Clause 9

Financial Services Bill – in a Public Bill Committee at 3:15 pm on 7th January 2010.

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Executives’ remuneration reports

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 52, in clause 9, page 7, line 5, leave out paragraph (a).

Photo of Roger Gale Roger Gale Conservative, North Thanet

With this it will be convenient to discuss amendment 53, clause 11, page 8, line 28, leave out paragraph (c).

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

We now move to three clauses that deal with remuneration, which has been a significant part of the debate on the causes of the financial crisis. Clauses 9 and 10 relate to remuneration reports and clause 11 relates to the rules that the FSA can make about remuneration.

I will make some wider remarks about remuneration when we reach clause 11, since it is that clause that refers to international standards that have been developed in the context of remuneration. Clause 9 deals with the provision of regulations on the preparation, approval and disclosure of executive remuneration reports. One can see from clause 10 that there is already a requirement for directors’ remuneration to be disclosed, which arises from the Companies Act 2006. I know from my time as a practising chartered accountant that, as time has passed, more and more detail is required to be disclosed in the remuneration reports. There are much more complex sets of disclosures now than there were 20 or 30 years ago, giving people a better understanding of the remuneration packages of directors.

One of the interesting aspects is that if someone was not a director, their remuneration package did not have to be disclosed in the accounts. That led to an interesting situation for financial service businesses, where some of the highest paid employees were not directors, and their packages were not disclosed. Indeed, it was suggested in the case of one institution that a senior employee chose not to become a director so that his remuneration would not be disclosed, suggesting the sensitivity around the number involved.

Clause 9 would extend the requirement to produce a remuneration report to executives. It is an enabling provision and the regulations have yet to be developed. I understand that they are quite complex, but it is disappointing that the Committee has not seen the draft regulations prior to this stage of the Bill. I do not know whether there is the intention to produce them in time for Report, which I suspect may be later this month, or whether they will be available for scrutiny only by members of the other place.

Photo of Andrew Tyrie Andrew Tyrie Conservative, Chichester

Given the implications of these clauses for the long-term competitiveness of the UK industry, whether synthetic or not, and given the huge row that is likely to be generated if it turns out that the regulations are not framed adequately, is it not essential that they are available to us while the Bill is in the House of Commons?

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I would rather they were available to us at this stage. In the past the Government have sought to make draft regulations available prior to the consideration of the appropriate clauses in Committee so that there  can be a proper debate and so that we can also understand what matters should be in the Bill and be capable of amendment rather than being stuck in secondary legislation with all the restrictions that are involved with that. The Minister is usually accommodating on this point, so it is a rare and unusual diversion for him not to have the draft regulations available for us at this stage.

Photo of Andrew Tyrie Andrew Tyrie Conservative, Chichester

The more I think about this, the more surprised I am that we do not have the regulations before us. After all, it is not a shock for the Government to find that we are asking for them. Perhaps this legislation is being prepared in a rush, but we have had some time to work up what should be required. I hope that my hon. Friend will press the Minister vigorously to ensure that we get a chance to see the regulations before scrutiny in Committee is completed.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I share my hon. Friend’s wish, but I suspect, given that the Committee’s scrutiny of the Bill will conclude by 5 pm next Thursday, that the chances—

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I suspect that the chances are limited, given the time scale. There are some complex technical issues to do with this matter that deserve some discussion and exploration in Committee. It is harder to discuss those issues without sight of the relevant regulations.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

Indeed.

I want to highlight some of my concerns in my remarks on amendments 52 and 53, because the clause is drafted rather widely and its definition of what might be included in regulations is quite comprehensive. For example, subsection (3) states:

“The following are relevant executives of an authorised person”, and (3)(c) says:

“other individuals who have a prescribed connection with the authorised person.”

That is a broad definition to set out in regulation. It has been suggested that that could encompass a firm’s advisers, its lawyers and auditors and the management or regulatory consultants it uses. That is an extensive provision. As a consequence, that coverage is more intrusive than one might expect. Are we really expecting the employees of an insurance auditor to have their remuneration disclosed in this executive remuneration report? I cannot imagine that that is the intention behind the breadth of this drafting, but that is the potential coverage that the clause encompasses, and we need to think carefully about that.

Amendment 52 removes subsection 4(a) from the clause. The clause already includes

“other individuals who have a prescribed connection with the authorised person.”

Subsection 4(a) talks about

“individuals who provide services, or whose services are provided (directly or indirectly), to the authorised person”.

