be data protection risks to consumers if they provide such information to third parties. Our proposals therefore seek to strengthen third-party arrangements to ensure customer data will be protected. Banks are bound by the common law duty of bankers' confidentiality, which extends to all information relating to customers, their accounts and transactions with the bank, and by the Data Protection Act. However, if customers engage a third party to analyse their data, these contractual arrangements alleviate the data protection issues for banks. This means that customers would be relying on the quality of the third party's security protocols.
Such third parties who seek to process customer data released under Midata should therefore be subject to increased regulation. Under Section 41A of the Data Protection Act, our amendment would extend the enhanced regime of inspection and enforcement by the Information Commissioner's Office to third parties who receive customer data. While the Government already have the powers to make this change, this amendment would ensure they exercise these powers. I beg to move.
My Lords, as I explained in Grand Committee, the idea behind the powers and Midata is simple: to give consumers the right to request their existing consumption and transaction data back from their suppliers in a portable, electronic format. I remind the House that this data already exist. We are not talking about collecting new data here.
In addressing Amendment 84AHNA, I reassure the noble Baroness, Lady Hayter, and the noble Lord, Lord Stevenson, who is speaking to this amendment, that I agree with them both that customers need to be protected from data misuse. Service providers under Midata must comply with all existing data security and protection rules. There are well-established complaint and redress schemes through the Information Commissioner's Office in the core sectors where ombudsmen already operate. Data controllers must notify the Information Commissioner of data processing under Section 17 of that Act. Failure to do so is an offence.
However, there may be a need for further measures. This is why a consumer protection and trust work stream has been established under the Midata programme. A number of working groups made up of privacy experts, business, regulators and consumer groups are looking at a wide range of consumer issues. They have been tasked with identifying and recommending existing best practices and, where appropriate, new approaches that may be needed to ensure the security of individuals' data. The groups are due to report in summer and any recommendations that they propose may need to be reflected in enforcement provisions made under these powers.
The role of third parties is important. Where citizens choose to provide data to a third party, or provide authorisation for a third party to request data on their behalf, the Data Protection Act applies. Under that Act, data controllers do not need to comply with a request for data unless they are satisfied that the requesting party has authority to access it. The consumer protection and trust working groups are looking at a wide range of issues that could emerge in a new Midata world and the Government will want to take their advice before acting. Their recommendations might include kitemarks, accreditation processes and complaint handling and redress schemes, as well as other proposals. The Government do not want to pre-empt any recommendations by setting out detailed protection measures in the Bill.
Turning to Amendment 84AHNB, I reassure noble Lords that the aim of our provision is to make data more accessible. We believe that Clause 75(5)(b)(ii) will have much the same effect as the limitation put forward by the noble Baroness, Lady Hayter, and the noble Lord, Lord Stevenson. The Government expect data to be provided back to consumers cheaply, and ideally for free, but businesses may initially incur additional costs in making data available electronically and the power allows businesses to charge to recoup their only cost. Noble Lords may be reassured to know that data that have been so far released under the Midata voluntary programme have been provided to customers free of charge.
On Amendment 84AHNC, I would like to deal with proposed new subsection (6A)(a) first. As I have said, businesses do not need to comply with a request for data unless they are satisfied that there is a valid claim of access under the DPA. Mechanisms that might enable this are being considered in the working groups, so this is still a matter under consideration. However, it is clear from our discussions with data controllers that they will not be willing to release data to third parties unless fully satisfied that it represents a legitimate request from an authorised party. The methodology may vary by sector but the additional measures proposed in this amendment do not appear necessary at this time.
In her proposed new subsection (6A)(b), the noble Baroness, Lady Hayter, has raised an interesting point but the Data Protection Act already affords protections in this area. I recognise the concerns in this respect, particularly around the possible actions of nefarious or rogue operators. However, access to Midata would not alter the current data protection law and any criminal activity could be dealt with appropriately, as it is now. In relation to proposed new subsection (6B), we are working with privacy experts, businesses, regulators and consumer groups in the working groups that I have mentioned. Legislation would be introduced only after a period of public consultation. Scope will exist in any regulations to place conditions on accessing data by authorised persons. Therefore, I believe the specific provisions set out in the amendment to be unnecessary.
