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|©Parliamentary copyright||Prepared 14th December 2010|
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General Committee Debates
European Committee Debates
Corporate Governance in Financial Institutions and Remuneration Policies
The Committee consisted of the following Members:
Eliot Wilson, Committee Clerk
† attended the CommitteeThe following also attended (Standing Order No. 119(6)):
Jacob Rees-Mogg (North East Somerset) (Con): It might be helpful to the Committee if I take a few moments to explain the background to the document and the reason why the European Scrutiny Committee recommended it for this debate.
The European Commission’s purpose with regard to the green paper was to identify and propose possible solutions to the failures of corporate governance that contributed to the financial crisis. It put forward a number of proposals for consideration, discussed how those measures could address the failures of corporate governance identified, and sought to generate a wider debate on those issues. It raised the question of whether those issues were better dealt with at the EU or national level, and the costs and benefits of greater harmonisation in such areas.
The Government’s response to the green paper, which is in the debate pack, usefully sets out their answers— we are grateful to the Minister for that—alongside the many questions posed by the Commission. The European Scrutiny Committee decided that a debate in this Committee would give Members the opportunity to consider the ideas floated by the Commission in light of the Government’s response.
Although this is only a green paper, it has no specific legislative proposals. We were concerned and interested to note that it was a potential extension of the European Union’s powers in an area that has previously remained very much within the bailiwick of individual Governments. We wanted to be sure, before the green paper developed further into more specific legislative proposals, that the House of Commons was kept fully informed and made aware that the European Union was once again looking to take more powers.
The Financial Secretary to the Treasury (Mr Mark Hoban): It is a pleasure to serve under your chairmanship, Mr Crausby. I want to set out the context to the debate and the UK approach to engaging with the EU. In June, the European Commission published its green paper “Corporate Governance in Financial Institutions” as part of its commitment to improve corporate governance in the aftermath of the financial crisis.
The collapse of financial markets in 2008 and the credit crunch that followed can be attributed to multiple, often interrelated factors at both macro-economic and micro-economic levels. There is a broad-based consensus that stronger corporate governance in financial institutions might have helped to mitigate some aspects of the crisis. The green paper examines a number of governance failures in the run-up to the financial crisis and proposes several possible solutions. In particular, the green paper examines: the functioning and composition of boards and oversight of senior management; risk culture and the consideration of long-term interests within firms; the role of shareholders, financial supervisors and external auditors; and pay policies, particularly in relation to directors of listed companies. The green paper is one element in a broad range of EU initiatives to improve financial sector governance in the wake of the financial crisis. The Commission has indicated that it will consider what proposals it can make for likely adoption in 2011.
The Government welcome the opportunity for the UK to set out a forward-looking agenda that contributes to improved financial sector stability and furthers UK objectives. The UK approach to engagement on the green paper is clear. We intend to get in early to push for: high-level governance principles at EU level, which can be mirrored in national codes, furthering the work that the Financial Reporting Council has done on the corporate governance code; comparable stewardship principles for shareholders, where the UK stewardship code is at the leading edge; a stronger role for supervisors and more detailed risk disclosures; and more detailed aggregate remuneration disclosures in line with Sir David Walker’s recommendations.
We have emphasised the need for those measures to be implemented within a coherent European—and indeed international—framework. However, different member states have different law and governance structures, ownership structures and business practices. We have therefore been clear that detailed measures and oversight to achieve those outcomes should be set at the national level.
The Government have already taken significant steps to improve financial sector corporate governance in the UK and we are working to take that forward. We have already consulted on the operating and financial review. My colleagues in the Department for Business, Innovation and Skills will be reporting in the new year on a new framework for narrative reporting. However, the Government recognise that financial sector governance deserves specific attention. That is why we have developed world-leading policies that target risk and reward in the banking sector: promoting a tough, new Financial Services Authority code, which is at the leading edge for the implementation of Financial Stability Board standards; implementing a world-leading remuneration and disclosure regime through the EU capital requirements directive; and pushing for global action on Sir David Walker’s banded disclosure principles.
To protect our international competitiveness, it is essential that we push for global consensus and support for a consistent approach in line with FSB standards. At the same time, it is important that we retain flexibility at a national level to apply global standards in a way that works with our wider national framework.
We have treated the green paper as an opportunity to promote the UK’s corporate governance framework and shape the debate at the European level. We will
The Chair: We have until 5.30 pm for questions to the Minister. I remind hon. Members that their questions should be brief and that it is open to them, subject to my discretion, to ask supplementary questions.
Chris Leslie (Nottingham East) (Lab/Co-op): Thank you for facilitating this debate, Mr Crausby. This is an incredibly relevant time to debate the question of corporate governance in financial institutions, even though the EU published the green paper back in June and invited representations by 1 September. It is a shame that it is only now that we are debating the matter, because such issues ought to be addressed with greater expediency.
