Mr.
Tyrie: 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?
Ian
Pearson: 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—
Mr.
Tyrie: Will the Minister give
way?
Ian
Pearson: 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—
Mr.
Tyrie: Will the Minister give
way?
Ian
Pearson: 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.
Mr.
Tyrie: 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? 3.45
pm
Ian
Pearson: 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.
John
Howell: 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?
Ian
Pearson: 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.
Mr.
Tyrie: 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?
Ian
Pearson: 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.
Mr.
Hoban: 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.
The
Chairman: 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.
Mr.
Hoban: I beg to move amendment 50, in
clause 9, page 7, line 11, leave
out
‘first’.
The
Chairman: With this it will be convenient to discuss
amendment 51, in
clause 9, page 7, line 13, leave
out subsections (7) and
(8).
Mr.
Hoban: 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).
Rob
Marris (Wolverhampton, South-West) (Lab): Amendment 51
would amend section 9(7)(b). Who will decide what constitutes
“onerous”, and if there is a dispute who will resolve
it?
Ian
Pearson: 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.
4
pm 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.
Mr.
Hoban: 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.
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