Finally, Amendment 84AHND would extend the Information Commissioner's powers of compulsory entry and audit to the private sector for the first time. This is primarily a matter for the Ministry of Justice and I am not convinced that such a major departure from current policy can be justified here. Its most likely effect would be to stifle innovation. As a result, services that help people to analyse their data will not be developed or may be withdrawn. The ICO already has investigation powers to require information from the private sector; we believe that these are sufficient in this case.
I would like to come back to the noble Lord, Lord Stevenson, on his assertion about claiming compensation through the courts. I think he deemed that to be unrealistic, but the power does provide for a non-court redress route. This could include empowering the ICO to address Midata complaints, if that helps the noble Lord. In the light of my responses, I ask the noble Lord, Lord Stevenson, on behalf of the noble Baroness, Lady Hayter, to withdraw the amendment that she tabled.
I thank the Minister very much for that full response. I am glad that he recognises the issues we raised. We are probably pulling in the same direction on this. In particular, the work streams to which he referred are obviously very helpful and seem to be widely inclusive. I am glad to hear that they will report in the summer, at the point where they can inform any regulatory steps that are to be taken in consequence of this Bill. I think we were very glad to see a couple of other points but I will read them in Hansard and come back if there are any further points we need to make.
My concern is that there were a couple of times in the Minister's response where he made great play of the fact that he felt that the companies to which requests for access to data are being made would have sufficient ability to determine whether the request was bona fide and therefore to be relied on, without having to have any other cross-regulatory approvals. I hear what he says on that but would like to read it in Hansard to be sure that I am right on it. At this stage, I would say only that that sounds a slightly unlikely premise on which to run what will be a very large amount of personal data, if this works, and be very widely spread across a number of possible providers and users. In that sense, it will therefore raise all the sort of concerns that the public have about how their data are being kept and looked after. At this stage, I would not like to push the amendment any further and I would like to withdraw it.
Amendment 84AHNA withdrawn.
Amendments 84AHNB and 84AHNC not moved.
Clause 76 : Supply of customer data: enforcement
Amendment 84AHND not moved.
Clause 77 : Supply of customer data: supplemental
Moved by Viscount Younger of Leckie
84AHP: Clause 77, page 77, line 25, leave out subsections (3) and (4) and insert-
"(3) A statutory instrument containing (whether alone or with other provision)-
(a) regulations under section 75 which make provision by virtue of section 75(2)(d), or
(b) regulations under section 76, may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.
(4) A statutory instrument which-
(a) contains regulations under section 75, and
(b) is not an instrument to which subsection (3) applies, is subject to annulment in pursuance of a resolution of either House of Parliament."
My Lords, I now turn in more detail to the Government's own amendment in this area by addressing Amendment 84AHP. I am grateful to have received the advice of the Delegated Powers and Regulatory Reform Committee. Following that advice, I have put forward an amendment to Clause 77 so that any enforcement measures made under the power provided in Clause 76 would be subject to the affirmative resolution procedure. I have also made changes to allow provisions relating to core sectors under Clause 75 to be introduced using the affirmative resolution procedure. This would apply only when regulations under Clause 76 or those applying to non-core sectors are simultaneously proposed. I have undertaken this because there will be times when instruments tabled under both clauses will probably be necessary. Enabling the instruments to be considered together and using the same procedure-the affirmative procedure-ensures efficient use of parliamentary time.
Having these provisions in the Bill will help to progress the Midata programme and deliver economic benefits in terms of consumer empowerment and growth. We continue to seek progress on a voluntary basis. However, we are continuing to discuss the potential enforcement regime and appropriate levels of funding with the Information Commissioner and other relevant regulators so that should the power in the Bill prove necessary, we will be in a position to provide protection to consumers. We believe that the Government's amendment strikes the right balance between providing the flexibility to tailor enforcement appropriately and ensuring adequate parliamentary scrutiny.
Amendment 84AHP agreed.
