Clause
9Executives’
remuneration
reports
Mr.
Hoban: I beg to move amendment 52, in
clause 9, page 7, line 5, leave
out paragraph
(a).
The
Chairman: With this it will be convenient to discuss
amendment 53,
clause 11, page 8, line 28, leave
out paragraph
(c).
Mr.
Hoban: 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. Mr.
Andrew Tyrie (Chichester) (Con): 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?
Mr.
Hoban: 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.
Mr.
Tyrie: 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.
Mr.
Hoban: 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—
Mr.
Tyrie: What about next
Tuesday?
Mr.
Hoban: 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.
Mr.
Tyrie: Or at least a
draft.
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. 3.30
pm 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.
Ian
Pearson: 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.
Ian
Pearson: I will happily give way to the hon. Gentleman,
but I hope that that response answered his first
question.
Mr.
Tyrie: 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?
Ian
Pearson: 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.
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