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Select Committee on Public Accounts Minutes of Evidence


APPENDIX 3

INDEMNITY TO NMEC DIRECTORS (PAC/2000-2001/12)

Copy of a letter to the Chairman of the Committee from the Permanent Secretary, the Department for Culture, Media and Sport

  At the PAC hearing on 15 November you and others raised the issue of reporting to Parliament the indemnity of NMEC Directors. I have looked afresh at that in the light of the comments from Speaker's Counsel and from the Comptroller & Auditor General which you read out at the hearing. Had I had warning of these comments in advance, I might have been able to provide more immediate assistance to the PAC on the point. We have however since discussed their comments with Speaker's Counsel and the NAO respectively.

  2.  I set out the results of my review in this letter. My comments reflect discussions with the Treasury, which leads on the Government's overall approach to reporting contingent liabilities to Parliament and on policy on indemnities to Board members. They cover future arrangements, where the Treasury proposes in consultation with the NAO to review the procedures on reporting contingent liabilities to Parliament; and the circumstances of the NMEC case, where I and the Treasury consider that the action taken was consistent with the existing reporting arrangements.

REVIEW OF EXISTING PROCEDURES

  3.  You and others made it clear at the hearing that you are not satisfied with a regime in which it can be argued that an indemnity of the sort offered to the NMEC Board members need not be reported specifically to Parliament. This obviously takes us well beyond DCMS territory, and I have discussed this point with the Treasury.

  4.  The Treasury is anxious that arrangements as to the reporting of contingent liabilities are perceived as satisfactory by Parliament. In respect of indemnities to NDPB Board Members, the Treasury has relied on a Minute laid in December 1998, on which I say more below. In the light of the representations that have been made, the Treasury recognises that the Minute of December 1998 could be regarded as an unusual example of the reporting of a contingent liability, in that it covered indemnities to the directors of several hundred separate bodies and indemnities which would be given in the future to the directors of new NDPBs as they were established. While this approach has the advantage of not imposing on Parliament several hundred notifications, the Treasury recognises that it is open to the objection that some of the indemnities may be ones that Parliament may have expected to be drawn specifically to its attention, perhaps because of the nature of the potential liability or the circumstances in which it had been issued. The Treasury has therefore agreed to review the reporting arrangements with a view to issuing guidance to departments on the categories of indemnities with a view to issuing guidance to departments on the categories of indemnities which should be reported separately to Parliament. The Treasury will consult the NAO in drawing up the guidance and will reflect that guidance and any changes to it in Government Accounting as necessary.

REPORTING OF INDEMNITY TO NMEC DIRECTORS

  5.  As I explained at the PAC hearing, we in DCMS considered the indemnity to NMEC Directors in consultation with Treasury and concluded that there was no need to report to Parliament. The reasoning for this is set out in detail in the enclosed note prepared by the Treasury.

  6.  In summary, the Treasury's view, with which I agree, is that indemnities to Board members of NDPBs were reported to Parliament in the Minute of December 1988 in line with the requirements of chapter 26 of Government Accounting. The Minute was in the usual format for reporting indemnities to Parliament. It indicated that, in the absence of objections from MPs, Treasury would give final approval to proceed with incurring the liability, which the Minute had previously explained was an indemnity to be offered to all NDPB Board members.

  7.  In discussion with Speaker's Counsel and the NAO, a number of arguments have been put to us as summarised below, together with our response:

    —  the Treasury's Minute of December 1998 should have been more explicitly drawn to the PAC's attention, in view of the material effect on the reporting of contingent liabilities. The Treasury's aim in administering the reporting arrangements for contingent liabilities is to ensure that Parliament has adequate notice of liabilities which it could later be asked to meet from voted money, and the opportunity to express any objection it might have in more significant cases. The Treasury is concerned if there was any confusion on this point because it considers that the laying of the Minute reflected previous agreement with the PAC;