Moved by Viscount Younger of Leckie
84B: After Clause 77, insert the following new Clause-
"Power to add to supplies protected under Insolvency Act 1986
(1) The Secretary of State may by order amend section 233 of the Insolvency Act 1986 so as to add to the supplies mentioned in subsection (3) of that section any of the following-
(a) a supply of gas, electricity, water or communication services by a specified description of person;
(b) a supply of a specified description of goods or services by a specified description of person where the supply is for the purpose of enabling or facilitating anything to be done by electronic means.
(2) The Secretary of State may by order amend section 372 of that Act of 1986 so as to add to the supplies mentioned in subsection (4) of that section any of the following-
(a) a supply of gas, electricity, water or communication services by a specified description of person;
(b) a supply of a specified description of goods or services by a specified description of person where the supply is for the purpose of enabling or facilitating anything to be done by electronic means.
(3) The power to make an order under this section includes power to make incidental, supplementary, consequential, transitional or saving provision, including doing so by amending any enactment.
(4) An order under this section must be made by statutory instrument.
(5) A statutory instrument containing an order under this section may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.
(6) In this section-
(a) an enactment contained in subordinate legislation (within the meaning of the Interpretation Act 1978),
(b) an enactment contained in, or in an instrument made under, an Act of the Scottish Parliament, and
(c) an enactment contained in, or in an instrument made under, a Measure or Act of the National Assembly for Wales; and
"specified" means specified in the order."
My Lords, these amendments respond to points raised by the noble Lord, Lord Stevenson, in Grand Committee. I am most grateful to him for raising this important issue. It is relevant to this Bill because it will help businesses, especially those needing to be rescued, and as such supports the Bill's themes. The amendments contain powers that, when exercised, will assist businesses in insolvency procedures by increasing the chance of business rescue. Alternatively, where there is no chance of a rescue they may help to achieve a better return for creditors than would be delivered by an immediate liquidation or bankruptcy.
Amendments 84C to 84E contain powers to render void contractual terms that allow an essential supplier in the utility and IT sectors to withdraw supply from an insolvent business. These powers would also prevent suppliers in these sectors taking advantage of the insolvency by unfairly and unreasonably increasing charges for that supply. Some have described such demands as "ransom payments", saying that where they are made, that supplier gains an unfair advantage over other creditors in the insolvency. They can act as a barrier to rescue and may force businesses to close down, causing unnecessary job losses.
Amendment 84B provides an enabling power relating to IT suppliers and those that provide or sell gas, electricity, water or communication services that are essential to business. By communication services, we mean services such as telephone, fax or broadband access that may be provided to a business. The amendment would add such supplies to an existing list of essential suppliers who must continue to supply and who may not demand payment of a pre-insolvency debt as a condition of that supply. They may, however, seek a personal guarantee from the insolvency practitioner as a condition of continuing to supply the insolvent business.
The Government recognise that some of these proposals would affect contractual rights. For this reason the provisions are restricted to supplies that are essential to today's business and which typically cannot be sourced quickly from alternative suppliers. They will not impact upon ordinary trade supplies. Further, this power is only exercisable in relation to procedures where there is still some chance of business rescue, that is to say administration and voluntary arrangements. There are also several safeguards provided for affected suppliers to ensure that the supplier is paid, including the right to require a personal guarantee from the insolvency practitioner for the post-insolvency supply.
The powers allow for exceptions to be made to this right to request a personal guarantee. The 16th report of the Delegated Powers and Regulatory Reform Committee noted that the provision to make exceptions is widely drawn and asked for further information as to the circumstances in which this provision might be used. We will consult on any use of these powers, and we require the flexibility provided by this power to address issues that might be flagged during consultation. Situations where it would be appropriate to restrict the right to obtain a personal guarantee might include, for example, where no point would be served in requiring a personal guarantee. One example of this is if the third party had already guaranteed payment.
The remaining amendments in this group deal with extent and commencement. The UK's insolvency regime is highly regarded internationally as one that delivers quick and effective business rescue mechanisms. The Government continue to seek to improve these mechanisms. These powers provide scope to give insolvency professionals the tools they need to rescue viable businesses, while giving adequate protection to those that will be impacted. I am grateful to the noble Lord, Lord Stevenson, for raising this important issue. I am aware that the noble Baroness, Lady Hayter, and the noble Lord, Lord Stevenson, may wish to speak about these amendments. I will respond to their amendments after they have spoken. I beg to move Amendment 84B.
