I beg to move Amendment 10, in Clause 5, page 13, line 36, at end insert—

‘(7D) In relation to the directors of a ring-fenced body, the following arrangements shall apply—

(a) Half of the board of directors of the ring-fenced body, both executive and non-executive, will be made up of independent persons.

(b) In this section an “independent person” means a person who—

(i) has not been an employee of the group within the previous five years;

(ii) does not have a material business relationship with the group and has not had one within the previous three years, including an indirect relationship as a partner, director, senior employee or shareholder or an adviser or major customer or supplier;

(iii) does not receive remuneration from the group, other than remuneration in their capacity as an independent person, does not participate in the group’s share option or performance-related pay schemes and is not a member of the pension scheme;

(iv) does not have close family ties with any of the company’s advisers, directors or senior employees;

(v) does not hold cross-directorships or have significant links with other directors through involvement in other companies or bodies;

(vi) does not represent a significant shareholder; and

(vii) has not served on the board of any body in the group for more than nine years.

(c) The board of directors of the ring-fenced body, both executive and non-executive, will have no formal, business or family relationship with the directors of the rest of the group, other than by virtue of their appointment to the same group.

(d) The primary objective of the board of directors of the ring-fenced body, both executive and non-executive, shall be on the performance and functions of the ring-fenced body and they will have no responsibility for the performance and functions of the remainder of group.

(e) All directors of the ring-fenced body shall have a duty to preserve the integrity of the ring-fence between the group and its subsidiary.’.

Clause 5 relates to other issues associated with the strength of the ring fence. The hon. Member for Amber Valley has taken us into the new territory of the electrocution of bankers, and it all depends on whether you attach the leads to their derivatives.

Here, we are talking about how we can reinforce the ring fence by ensuring that the directors—the people controlling the banks—are independent. The clause sets out another change to the Financial Services and Markets Act 2000 that would ensure that the function  of acting as a director of a ring-fenced body is a significant influencing function and must be specified as a controlled function. We will come to those issues if we have a stand part debate.

We are considering an amendment to introduce at the end of the clause a principle, as described in proposed new section 59(7D) of FSMA, that half the board of directors of a ring-fenced body, whether executive or non-executive, must be made up of independent people. That is an important principle because it is a safeguard to protect the integrity of the ring fence. We are slightly surprised that the Government have not yet shown willingness to embrace that notion. On the previous clause, we talked a little about what we mean by “independent”, and I welcome the Minister’s acceptance that we should be guided by the UK corporate governance code set by the Financial Reporting Council. We suggest that the ratio of 50% should be applied to all directors, whether executive or non-executive.

We have discussed in another context ways of using corporate governance arrangements to ensure that the ring-fenced bank has a degree of independence. We still think it important to look at the relationship between retail and investment, and to have a sibling structure—that is something the Parliamentary Commission felt strongly about—rather than a parent-child relationship. Another way of ensuring that is to make sure that there is a sufficiency of directors who are not dependent on the investment banking arm or a parent company arrangement.

We know that elsewhere in the Bill—perhaps the Minister can remind me where it is—directors are supposed to be given an explicit duty to protect the ring fence. That is an important duty, although I wonder how it can be enforced in practice. Perhaps we can discuss that at another time. We hope that the directors who are given that duty will have sole responsibility to the ring-fenced bank and not to the performance of the group as a whole.

As we know, the lack of scrutiny and challenge of senior executives in some of the banks was at the heart of events that led to the financial crisis—for example, the lack of challenge to the then chief executive of RBS, which included problems not just in the executive team but with non-executive directors. In its 2011 report into the failure of RBS, the FSA said that if a review had been commissioned at the time as first intended, it

“would have sent a strong message to RBS, including its board, and might have provided the FSA with more information on the effectiveness of governance, particularly around the potential dominance of the chief executive”.

In another context, one of the whistleblowers at HBOS, Paul Moore, the head of group regulatory risk between 2002 and 2004, said that his experience of non-executive directors

“on risk committees is that they were generally inadequate. As a rule, they did not have technical expertise in risk management, audit, assurance, oversight.”

Lord McFall, the former head of the Treasury Committee, said:

“We were shocked when we discovered many non-executive directors were holding not only senior full-time jobs but also multiple non-executive directorships, as well as other roles. This simply cannot have given them the time to conduct proper oversight. Too often seemingly eminent and highly-regarded individuals failed to act as an effective check on, and challenge to, executive managers, instead operating as members of a ‘cosy club.’”

Our amendment would help to strengthen the ring fence, given the day-to-day pressures of the larger financial group in which directors might find themselves, and it would ensure that the independent directors were able to live up to that role.

The Minister indicated that there is a definition of “independence” set out in the UK corporate governance code, and we have sought to pick up many of those aspects in the amendment by suggesting that an “independent person” means a person who

“has not been an employee of the group within the previous five years; does not have a material business relationship with the group and has not had one within the previous three years, including an indirect relationship as a partner, director, senior employee or shareholder or an adviser or major customer or supplier…does not receive remuneration from the group, other than remuneration in their capacity as an independent person, does not participate in the group’s share option or performance-related pay schemes and is not a member of the pension scheme”,

and also, because these things sometimes need to be said, a person who—

“does not have close family ties with any of the company’s advisers, directors or senior employees…does not hold cross-directorships or have significant links with other directors through involvement in other companies or bodies…does not represent a significant shareholder; and…has not served on the board of any body in the group for more than nine years.”