    —  the Treasury's Minute does not state explicitly that the new arrangements proposed supersede Government Accounting (which has not been amended to refer to it); instead it arguably ought to be read alongside Government Accounting, with individual indemnities judged against the tests in chapter 26. The Treasury recognises that the relationship between the Minute and Government Accounting could have been clearer and indeed draws the Committee's attention to the fact in the forthcoming re-issue of Government Accounting. Chapter 26 draws departments' and NDPBs' attention to the guidance in the two Dear Accounting Officer letters (DAO(GEN)3/96 and DAO(GEN)2/99) on indemnities to NDPBs. Nevertheless its considered view is that the Minute satisfied the existing reporting requirements in Government Accounting in respect of all indemnities in accordance with the Minute, both by implication and in view of the explicit reference to the indemnity to be offered to all NDPB Board members;

    —  the delay between the NMEC Board members' request for indemnity and the issue of my letter of 21 June implies that the issues are more complex than the explanation above suggests. Our response is that we were bound to examine with them why they felt the need for a specific indemnity, and it inevitably took a while to establish the position and to consult the Treasury;

    —  the NMEC Board members' request for indemnity reflected a new situation, not envisaged in the Treasury's Minute, which stated that "the risks of this cover being called are considered to be very small". NMEC Directors were considering their personal positions in the light of NMEC's financial situation and had raised the issue in that context. Our response is that the Treasury's Minute acknowledge that circumstances could arise where cover might be called. The Treasury agrees that the issue of changing circumstances such as this would be a matter for the review of reporting arrangements;

    —  the terms of my letter of 21 June suggest a greater degree of protection than implied in the Treasury's Minute. Our response is that the Company's Board members had requested a form of personal indemnity that was legally binding. We couched the letter of 21 June in the specific terms requested by the Company because the scope of the cover was in accordance with the standard form of indemnity which the Treasury had indicated should be offered to NDPB Board members. The letter merely confirms the Government's commitment, which existed in advance and from which the Government could not have walked away. We would have had to disapply the general indemnity scheme if we had wanted to deny NMEC Board members protection under it.

  8.  In their letters Speaker's Counsel and the Comptroller & Auditor General assessed the indemnity against the tests for reporting to Parliament set out in chapter 26 of Government Accounting. We consider there is a valid argument that the tests were met, but in any event our main argument is that the indemnity had already been reported to Parliament.

  9.  Accordingly I hold to the view which I expressed at the PAC hearing that the contingent liability had been appropriately reported to Parliament within the existing framework of guidance. I acknowledge that we could have offered the NAO a fuller explanation for them to put in paragraph 2.44 of the NAO report as to the basis of the indemnity and why no report was made to Parliament, and I regret that we did not pick up this point in clearing the text with the NAO.

  10.  I am copying this letter to the Comptroller and Auditor General.

Robin Young

4 December 2000

INDEMNITY TO DIRECTORS OF THE NEW MILLENIUM EXPERIENCE COMPANY BY DEPARTMENT FOR CULTURE, MEDIA AND SPORT

PUBLIC ACCOUNTS COMMITTEE HEARING OF 15 NOVEMBER

FURTHER EXPLANATORY NOTE

  1.  This Note explains that the Treasury and DCMS take the view that any contingent liability arising from the indemnity cover available to the directors of NMEC, which accords with current policy on indemnities to board members of NDPBs, had already been reported to Parliament.

  2.  A Contingent Liability Minute laid before Parliament by the Treasury in December 1998 (attached) reported to them in advance the indemnity to NDPB board members, provided for in DAO (GEN) 2/99 (attached). That Minute set out the terms of the proposed general indemnity and confirmed that the "wording [of the indemnity] is . . . broadly comparable . . . with the cover that would be available in a commercial insurance policy". It did not put any cap on the Government's liabilities from offering the indemnity. The indemnity covered any personal civil liability of the board members, excluding any arising from dishonesty, bad faith or recklessness. The Minute stated that it was not possible to quantify a figure for the total potential liability resulting generally from the indemnity in view of the disparate forms of NDPBs as well as the lack of precedent. The Minute did not receive any objections from MPs.

  3.  As new policy on this type of indemnity had already been notified in the standard way to Parliament, and given effect through DAO (GEN) 2/99, the Treasury took the view that it would be unnecessary, for the purpose of the rules in chapter 26 of Government Accounting, to report to Parliament, each time specific indemnities were subsequently given by NDPBs or departments to board members; they had already been notified to Parliament, provided that the cover given did not exceed that reported in the Minute of December 1998 and provided for in DAO (GEN) 2/99. Parliament would expect departments and NDPBs to conduct their business in accordance with the Minute.