That definition picks up people who could be accountants, lawyers, the person who delivers the coffee or the man who sells sandwiches at lunchtime. There is no restriction on who such a measure applies to in practice. That suggests an unprecedented intrusion into the affairs of people whose only connection with the firm is through the provision of services. They are not people who are employed by the firm; they are contracted to them for the provision of a service.

The same issue arises in line 28 of clause 11. I propose that we delete “other persons”, because of its breadth. When the Bill was published, the breadth of the provisions triggered significant concern. Unfortunately, because the regulations have not been published, it is difficult to know how they were intended to work in practice and whether they will offer sufficient safeguards to the accountant, the solicitor and the sandwich delivery man.

As my hon. Friend the Member for Chichester said, it would have been better if draft regulations had been available to us beforehand. I suspect that the Minister will argue that the clause is drafted widely as an anti-avoidance device. There may be individuals who are currently classified as employees of institutions who would seek to use a change of contract or status from an employee to an adviser as a means of exempting themselves from the provisions of clause 9. I suspect that that is the comment that the Minister will make. My hon. Friend the Member for Chichester was right. The Bill was published on 19 November 2009, which is over six weeks ago. The Treasury obviously gave some thought to this clause when it drew it up. It is on a complex issue, but we expected to see more definition about who is within or without the scope of the clause.

This is an opportunity for the Minister to provide reassurance about the intention of the regulations, as regards where the exemptions will be and where the line will be drawn. Unless that is clear, the Bill will create more concern and confusion about its coverage, instead of reassuring those who assumed that they would be outside the scope of the Bill that they are indeed outside it.

Amendments 52 and 53 are aimed at trying to get the Minister to be much clearer about the scope of the provisions in the absence of the regulations, and offer us a chance to debate those regulations fully. Although these are probing amendments, they merit a serious answer—which the Minister invariably gives—as there is a wide degree of public interest in who is caught by the measure, and who ultimately will have to make sure that details of their remuneration are made available in a report for a business with which perhaps their only connection is through a normal commercial contract.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury 3:30 pm, 7th January 2010

I will address the hon. Gentleman’s amendments directly, but before doing so, it might be helpful if I said something about the context and clause 9 more broadly. The clause gives the Government the power to make regulations requiring increased disclosure of the remuneration paid to the officers, employees and other specified persons at any firm that is an authorised person under FSMA 2000, or any specified class of such firms.

That power, and the regulations that are currently being drafted to implement it—I will say something more on that in a moment—are part of a wider  Government agenda to reform corporate governance practices in the financial services sector. Disclosure is an important component of those reforms, as increased transparency should lead to more effective shareholder oversight of the relationship between remuneration and performance.

It has been mentioned that David Walker was commissioned by the Government to review the governance framework in the banking sector and to look particularly at the problems that contributed to the financial crisis. His final report was issued only on 26 November, but it set out a number of detailed recommendations for governance improvements in banks and other financial institutions, including increased disclosure of the remuneration paid to high earners in the financial services sector.

Sir David recommended that disclosed details include the main elements of salary, cash bonuses, deferred shares, performance-related long-term awards and pension contributions, all aggregated and reported in bands. In addition, the Financial Stability Board, in its “Principles for Sound Compensation Practices—Implementation Standards”, which were agreed by G20 members at the Pittsburgh summit in September 2009, has called for aggregated and banded disclosure of remuneration. So there is consensus internationally and domestically that improving the transparency of remuneration is an important component of the reforms that are necessary to ensure that the events of the past couple of years are not repeated and, in particular, that remuneration is consistent with value creation and does not incentivise excessive risk taking.

The Companies Act already includes legislative requirements for the disclosure of remuneration paid to executive and non-executive directors of public companies. As hon. Members are well aware, company directors have a fiduciary duty to act in the interests of shareholders, and disclosure of the kind required by the Companies Act facilitates oversight of that duty.

However, as the recent financial crisis illustrates, the remuneration paid to employees outside the boardroom can also have an impact on the well-being of a business. Pay policies should align employees’ interests with shareholders’ interests and should encourage long-term value creation. Increased levels of transparency and greater oversight will play an important role in ensuring that that is the case.

It is the Government’s view that banks are unlikely to release that kind of information voluntarily, so we need a legislative mandate to compel them to do so. Clause 9 provides the Government with the necessary powers to implement the appropriate regulations. Those regulations will follow Sir David Walker’s recommendations for aggregated banded disclosure. Large banking and other financial institutions that operate in the UK will have to publish a report detailing the quantum of salary, cash bonus, deferred shares, performance-related long-term awards and pension contributions paid to employees whose gross remuneration and benefits are above some minimum threshold.