Those are sturdy safeguards in how the UK corporate governance code ought to define this matter. It would be useful if, rather than just talking about concepts of independence, the Minister could find an opportunity to enshrine those concepts in the Bill. I would be grateful if he would consider the concept of having a proportion of directors who satisfy that definition.

We tabled the amendment to probe Government thinking on the matter; I am sure that that is fairly self-explanatory. I would be grateful if the Minister would respond.

I am grateful for the opportunity to talk about the composition of boards, because it is important, and the hon. Gentleman is right in his desire to probe the Government’s intentions on that. It is extremely important that the board of the ring-fenced body should maintain its independence from the group; in fact, the Government’s intention is to go further than is proposed in his Amendment.

The hon. Gentleman will recall that in the white paper produced in June 2012, the Government’s view, which remains our view, was that it would be appropriate that at least half of the ring-fenced bank’s board should be independent. That remains our intention, so one problem with the amendment is that it specifies that the proportion should be 50% when, in fact, it seems to us that it is desirable that it should be greater than that. We have no problem at all with the definition of independence in the corporate governance code, as that is also our view of what constitutes being independent. We have no difficulty with that.

Let me explain the approach that the Government have been minded to take; then I will happily consider the views of Members about whether it is the best approach. We have established the principle that there should be separation. We discussed the Haldane principles in the debates on Clause 4, which places an obligation  on the PRA to maintain those principles as part of its practice and regulatory duties. Governance is one of those principles. The essence of that approach is to empower the regulator and require it to do that, rather than to specify the matter in primary legislation. That is for a number of reasons, one of which has been illustrated through the question of whether 50% is the right number. It seems to us and to the regulator that the right number may be variable.

Suppose that a ring-fenced body constituted the vast Majority of a group’s assets. It might be better for the regulator to be able to calibrate what the cross-governance requirements were. If a tiny part of the group was outside the ring fence, it might be appropriate not only to permit but to require higher participation on the group board by the ring-fenced bank. The specification of exactly half might not be quite right.

There is also some difficulty in the transposition of the code’s requirement that the directors should not have any business relationship with or responsibility to the rest of the group. That could weaken the ability of the ring-fenced bank to be heard on the main board of the group. Although the principles of the code are clear, we need to give the regulator the ability to go beyond those requirements in some cases. Of course, the PRA would have to have good prudential reasons to insist that a senior member of the ring-fenced bank be on the main board of the group. Strict separation could undermine the ICB’s objective that one of the benefits of ring-fencing is to enable a group to operate as a group. The proposals for the composition of boards are designed to capture that balance.

The Financial Reporting Council, in considering the recommendations, has expressed concern in evidence to the PCBS that the regulator should be able to make the right judgment as to what constitutes true independence according to the Haldane principles. The Government’s approach is to agree with the recommendations that have been made and the spirit of the hon. Member for Nottingham East’s amendment.

So far we have been persuaded, not least by the views of experts such as those on the Financial Reporting Council and the regulator, that we need regulatory flexibility to be used in the right way. I therefore do not think that the amendment, which the hon. Gentleman said was a probing amendment, would help. I think it would take us backwards.

This is a matter of great interest and importance. Throughout the parliamentary scrutiny it, if there are any ways in which a strengthening or a clarification would be advantageous, the Government will consider it.

I am feeling quite cheery now. It makes me optimistic to think that had I tweaked the Amendment slightly and considered some of the smaller issues about the relationship between the group and the ring-fenced body, we might have had another concession on our hands. I almost want to tell the Minister not to table a Government amendment—let us make those changes, and we will table them on Report so that we can show the whole House how magnanimous he can be.

It is helpful that the Minister has said that he agrees with our corporate governance code as the basis for many of the definitions. It is also quite useful that the Government have talked about using the corporate governance method as a way of bolstering the independence  of the ring-fenced body from the parent company or the investment bank. We are not far apart on that issue. That is helpful, and we will take the Minister’s points away to think further about them. I look forward to consensus breaking out on Report, if only on this narrow issue. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Clause 5 amends section 59 of the Financial Services and Markets Act 2000 to ensure that directors of ring-fenced bodies, or people with an equivalent management role in ring-fenced firms with no board of directors, should be approved persons and exercise a control function. It is sensible that all retail bank directors have to be approved persons, but will the Minister explain why the requirement is not being extended to directors of non-ring-fenced banks? I would have thought that it was important that all bank directors, whether of investment or retail banks, should fall under the disciplinary capabilities of the regulators. I had assumed that that was already the case, but it is clearly not. What possible reasons can there be for not ensuring that all directors of all banks are deemed approved persons?