The Government responded on 8 September. Why did they miss the deadline for responding to the EU on the consultation? This might be a punctilious point, but will the Minister explain why the Government did not submit the UK’s representation on time?
I should like to ask the Minister a number of questions about his attitude towards this comprehensive document, which covers a vast array of issues relating to corporate governance, particularly in the financial sector. First, as the hon. Member for North East Somerset said, the regulatory proposals in relation to the board of directors are more speculative than hard-edged. Nevertheless, they might give an indication of the direction of travel from the regulatory perspective of the EU.
The paper suggests that it would be worth considering placing a cap of three on the number of board memberships that directors of financial services institutions can hold. The Treasury has rejected that altogether, but suggested that there might be other ways of dealing with the issue. Why is the Minister not attracted to the idea of giving greater assurance to companies that their directors are spending sufficient time on the oversight and scrutiny of the activities for which they are responsible? Why does he object to the suggestion that there should be a duty of care imposed on directors in relation to depositor interests? That seems an attractive proposition, particularly since depositor interests were not necessarily at the forefront of the minds of the institutions that got us into a mess in recent years, so I would be grateful if the Minister would respond to that point.
Is it possible that the EU might pick up on the comments made by the chairman of the Financial Services Authority, Lord Turner? He has proposed a ban on failed bank directors or executives getting jobs in other banks unless they can prove that they flagged up certain risks during their previous tenure, which would certainly be a stronger form of corporate governance. Given that the proposal was made at a senior level of the FSA, has the Minister considered any action in relation to it?
The EU makes several suggestions in the risk-management aspects of the green paper, the first of which is the possibility of mandatory board risk committees, which sounds worth while in relation to banks and
The document suggests—reasonably, in my view—that boards of large financial services institutions ought to approve new financial products as they enter the market, yet it is most surprising that the Minister has said that it would not be proportionate for them to have a legal requirement to do so. It seems reasonable that boards of banks and so forth should be required to approve new financial products, and I am surprised that the Treasury has taken such a laissez-faire view.
An external auditor is mentioned in the document. Although no specific recommendations have been made, the Minister will be aware that the EU Internal Market and Services Commissioner, Michel Barnier, has proposed a compulsory rotating audit of accountants to avoid an oligopoly in the auditor community and to ensure that a more competitive dynamic is available for financial services companies. What are the Minister’s views on that proposal, and will he facilitate such a debate?
In respect of supervision and regulatory rules, the European Union suggests that regulators should have powers to check the correct functioning of boards. Do we need greater surety that there is an acceptance of the need for regulators to have that right to check board adequacy?
Chris Leslie: For the convenience of the Chair, I have a series of questions, so it might take quite a lot of time if I request an answer and then come back. I can go more slowly if it helps the Minister so that he can write the points down. I will try my best to slow down if that would be useful.
The Chair: Order. All I am saying, Mr Leslie, is that having asked some questions, you can ask further supplementary questions, so you do not need to get them all in at once. You could allow Mr Hoban to answer some of them and then come back with further questions.
The hon. Gentleman asked about the missed deadline. The Commission’s green paper is an important document. We needed to consider it properly, with a recognition of the UK’s particular experience and the way in which our response could help to shape the debate, so we sought an extension from the Commission to enable us to do so. That was not a particular concern for the Commission.
On the cap in the number of directors, it is important to be proportionate when we look at corporate governance and the role of directors on boards. People who put themselves forward as directors will need to consider
One additional check, which is in place now—I do not think it was in place before the crisis—is that the FSA now also interviews board-level appointees to ensure that they have the requisite expertise. The FSA will ensure that the board has considered directors’ other commitments to determine that they are not excessive. Someone might have only one directorship, and a simple numerical cap might exclude the fact that that directorship was so time-consuming that the person did not have time to do anything else properly. In such a situation, however, the individual could say that they were able to do another job because they had fewer directorships than the cap. It is a question of taking a common-sense approach.
As the hon. Gentleman knows, we commented specifically on depositor interests in response to question 1.13 of the green paper. The Companies Act 2006 requires that directors act in the best interests of shareholders and, in doing so, they should also take into account the interests of not only shareholders, but other stakeholders. The Walker review concluded that it was not appropriate to extend that duty to the board because the principle of corporate governance is about not the terms under which the boards operate, but the fulfilment of those terms. Our recognition of some of Sir David Walker’s comments led us to reject that concept.
On the question about Lord Turner’s comments, I return to the fact that the FSA does examine board appointments. The nominations committees of boards and shareholders in companies will be interested to see the credentials of people who are appointed to the board. We do not want to reward failure, so we need to understand the role of those directors who have been on boards of companies in which there have been failures, and whether that poses a question about their competence to be a member of another board. We need to think quite carefully about the balance of interests.