Those amounts will be aggregated and reported in bands, details of which will be set out in draft regulations consulted on and debated in both Houses. The report will not show the amounts paid to individuals, and individual employees will not be named. It is likely that the measures will go further than Sir David’s  recommendations by implementing a lower minimum threshold—below £1 million—and narrower reporting bands.

On the timing of the preparation of the draft regulations, I appreciate the comments made by the hon. Members for Chichester and for Fareham. Ideally, I would have liked the regulations to have been available now, but the Government wanted to ensure that changes were made in the light of the consultation that led to Sir David’s final recommendations. Given that the Bill was introduced prior to the release of Sir David’s final report, which, as I said, was at the end of November 2009, it has not been possible to introduce draft regulations with the Bill. However, we are in the process of preparing the regulations and we want to release them for consultation as soon as possible.

Mr. Tyrierose—

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I will happily give way to the hon. Gentleman, but I hope that that response answered his first question.

Photo of Andrew Tyrie Andrew Tyrie Conservative, Chichester

A raft of questions are being thrown up, which, frankly, we would and should have had the time to think about if we had had the information that the Minister is now making available. That information is basically a preliminary summary of what appears likely to turn out to be a memorandum, which we have not had an opportunity to see.

One of my many questions is about the phrase that the Minister used a moment ago: he said that it was important that the remuneration does not incentivise excessive risk taking. Will any effort be made to distinguish between risks that affect all of us—risks that have contagious effects—and risks that a business might decide it has incorrectly incentivised employees to take, and that are to its detriment and at the expense of a competitor?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

There will always be an analysis of risk that needs to be made. What we have been talking about with regard to excessive risk taking in general is instances where that excessive risk taking would threaten financial stability because of decisions being taken by banks.

I want to make the point that although we do not at the moment have draft regulations that can be made available, they will eventually be consulted on, and in due course they will be debated in both Houses. I believe that we have sufficient detail in the Bill to make a decision on the principle, which is what we are required to do in primary legislation.

Photo of Andrew Tyrie Andrew Tyrie Conservative, Chichester

May I reframe the question more crisply? Will the transparency requirements be limited in their effect to trying to expose remuneration that potentially generates risks that would have a bearing on financial stability, and only that?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

As we have previously announced, what we are doing is accepting Sir David Walker’s recommendations with regard to disclosure, and I think that the hon. Gentleman is aware of that. Indeed, there has been a debate—

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

Let me make a bit more progress. Indeed, a number of people have expressed the view that they would like to see the remuneration levels of individual employees made public. We are of the opinion that named disclosure will not be necessary. From the perspective of shareholder oversight—

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

In a moment; let me finish my point. From the perspective of shareholder oversight, it is valuable to know the structure under which remuneration is paid out by a firm, but not to whom it is paid.

Let me give an example. The relationship between a firm’s risk appetite and its remuneration policy can be effectively evaluated by assessing the quantity, structure, rationale and distribution of remuneration paid by the firm in a given period as against the profit generated. The names of individuals in receipt of remuneration payments are not relevant to that analysis and including named disclosure would add nothing to the strength of shareholder oversight.

The measure is not intended to single out for criticism high earners within a firm. It is designed to illustrate where the remuneration paid by a firm is not consistent with effective risk management and value creation, thus providing shareholders with the information that they need to take appropriate action. I will happily give way to the hon. Gentleman.

Photo of Andrew Tyrie Andrew Tyrie Conservative, Chichester

A moment ago, the Minister said that I need not be concerned because we are only implementing what Sir David Walker has said. However, he also said that the Government will go further than the Walker proposals in at least one respect, and that recommendation—that threshold—was a crucial part of the Walker recommendations. I remember Sir David justifying those recommendations before the Treasury Committee, in turn. Are there any other areas in which the Minister is going beyond the Walker recommendations in the memorandum?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury 3:45 pm, 7th January 2010

With regard to bands and the £1 million limit, I have indicated that the Chancellor has already announced that we want to go further in that area. That covers the points that I wanted to make on that subject.

It is worth noting that oversight of the relationship between risk and remuneration is quite different from the oversight of directors’ remuneration. As I indicated previously, directors are in a different position. While the evaluation of a director’s fiduciary performance can be done only on the basis of named disclosure, evaluation of the relationship between a firm’s remuneration policy and risk tolerance does not require the disclosure of names, for reasons that I explained.