  4.  Accordingly, when the NMEC directors requested the indemnity given to them in June 2000, the Treasury concluded that a further Minute would be unnecessary. The issue of the NMEC indemnity did not increase the overall financial exposure of the Government. It may be helpful to confirm here that NMEC is a non-departmental public body to which DAO (GEN) 2/99 applies. NMEC is specifically listed as an NDPB in the Cabinet Office guide on Public Bodies (at page 15) and it is no bar to a body being classed as an NDPB that it is a Companies Act company.

  5.  The Minute of December 1998 had made it clear that board members "should be offered" an indemnity. Accordingly, DAO (GEN) 2/99 advised NDPBs "to issue suitable revised indemnities to their board members" consistent with the agreed cover. It also retained in effect the provisions of DAO (GEN) 3/96 (attached) on how the indemnity should be afforded (see paragraphs 3 and 4). Where, as with NMEC, an NDPB lacked the power to give the new indemnity, the Cabinet Office Code of Best Practice for Board Members (now known as the Cabinet Office Guide on Codes of Practice for Board Members) would act as a letter of comfort from Government and so, where the board members required individual written indemnities, the Treasury have been content for the sponsor department to issue them.

  6.  As stated, the indemnity to the NMEC directors did accord with the December 1998 Minute; it expressly excluded liability arising from dishonesty, bad faith and recklessness. It was therefore viewed by the Treasury as a re-affirmation and clarification of an existing commitment of the Government to the directors rather than as imposing any potential new claim on the Government. Had the directors not asked for the written assurance the department would still have had to stand behind them to the extent of the cover provided by DAO (GEN) 2/99. The present Cabinet Office Guide for Departments on Non-Departmental Public Bodies of March 2000 explains (at paragraph 48—attached) the cover against civil liability, which Government has indicated will be made available to individual board members. Annexed to this Guide is the above Guidance on Codes of Practice on which are modelled the Codes for Board members of individual NDPBs and which explains in similar terms the cover which Government has indicated will be available. No new commitment was therefore made which would fall to be met out of Exchequer funds.

  7.  No doubt a number of individual NDPB indemnities have been issued since the DAO letter; they are normal practice and are routinely given. None of them have been reported to Parliament nor would the Treasury have expected them to be. A requirement that DCMS should report to Parliament the indemnity to the directors of NMEC would be odd, both because that indemnity would be treated inconsistently with those afforded to the board members of other NDPBs and because it would not increase the overall risk which Government had notified in the Minute of December 1998 and to which it had committed itself in DAO (GEN) 2/99. The practice of not notifying each indemnity provided pursuant to the Minute has not previously been questioned.

HM Treasury

24 November 2000

TREASURY MINUTE: DECEMBER 1998

GOVERNMENT INDEMNITY TO COVER THE PERSONAL CIVIL LIABILITY OF BOARD MEMBERS OF NON-DEPARTMENTAL PUBLIC BODIES (NDPBS)

  It is the normal practice, when a government department proposes to undertake a contingent liability in excess of £100,000 for which there is no specific statutory authority, for the department concerned to present to Parliament a Minute giving particulars of the liability created and explaining the circumstances; and to refrain from incurring the liability until 14 days (exclusive of Saturdays and Sundays) after the issue of the Minute; except in cases of special urgency.

  2.  The Neill Committee's report on "Personal liability in public service organisations", published in the summer of 1998, included a recommendation that:

    "The Treasury should undertaken a review of the means of legal protection available to appointees in Non-Departmental Public Bodies. It should ensure that, if such protection continues to be provided in the form of a standard indemnity, its terms accord with the protection which would be afforded under a commercial insurance policy."

  3.  In response to this recommendation, the Treasury has now undertaken a review along the lines suggested by the Committee. Following this review the Treasury proposes that board members of NDPBs should be offered an indemnity in the following terms:

    "The Government has indicated that an individual board member who has acted honestly and in good faith will not have to meet out of his own personal resources any personal civil liability which is incurred in the execution or purported execution of his board functions, save where the person has acted recklessly."