The hon. Gentleman asked why risk committees were not mandatory. Again, we have picked up on that in our response to question 1.6 from the Commission’s green paper. Risk committees can play an important role in the governance structures of financial institutions, but we must think carefully about whether they need to be mandatory in every financial institution, and about what a board needs to be satisfied that adequate risk procedures are in place. Simply having a risk committee does not necessarily mean that risk management will operate at a high standard. We need to be proportionate and think about when a risk committee would be of value to a company and when it would not. This goes back my point that we should not be aiming for a one-size-fits-all policy. It is important not only to have the right high-level principles in place, but to ensure that supervisors and boards look carefully at how they apply those principles to the way in which the business operates.
The seventh question was about audit. As the hon. Gentleman knows, Commissioner Barnier not only has produced the green paper on corporate governance, but
This is not the first time, however, that the issue has emerged. In the early part of the past decade, in the aftermath of Enron and other accounting and auditing issues, the previous Government looked quite carefully at the matter and concluded that the rotation was not appropriate. My recollection is that incidents of audit failure were higher in the years immediately following the rotation of audit firms, so we need to think carefully about the costs and benefits of such measures.
Mr Hoban: Oh yes—new financial products. We could have an interesting debate about how involved a board should be with each individual product that its firm produces. There is a whole suite of financial products on offer in one’s local bank or from an insurer. There are some 2,000 ISAs—individual savings accounts—across a wide range of financial institutions and I am not sure that we are suggesting that boards should approve each of those. Perhaps the hon. Gentleman wants that, but if he thinks about it, that might not be the right approach. Boards could end up being entirely focused on process and might not look at the broader issues.
When new products are being designed and developed, it is important that boards ensure that there are adequate risk procedures in place to ensure that the risks are understood, that the right process is in place, because they need to know those risks before the products are sold, and that the financial consequences of when those products go wrong are considered. Financial practice is littered with examples of where badly thought through and badly designed financial products have caused huge damage to some companies. It is absolutely right to have proper risk controls on the creation and design of such products, but I am not sure that getting boards to sign off each one is the proportionate response to that issue.
Chris Leslie: I think, Mr Crausby, that I am getting the hang of the way that the Committee works—questions and answers, rather than speeches. I will try to be briefer, because I am conscious of the time.
My next question is about shareholder activity. The green paper asks whether consideration should be given to the mandatory disclosure of institutional investor
I have a couple more questions, and my next one is on general board of directors issues. The EU green paper suggests that we need to reinforce the criminal liability of directors and move away from the “comply or explain” approach in the UK. Clearly, that approach currently underpins much of the regulatory architecture, but will the Minister reiterate that he does not believe that criminal liability issues need to be taken further? Will he also say why the FSA has not published its investigations from the Royal Bank of Scotland inquiry?
My final question is on the mandatory disclosure of the remuneration, in bands of £1 million, of directors and senior executives—the numbers, not the names—which, given that it has been raised in Prime Minister’s questions and elsewhere, is perhaps the biggest political issue of all. We heard what the Prime Minister and Chancellor have said on that, but I am confused. On page 105 of the document, the Minister states:
“However, as was elaborated in the Walker Review, there is a case for additional disclosures of the remuneration of senior staff in the largest banks because of the more complex risk management issues arising from their remuneration policies… A public breakdown of the aggregate pay disclosure…into bands of EUR 1 million…would provide more information on the ‘shape’ of pay and the distribution and composition of pay at different levels… This could enhance board governance and accountability to both shareholders and the public”.
I say, “Hear, hear!” to that. That was the Minister’s view on 8 September, and he submitted it just a week late. Was he slapped down by the Chancellor? Did he change his mind between then and now? Is he slightly embarrassed at having signed off the report? What changed his mind? Walker may have changed his mind, but does that necessarily mean that the whole British Government changed their mind in step with that? Has the Minister had a chance to speak to the Business Secretary about his views, because that view is clearly not in line with those expressed by the Business Secretary in many of his utterances before the general election?
Mr Hoban: First, shareholder activism was clearly an important concern of my predecessor, Lord Myners, when he was Financial Services Secretary. He expressed significant concern on the breaking of the link between the ownership role, which chairmen have traditionally exercised, and their engagement with the firm. The consequence of his views, Sir David Walker’s views and the debate on corporate governance was the publication of the stewardship code by the Financial Reporting Council, which did an excellent job of putting that together for institutional investors.
In its elaboration of that principle, the FRC states that the disclosure should include the policy on voting and the use made of it; whether proxy voting is used;
This is a “comply or explain” approach to stewardship. We will increasingly find more institutional investors expressing the way in which they engage with the holdings that they manage. It is also important that people who give the investment mandate to the fund managers are clear about the expectations they have about the way in which fund managers will exercise those votes. That requires pension fund trustees, the trustees of foundations and so on to take their side of this very seriously, too.