Photo of John Howell John Howell Conservative, Henley

There are two issues. The first is the impact of excessive risk remuneration on the health of the individual business and the issue of how that could cumulatively affect financial stability as a whole. Secondly, the question that, to my mind, has never been answered  and is not answered by the academic research that I have looked at is whether an excessively risky remuneration culture drives an excessively risky financial culture, or whether it is the other way round. Does the Minister have a view on that?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I have views on many matters here. What we are trying to do through the proposed new section—I shall move on to the amendments of the hon. Member for Fareham shortly—is ensure that there is disclosure of the remuneration of all employees who earn over a certain limit. We would certainly expect a correlation between greater levels of remuneration and greater levels of responsibility within a firm but, as Sir David made clear, that is not the ultimate objective of his recommendations. The Government’s clear intention is to ensure greater transparency and to provide sufficient information for shareholders and others to be able to make appropriate decisions.

Photo of Andrew Tyrie Andrew Tyrie Conservative, Chichester

Before the Minister moves on to the amendment, may I intervene again? I hope that all the interventions can be a substitute for something more substantive.

It is absolutely crucial that we have clarity about what exactly we are trying to tackle in the clauses. The Minister talked about risk appetite a moment ago. The risk appetite is, of itself, irrelevant. What matters and what counts is whether a given risk affects financial stability. Is that risk being incentivised by excessive or distorted bonus or remuneration schemes? Specifically, will what the Minister is working on at the moment, which unfortunately we have not had a chance to see, address the need to distinguish those two types of risk?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

The point that I have been making about what the Government are doing is to do with disclosure. The hon. Gentleman is making rather a different point, which is not really covered under clause 9. Essentially, the clause is about disclosure of pay above certain levels. We intend to establish the general principle in the Bill, then to consult on detailed regulations for that disclosure. We believe that greater disclosure helps in ensuring transparency, which aids decision making and accountability. That is the Government’s argument.

Collectively, the amendments tabled by the hon. Member for Fareham would create significant loopholes that might be exploited by high earners who did not want to disclose their earnings publicly.

Without subsection (4)(a), regulated firms would be able to restructure their employment arrangements so that individuals who perform significant risk functions, for example, could provide services as consultants rather than employees of the firm in order to be exempt from the disclosure requirements. Paragraph (a) is necessarily drafted broadly to enable the Government to limit opportunities for firms to avoid the effect of the regulations.

I reassure the hon. Gentleman and the Committee that it is not the Government’s intention to impose disclosure requirements on individuals with little or no impact on the risk exposure of the regulated firm, such as auditors or independent advisers. I am happy to clarify that. Regulations made under the powers will be drafted to ensure that firms are required to provide information only on the remuneration given to consultants  who fulfil the same role as an employee of the firm. They will not be required to provide information on fees paid to independent consultants such as auditors or legal advisers who are not performing an employee’s role.

I emphasise that the text of the draft regulations will be subject to full consultation and submitted to a debate in each House under the affirmative resolution procedure. In addition, any subsequent amending regulations to extend the scope of disclosure requirements imposed under the powers will be similarly subject to affirmative resolution.

The second of the hon. Gentleman’s amendments relates to clause 9. Without subsection (2)(c), regulated firms could restructure employment arrangements to exempt individuals who perform significant risk functions from the requirement to act in accordance with remuneration policy. The FSA will be responsible for identifying the specific employees and individuals within the specified firms to whom the requirement to have a remuneration policy will apply. However, it is important that we do not unnecessarily limit its ability to operate in that area by giving firms the option to avoid remuneration policy requirements. Removing the paragraphs would provide a clear opportunity for avoidance of important remuneration measures, so I urge him to withdraw his amendments.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I have two points to make. First, the Minister said yesterday that the measures flow not only from Sir David Walker’s report but from the agreements reached at Pittsburgh. I hope that we monitor carefully global compliance with international agreements, because some have expressed a concern that we will, as ever, be in the forefront of applying the rules while others lag behind, and that some may find the UK an unattractive place to do business in consequence of the disclosure. We must ensure that the playing field is level.

