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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