Amendment 84BA (to Amendment 84B)
Moved by Lord Stevenson of Balmacara
84BA: After Clause 77, line 4, after first "to" insert-
"( ) omit subsection (2)(a), and"
I start by warmly welcoming the amendments tabled by the Minister, which respond in a very positive fashion to the amendment that I moved in Committee. I had no idea I was being so persuasive. That was a trick I should learn in other places. I clearly have something that I did not know I had. The points that the noble Viscount went on to make are also well taken. Even so, there are a couple of things that we would like to suggest are also taken into account.
For the reasons outlined, the necessity of IT equipment to the continuity of a business in difficulty cannot be overstated. Frankly, without this, there is no chance of any continuation, or of selling on, and thus of maintaining economic activity and jobs. IT is today as central as supplies of water and utilities. Therefore we also welcome the Government's amendments to add on-sellers of utilities to the list of supplies that must continue. Given our desire to enhance business rescue, especially in these difficult times when banks are less than helpful, this change to prevent certain suppliers withdrawing services to struggling businesses is a significant step forward. We are delighted that the Government heard this plea.
The one area that we wish to raise, covered in the amendments that have been tabled, is the new mandatory requirement for a personal guarantee from the office holder-the insolvency practitioner-to cover essential supplies. Subsection (3) of government Amendment 84C permits the supplier to terminate the supply unless an insolvency office holder personally guarantees any charges arising from the continuation of the supply. This is a move away from the current legislation, which provides for an optional personal guarantee.
Although Section 233 of the 1986 Insolvency Act contains an optional guarantee in subsection (2)(a), when the Bank of England, FSA and HMT introduced equivalent provisions to protect financial institutions, this optional guarantee provision was removed, and there are now no provisions for such personal guarantees. This position for financial institutions is right, as we see no case for a personal guarantee from an office holder, since an insolvency practitioner should not be subject to personal liability when acting as the agent for the company.
Contrast the situation affecting directors, who are not mandatorily subject to such personal liability even though they have a similar relationship to their company. Such a requirement for a personal guarantee appears particularly inappropriate in respect of certain types of insolvency, such as for a supervisor in a voluntary arrangement who has no control over the business. The mandatory guarantee requirement in the government amendment is therefore a backwards step, and our amendments are to align the provisions with the recent regime for financial institutions, by removing the requirements for mandatory personal guarantees from office holders.
Our first two amendments also take this opportunity to amend the 1986 Insolvency Act to remove the optional guarantee from Section 233(2)(a) so that the provisions for essential services in the 1986 Act are brought into line with the protection regime for financial institutions. It is hard to understand the requirement for a personal guarantee, as there is no reason why insolvency practitioners should be subjected to personal liability when acting as the agent of the company. There is a real danger that such a requirement would reduce use of this tool with a real threat, therefore, to business rescue.
The existence of a mandatory personal guarantee would be particularly detrimental in CVAs where the management retains control of the business with the insolvency practitioner acting as supervisor. Given the limited control insolvency practitioners have over the business, with no control over the assets, they would be exposing themselves to significant risk by providing a personal guarantee. It is very unlikely that any insolvency practitioner would, in fact, go down this route. I should add that the proposed 28-day maximum credit period in subsections (2)(c) and (3)(c) of the new clauses is a reasonable compromise. Thus the demand for an additional personal guarantee seems excessive. We know the Government share our desire to maximise company rescues-often with the role of an insolvency practitioner as key. We trust they will not undermine their otherwise welcome amendments by the introduction of this counterproductive measure. I beg to move.
My Lords, these amendments seek to amend the powers being introduced by the government amendments, to remove an important protection for suppliers. That protection is provided in the Government's amendment by allowing suppliers to require a personal guarantee from an insolvency practitioner where they are prevented from exercising a contractual right to terminate supply. Not only does the amendment put forward by the noble Lord remove the protection provided by the government amendment, it also seeks to take away the right of a supplier to a personal guarantee in situations where it already exists in legislation.