Secondly, it is because the regulations are not before us that we must table amendments such as mine to probe the Government’s intentions. The Minister has set out clearly on the record what behaviour he is trying to stop and who he thinks should fall outside the measures. That is welcome, and those assurances will be heard outside this room. I understand exactly what sort of behaviour he is trying to stop, but I think that producing primary legislation without secondary legislation beyond it creates a gap that causes confusion and concern. There is also, of course, a deficiency in the process for secondary legislation, as it cannot be amended. That is why it is often helpful to have amendments so that we can discuss the regulations at this point. However, given the Minister’s assurances, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Roger Gale Roger Gale Conservative, North Thanet

It is now 4.55 pm. It is a convention, although not a firm one, that Members try to terminate business at a reasonable hour on a Thursday. It is understood that some have long journeys back to their constituencies. On the other hand, we are here to consider a Bill, and that is the overriding matter before us. If at 4.15 pm we have not concluded what the usual channels feel to be satisfactory business, I shall suspend the sitting for half an hour, as I am not prepared for the  staff to have to sit here for more than three and a half hours without a break. I shall not be dogmatic about it if we are within five minutes of the end. However, I want all Members to understand the position.

I made the offer the other day—I reiterate it now—that I am prepared to chair a sitting between 8 pm and 10 pm on Tuesday next, as I imagine that there will be a Division, and if necessary thereafter. I and the staff are quite prepared to sit through the night if we have to, because that is our job, but Members need to understand the position in which we find ourselves. The Bill is running behind schedule; it is an important piece of legislation, and it is important that is properly debated. We behind this table will do our best to facilitate that, and I ask hon. Members on the other side to do the same.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I beg to move amendment 50, in clause 9, page 7, line 11, leave out ‘first’.

Photo of Roger Gale Roger Gale Conservative, North Thanet

With this it will be convenient to discuss amendment 51, in clause 9, page 7, line 13, leave out subsections (7) and (8).

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I do not need to say this too often, because there is a perpetual call by the Opposition for greater parliamentary scrutiny. I am wary of trying too often to insert into Bills the need for secondary legislation to go through the affirmative resolution procedure, as Oppositions can overuse the tool. However, in this instance, given the nature of the regulations proposed by the Government, it should not be only the first regulations that are subject to the affirmative procedure. Subsequent regulations should be subject to the same procedure.

Subsection (7)(b) states:

“otherwise render the requirements imposed as a result of this section more onerous”.

To my mind, it is a matter of judgment; one can decide for oneself whether or not something is onerous. There is no cast iron test of what is or is not onerous. What is onerous to one person may not be onerous to another. It is not a good test to use in determining whether subsequent regulations should be subject to the affirmative resolution procedure. I believe that all the regulations produced under clause 9 should be subject to the affirmative procedure and not the carve-out proposed in subsection (7).

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Amendment 51 would amend section 9(7)(b). Who will decide what constitutes “onerous”, and if there is a dispute who will resolve it?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I do not want to make too much of this either. We can talk about the onerousness—or is it onerocity?—of the legislation, but in all cases when regulations require additional disclosure or otherwise impose more onerous requirements on firms, we propose that the affirmative resolution procedure be used. Only when regulations made under clause 9 do not do that—in other words, they reduce the disclosure requirements on firms—will the negative resolution procedure apply.

What we are doing here is the exactly the same as the procedure that applies under section 473 of the Companies Act 2006 to regulations made in relation to directors’ remuneration reports or that require disclosure of information about directors’ benefits. There are other examples. It is a standard part of FSMA that extending the scope of regulation, for example by amending the regulated activities order, requires affirmative resolutions of Parliament, whereas reducing the scope of regulation can be done by negative resolution.

In response to my hon. Friend the Member for Wolverhampton, South-West, “onerous” is a word that has been used elsewhere in legislation. The Government of the time must make the judgment whether it is more onerous or not, when deciding whether it should be through affirmative or negative procedure. We are following established principles that have been applied without controversy elsewhere, so I hope they can be accepted here.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury) 4:00 pm, 7th January 2010

I am not entirely sure about that. I can understand the argument the Minister made where under FSMA the regulatory boundary has been expanded. I think one knows when the regulatory boundary has been expanded. It is hard to know when something is onerous. I am also surprised that a flagship measure in the Bill can simply be disposed of, if one were inclined to do so, through the negative procedure, without having to justify why it was no longer appropriate to have an executives’ remuneration report. I would have thought that moving away from that position would be quite significant, requiring parliamentary debate rather than simply going through on the nod if no one spotted it on the Order Paper. I am surprised that the Minister has been so laid back about the way in which the provision could be removed from the statute book, but that is his choice. I will give him the opportunity to re-think that. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 9 ordered to stand part of the Bill.