  4.  The cover offered here is wider than that provided in the existing indemnity offered to board members, which excludes cover for negligence. The wording is, however, broadly comparable both with the cover that would be available in a commercial insurance policy (which meets the Neill Committee's recommendation) and with that which is given to those civil servants who, as part of their official duties, act as directors of companies (as provided for in Section 12.2 of the Civil Service Management Code). The cover excludes any personal criminal liability. Nor will it protect the reckless or those who have acted in bad faith.

  5.  The risks of this cover being called are considered to be very small. NDPB board members are responsible people and there are in place robust governance arrangements for NDPBs including codes of practice. Ministers have the ability to dismiss board members who are negligent. The Treasury is not aware that any such cases (which would have involved the cover being called) have arisen in the recent past.

  6.  It is not possible to quantify a figure for the total potential liability resulting generally from this indemnity or for an individual case involving a single NDPB board member. This disparate functions of NDPBs and the lack of a precedent prevent this.

  7.  If costs of this type do arise claims will need to be met in the first instance by the NDPBs from offsetting savings. If, exceptionally, payments have to be made by departments, then consideration would be given to clawback.

  8.  If the liability is called, provision for payment will be sought through the normal Supply procedure. The Treasury has approved the proposal in principle. If, during the period of 14 days (exclusive of Saturdays and Sundays) beginning on the date on which this Minute was laid before Parliament a Member signifies an objection by giving notice of a Parliamentary Question or by otherwise raising the matter in Parliament, final approval to proceed with incurring the liability will be withheld pending an examination of the objection.

INDEMNITIES FOR PERSONAL LIABILITY OF NDPB BOARD MEMBERS: REVIEW OF POLICY

PURPOSE OF THIS DAO

  To draw departments' attention to a change in the standard indemnity issued to NDPB Board Members.

INFORMATION

  2.  The current policy on these indemnities is set out in DAO (GEN) 3/96 issued on 29 January 1996.

  3.  The Neill Committee's Report on "Public liability in public service organisations" (published in the summer of 1998) included a recommendation that:

    "The Treasury should undertake a review of the means of legal protection available to appointees in Non-Departmental Public Bodies. It should ensure that, if such protection continues to be provided in the form of a standard indemnity, its terms accord with the protection which would be afforded under a commercial insurance policy."

  4.  In response to this recommendation, the Treasury has undertaken a review along the lines suggested by the Committee in consultation with the Cabinet Office; and Treasury Ministers have agreed that a wider indemnity should now be offered to board members in the following terms:

    "The Government has indicated that an individual board member who has acted honestly and in good faith will not have to meet out of his own personal resources any personal civil liability which is incurred in the execution or purported execution of his board function, save where the person has acted recklessly."

  5.  This wording is broadly comparable both with the cover that would be available in a commercial insurance policy and with that which is given to those civil servants who, as part of their official duties act as directors of companies (as provided for in Section 12.2 of the Civil Service Management Code). The cover excludes any personal criminal liability. Nor will it protect the reckless or those who have acted in bad faith.

  6.  The risks of this cover being called are considered to be very small—the Treasury is not aware of any relevant cases arising in the recent past. NDPB board members are responsible people and there are in place robust governance arrangements for NDPBs including codes of practice. Ministers have the ability to dismiss board members who are negligent.

  7.  Subject to their own specific statutory powers. NDPBs are now advised to issue suitable revised indemnities to their board members, consistent with the above text.

  8.  The advice which was provided in paragraphs 3-6 of DAO (GEN) 3/96 about further relevant issues arising in respect of the policy is unchanged and continues to apply to the revised indemnity set out above.

ACTION

  9.  Departments should send copies of this letter to any NDPBs they sponsor.

ENQUIRIES

  10.  Enquiries about these new arrangements should be addressed to Ron Carpenter (GTN 270 5364) except for questions on the use of commercial insurance which should be addressed to Nick Towers (GTN 270 5477) both here.