I should make clear that essential suppliers who may be required to supply the insolvent business are very likely to be owed money within the insolvency. They are most unlikely to be repaid any more than a small proportion of that claim through realisations within the insolvency. Therefore the Government think it is only right that where such suppliers are obliged to continue supplying the insolvent business, they do so knowing that they will be paid.
The new powers do include other safeguards for the supplier, but none of these guarantees payment of the post-insolvency charges. We do not expect that a supplier will always require a personal guarantee, but we do think that, as is the case as the legislation currently stands, they should be entitled to one where they feel it necessary. It should be noted that the right to request a personal guarantee from the insolvency practitioner is a protection that utility providers have had since 1986, where they are requested to continue supplying the insolvent business.
Removing this right at a time when we are extending the requirement to provide supplies may send the wrong message. However, noble Lords will be aware that the powers do contain the ability to provide for exceptions to the right to request a personal guarantee. While it is anticipated that this would only be exercised in certain limited circumstances, it does provide for some flexibility in the matter.
There is a balance to be struck here. The powers provided by the government amendments will prevent essential IT and utility providers making ransom demands upon insolvency professionals. This can only help the chances of insolvency practitioners being able to rescue struggling businesses. However, they do interrupt normal contractual rights and, as such, we believe it is right to provide safeguards, of which the right to a personal guarantee is one of the most important.
I thank the noble Lord, Lord Stevenson, for his contribution. I am grateful for his comments and reassure the House that the Government take these issues very seriously. The government amendments demonstrate that the Government are committed to seeking improvements to the insolvency regime where there are clear reasons for doing so. However, the Government consider that the amendments suggested by the noble Lord would unfairly remove necessary protections for suppliers. I therefore hope that the noble Lord will agree to withdraw his amendment.
My Lords, I agree that the Government are making good steps in this area. I do not want to in any sense take away from them the change that they are introducing through their substantive amendment. I agree that the insolvency processes in the UK generally are very good. They may be slightly better in Scotland, which is moving ahead with another Bill, and I hope that the lessons that Scotland is going to teach us are learnt in the processes in England and Wales.
It is really a question of whether it is appropriate to expose those who are trying to help companies get back on their feet and continue to operate to having to give a personal guarantee. On a very superficial level, it seems to be completely at variance with the overall process that we are trying to introduce. The fact that it may exist in legislation at present does not make it right. Given that the Government have legislated to make sure that these personal guarantees no longer exist in financial companies, it seems slightly odd that we are requiring them for SMEs and smaller companies, which often go into voluntary administration or some other form and then come out again. To hamper that by curtailing the willingness of an IP to get involved does not seem to be right.
However, there is a balance to be struck. I ask the Government to think very carefully about this and to look at it again. I am very happy to have further discussions if that would be helpful. At this stage, I beg leave to withdraw the amendment.
Amendment 84BA (to Amendment 84B) withdrawn.
Amendment 84BB (to Amendment 84B) not moved.
Amendment 84B agreed.
Moved by Viscount Younger of Leckie
84C: After Clause 77, insert the following new Clause-
"Corporate insolvency: power to give further protection to essential supplies
(1) The Secretary of State may by order make provision for insolvency-related terms of a contract for the supply of essential goods or services to a company to cease to have effect where-
(b) any conditions specified in the order are met.
(2) The order must include provision for securing that, where an insolvency-related term of a contract ceases to have effect under the order, the contract may be terminated by the supplier if-
(a) an insolvency office-holder consents to the termination,
(b) a court grants permission for the termination, or
(c) any charges in respect of the supply that are incurred after the company enters administration or the voluntary arrangement takes effect are not paid within the period of 28 days beginning with the day on which payment is due.
(3) The order must include provision for securing that, where an insolvency-related term of a contract ceases to have effect under the order, the supplier may terminate the supply unless an insolvency office-holder personally guarantees the payment of any charges in respect of the continuation of the supply.
(4) The order may provide for exceptions to the right of a supplier to terminate a supply under provision made by virtue of subsection (3).
(5) The order must (in addition to the provision mentioned in subsections (2) and (3)) include such other provision as the Secretary of State considers appropriate for securing that the interests of suppliers are protected.
(6) A contract for the supply of essential goods or services is a contract for a supply mentioned in section 233(3) of the Insolvency Act 1986.