The clause also extends the current system of supervision of bank directors to the people running ring-fenced operations under the new twin peaks regulatory system created by FSMA. Obviously, the PRA will be the body responsible for authorising senior staff. Will the Minister explain which ring-fenced bodies will not have a board of directors? If hon. Members look at line 30 on page 13 of the Bill, they will see that there is an interesting little section in parentheses:

“the function of acting as a director (or, where the ring-fenced body does not have a board of directors, as a member of its equivalent management body)”.

Will the Minister explain exactly what that means and how he expects the equivalent management body to operate under these particular reforms? I was wondering which banks do not have boards of directors in that way.

Will the Minister update the Committee on the transfer of records and all relevant data relating to authorised persons from the FSA to the PRA? The PRA is being created over the next 10 days or so, so we are seeing a lot of data and information migrating from the existing FSA to the lovely shiny new offices right next to the Bank of England on Moorgate under the auspices of the PRA. We would not want any pieces of paper to go astray in that move, and we want to see data and records transferred properly, so I hope that the Minister can assure us that everything is going smoothly.

Generally speaking, clause 5 contains a reasonable change, but it could do with the Amendment about the independence of directors just to flesh it out some more. I would be grateful if the Minister can help us by responding to my queries.

Let me first make a few remarks about the purpose of the important Clause 5. As I think I made clear in the debate on the Amendment, if we hear helpful suggestions throughout the life of the Committee and the House’s scrutiny, we are happy to go further.

The regulator and the Government have a crucial role to play in upholding and enforcing the ring fence, but we agree with the Parliamentary Commission on Banking Standards and the ICB that the ring fence needs to be upheld from within the ring-fenced bodies themselves. The ICB’s final report said:

“It is difficult for regulations to work effectively if they are operating against the grain of corporate culture.”

The requirements on directors in this part of the Bill are therefore important. The clause ensures that the directors of ring-fenced banks will always be under a personal duty to uphold the ring fence. If a director is knowingly complicit in a breach by the ring-fenced bank of any of the ring-fencing requirements, the regulator will be able to take enforcement action against that director. That is part of giving ring-fenced banks truly independent governance, which is an essential part of ensuring that the culture of ring-fenced banks works alongside the regulator’s other powers.

Directors of ring-fenced banks will always have to be approved persons under either the PRA or the FCA regime, which means that the regulator may use a suite of powers, including unlimited fines, suspension of approvals, limitations on how a director may act in relation to a ring-fenced bank and published statements of a director’s misconduct. That is an effective way in which the regulator can make its powers felt.

Our approach is consistent with the strengthening of the powers of the conduct and prevention regulators. The provisions establish requirements for ring-fenced banks in particular, but the hon. Member for Nottingham East makes a reasonable point on possibly requiring directors of non-ring-fenced banks to be approved persons. On Report, we will consider whether there is advantage in extending some of the provisions.

For a ring-fenced bank or ring-fenced body not to have a board would be a slightly curious circumstance, and I cannot think that it is either likely or possible, but it is a piece of future-proofing.

It occurs to me that someone could set up a limited liability partnership, which would not have a board.

My hon. Friend is absolutely right. We still think it is unlikely that a bank would operate under such a structure, but it is theoretically possible, subject to the necessary approvals. We do not envisage that, or expect it to happen, but we feel it is important to make a contingency in this Clause.

I am pleased that the Minister accepted the spirit of our proposed Amendment and that more than half the directors will be independent. In his introduction he used the phrase “approved persons,” but does he have a definition in mind?

I fear that there is an extensive definition of “approved persons” in FSMA. The phrase has a certain meaning in everyday life, but in the context of financial services it has a definition so extensive that I will send it to the hon. Gentleman so that he may consider it before we next meet. Needless to say, although  the definition respects the spirit of everyday use, it is defined technically to give the regulator powers over the individual so that only approved persons can participate at various levels of responsibility in a bank. That ensures that the regulator can bite, as it were, on individuals as well as on companies. I will furnish him with the pages of definition from FSMA, which has probably been amended by subsequent Acts of Parliament.

The question is—

I beg your pardon, Mr Hood, but I was in the mindset of debating an Amendment and I entirely forgot that the Minister’s speech was the final word on the matter. I ought to have sought to intervene on him—

Order. The hon. Gentleman is absolutely right. He should have intervened before the Minister sat down, but, on this occasion, I will ask the Minister whether he is prepared to accept a belated Intervention.

It is clearly the case that I sat down while I was continuing to speak, for some unaccountable reason. I am happy to give way to the hon. Gentleman.

I am grateful to the Minister for giving way, and I apologise for missing that moment. The fact that he could not think of reasons why all bank directors should not be approved persons was helpful, because I could not think of any either. I hope that we can tackle that issue on Report, as he seemed to indicate. We would like to give notice that we intend to do something about the matter at that point.

I will finish my remarks. The hon. Gentleman is right to say that it seems logical and sensible for bank directors to be approved persons. We will consult the regulator, and if there are reasons why an absolute requirement is inappropriate, I will make sure that we are aware of that before Report.

Question put and agreed to.

Clause 5 accordingly ordered to stand part of the Bill.