Jamie Mortimer

19 July 1999

INDEMNITIES FOR PERSONAL LIABILITY OF NDPB BOARD MEMBERS

  Following representations from the Office of Public Service, the Treasury has reviewed, in consultation with departments who are major sponsors of non-departmental public bodies (NDPBs), the current policy on the provision of indemnities to NDPB Board members (which at present provides that such indemnities should not be offered except in exceptional circumstances).

  2.  Following this consultation, the Financial Secretary has now agreed that the policy should be changed. The change will be implemented by deleting paragraph 14 of the current Code of Best Practice for Board Members of Public Bodies and substituting a new text. The key passage will read:

    "The Government has indicated that an individual Board member who has acted honestly, reasonably, in good faith and without negligence will not have to meet out of his own personal resources any personal civil liability which is incurred in execution or purported execution of his Board function."

  3.  Subject to their own specific statutory powers, NDPBs are now advised to issue suitable indemnities to their Board members, consistent with the above text. Legal advice should be taken on the best way to effect this. In some cases an amendment to the NDPB's own Code of Best Practice may suffice; in others there may be a need for separate indemnities to be provided.

  4.  Where it is not possible for a particular NDPB to offer the recommended level of protection because relevant powers are lacking, the Code of Best Practice for Board Members, as revised, will act as a "letter of comfort" from the Government and cover the gaps.

  5.  In general we would expect NDPBs to use a "non-insurance" approach to such risks. Any proposals by them to cover the risks through commercial insurance would be subject to the normal Government Accounting requirement that insurance can only be purchased where NDPBs can demonstrate it provides value for money and, unless they have specific delegated authority, with the approval of their sponsor departments following consultation with the Treasury. As the risks involved are normally very low, we would not expect insurance to prove cost-effective except in exceptional cases.

  6.  The costs arising from underwriting the risks are unlikely to be significant. However, where costs do arise, claims should be met by the NDPBs from offsetting savings. If, exceptionally, payments have to be made by departments, then consideration would need to be given to clawback.

  7.  Departments should send copies of this letter to any NDPBs which they sponsor.

  8.  Enquiries about these new arrangements should be addressed to Ron Carpenter (GTN 270 5364) except for questions on the use of commercial insurance which should be addressed to John Breckenridge (GTN 270 5361)—both here.

Jamie Mortimer

HM Treasury

29 July 1996

CABINET OFFICE NON-DEPARTMENTAL PUBLIC BODIES A GUIDE FOR DEPARTMENTS (MARCH 2000)

MEMBERS LIABILITY

  48.  Legal proceedings by a third party against individual board members are very exceptional. A board member may be personally liable if he or she makes a fraudulent or negligent statement which results in a loss to a third party; or may commit a breach of confidence under common law or a criminal offence under insider dealing legislation if he or she misuses information gained through their position. The Government has indicated that an individual board member who acted honestly and in good faith will not have to meet out of his or her own personal resources any civil liability which is incurred in the execution or purported execution of their board function, save where the person has acted recklessly. Further relevant advice is provided in the Dear Accounting Officer letters DAO (GEN) 2/99 and DAO (GEN) 3/96.

Annex H

(To NDPB Guide of March 2000)

CABINET OFFICE GUIDANCE ON COPIES OF PRACTICE FOR BOARD MEMBERS OF PUBLIC BODIES (FEBRUARY 2000)

PERSONAL LIABILITY OF BOARD MEMBERS

  25.  Although any legal proceedings initiated by a third party are likely to be brought against the board, in exceptional cases proceedings (civil or, in certain cases, criminal) may be brought against the chair or other individual board members. For example, a board member may be personally liable if he or she makes a fraudulent or negligent statement which results in loss to a third party. Board members who misuse information gained by virtue of their position may be liable for breach of confidence under common law or may commit a criminal offence under insider dealing legislation.

  26.  In the case of a board which is incorporated under the Companies Act or the Companies (Northern Ireland) Order, an individual board member will be subject to the duties of directors under company law.

  27.  However, the Government has indicated that individual board members who have acted honestly and in good faith will not have to meet out of their own personal resources any personal civil liability which is incurred in execution or purported execution of their board functions, save where the person has acted recklessly. Subject to their own specific statutory powers, NDPBs should issue to their board members suitable indemnities consistent with this paragraph.

  28.  Board members who need further advice should consult the board's legal advisers.


 
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