(7) An insolvency-related term of a contract for the supply of essential goods or services to a company is a provision of the contract under which-
(a) the contract or the supply would terminate, or any other thing would take place, because the company enters administration or the voluntary arrangement takes effect,
(b) the supplier would be entitled to terminate the contract or the supply, or to do any other thing, because the company enters administration or the voluntary arrangement takes effect, or
(c) the supplier would be entitled to terminate the contract or the supply because of an event that occurred before the company enters administration or the voluntary arrangement takes effect.
(8) In this section, "insolvency office-holder" means-
(a) in a case where a company enters administration, the administrator;
(b) in the case where a voluntary arrangement under Part 1 of the Insolvency Act 1986 takes effect in relation to a company, the supervisor of the voluntary arrangement."
Amendment 84CA (to Amendment 84C) not moved.
Amendment 84C agreed.
Moved by Viscount Younger of Leckie
84D: After Clause 77, insert the following new Clause-
"Individual insolvency: power to give further protection to essential supplies
(1) The Secretary of State may by order make provision for insolvency-related terms of a contract for the supply of essential goods or services to an individual to cease to have effect where-
(a) a voluntary arrangement proposed by the individual is approved under Part 8 of the Insolvency Act 1986, and
(b) any conditions specified in the order are met.
(2) The order must include a condition that ensures that an insolvency-related term of a contract for the supply of essential goods or services to an individual does not cease to have effect unless the supply is for the purpose of a business that is or has been carried on by the individual or with which the individual has or had another connection of a kind specified in the order.
(3) The order must include provision for securing that, where an insolvency-related term of a contract ceases to have effect under the order, the contract may be terminated by the supplier if-
(a) the supervisor of the voluntary arrangement consents to the termination,
(b) a court grants permission for the termination, or
(c) any charges in respect of the supply that are incurred after the voluntary arrangement proposed by the individual is approved are not paid within the period of 28 days beginning with the day on which payment is due.
(4) The order must include provision for securing that, where an insolvency-related term of a contract ceases to have effect under the order, the supplier may terminate the supply unless the supervisor of the voluntary arrangement personally guarantees the payment of any charges in respect of the continuation of the supply.
(5) The order may provide for exceptions to the right of a supplier to terminate a supply under provision made by virtue of subsection (4).
(6) The order must (in addition to the provision mentioned in subsections (3) and (4)) include such other provision as the Secretary of State considers appropriate for securing that the interests of suppliers are protected.
(7) A contract for the supply of essential goods or services is a contract for a supply mentioned in section 372(4) of the Insolvency Act 1986.
(8) An insolvency-related term of a contract for the supply of essential goods or services to an individual is a provision of the contract under which-
(a) the contract or the supply would terminate, or any other thing would take place, because the voluntary arrangement proposed by the individual is approved,
(b) the supplier would be entitled to terminate the contract or the supply, or to do any other thing, because the voluntary arrangement proposed by the individual is approved, or
(c) the supplier would be entitled to terminate the contract or the supply because of an event that occurred before the voluntary arrangement proposed by the individual is approved."
Amendment 84DA (to Amendment 84D) not moved.
Amendment 84D agreed.
Moved by Viscount Younger of Leckie
84E: After Clause 77, insert the following new Clause-
"Sections (Corporate insolvency: power to give further protection to essential supplies) and (Individual insolvency: power to give further protection to essential supplies): supplemental
(1) The power to make an order under section (Corporate insolvency: power to give further protection to essential supplies) or (Individual insolvency: power to give further protection to essential supplies) includes-
(a) power to make different provision for different cases;
(b) power to provide for a person to exercise a discretion in a matter;
(c) power to make incidental, supplementary, consequential, transitional or saving provision;
(d) power to make any provision that may be made by the order by amending the Insolvency Act 1986 or any other enactment.
(2) An order under either of those sections may not be made so as to have effect in relation to contracts entered into before the order come into force.
(3) An order under either of those sections must be made by statutory instrument.
(4) A statutory instrument containing an order under either of those sections may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament."
(5) In this section, "enactment" has the same meaning as in section (Power to add to supplies protected under Insolvency Act 1986)."
Amendment 84E agreed.
Consideration on Report adjourned.