The “comply or explain” principle is an important one. It has been part of the development of corporate governance for some time. We recognise that corporate governance has some principles, and it is the responsibility of boards to determine how those principles should apply to their businesses. People can take into account the factors and circumstances that apply to their business and how they should influence the way in which they set up their procedures.
The “comply or explain” principle is much better; I am always wary of a prescriptive approach, because it is easy for people to find a way around such an approach, which becomes a box-ticking exercise, rather than a cultural shift, in an organisation. I think that a cultural shift is much better than a box-ticking approach.
On liabilities, which are linked to that point, Sir David Walker concluded that the problem was not so much with legal obligations, but, at a time of financial crisis, with competence and board functioning. The US response to the problems of Enron, WorldCom and so on was the implementation of Sarbanes–Oxley, which tightened liability for human-risk regimes. The benefits of that are not yet clear. I would counsel caution on such matters. We have seen that, if one gets the regulatory response wrong, businesses will move to other jurisdictions to raise capital, as they did from New York to London, as a consequence of Sarbanes-Oxley. Whether the FSA will publish its report on RBS—about which it has concerns regarding confidentiality—is a matter for the FSA, not the Government, who have not seen it.
Regarding the Walker recommendations on disclosure, I am happy to stand by our response to question 7a in the green paper. It is important that there is better disclosure and, of course, capital requirement directive 3 improves disclosure and applies to all operating companies. We recognise the importance of proper, robust disclosure, which will improve confidence in the financial sector.
The hon. Gentleman may have seen Sir David Walker’s recent article in the Financial Times: he had assumed by this stage that the debate in Europe would have moved further than it has in practice. In recognition of that, my right hon. Friend the Chancellor has written to his EU counterparts proposing that there should be an EU-wide agreement on pay disclosure in line with Sir David’s recommendations.
Jacob Rees-Mogg: I have two questions. The first relates to what was said about high-level principles. Could the Government have their own high-level principles; is it necessary to do this on the European level? For my
Mr Hoban: My hon. Friend raises two interesting questions. To deal with the second one first, he highlighted the approach that different types of shareholders might take. Some of them want to be long-term shareholders and engage regularly and fully with management and to play a slightly more active role; others believe that selling their shares is a clear signal of their view of the management’s ability to deliver shareholder returns, the right strategy and so on. There are different approaches. Lord Myners rather believed in the first approach to investment management, perhaps influenced by the way that he ran Gartmore. A number of people adopt the second approach. There is no consensus, which is why my hon. Friend is right to highlight that the “comply or explain” approach reflects the realities of investment management in the UK. One may take the view that that long-term activist approach is where one wants to be. Pension fund trustees and others can decide to appoint managers who adopt that approach. That is their choice, and it is right that there is some flexibility.
My hon. Friend’s first point is one that I have thought about carefully myself. At what level should Europe be engaged in the debate? It is helpful to agree some overarching principles at a European level, particularly given the freedom for businesses to set up wherever they want to. Shareholders would expect some common approaches to corporate governance. For some of the reasons that I set out in my opening remarks about the difference in legal and ownership structures and the different approaches, they should be high-level principles. It should be the responsibility of individual member states to determine the right application of those principles, whether through codes of practice, as with the Financial Reporting Council, or through company law. We should think carefully about subsidiarity in these matters and about what can be best done at a European level and what should be best done at a national level. In this case, we would all welcome support for some overarching principles, but we would be wary of a more prescriptive, detailed regime being imposed, given the variety of circumstances in member states.
John Cryer (Leyton and Wanstead) (Lab): It is always a pleasure to serve under your chairmanship, Mr Crausby. Could the Minister answer the first question posed by the hon. Member for North East Somerset? I nearly said the hon. Member for the 18th century: it is a compliment. What is the point of this document? The Minister says repeatedly that this is a matter for individual member states. He also says that there should be a series
Mr Hoban: I do not think that there is a straight binary divide and that this is either European or national. It is possible to have a blend here. A number of company issues are decided at a European level. Company law directives, for example, are enshrined in UK legislation, so the EU already exists in this space. It already has its legislative competence on other issues. I do not think that it does any harm to have higher standards of corporate governance across the EU, and that can be delivered through high-level principles. I stick to my point: the discretion about how they are implemented in national regulations, national law and national codes is a matter for individual member states. That is where the division opens up between what can be done at a European level and what should be done at a domestic level.
Kwasi Kwarteng (Spelthorne) (Con): On a point of order, Mr Crausby. As the hon. Gentleman has missed half the sitting, I wonder whether it is in order for him to be called so quickly to ask a question that may have been dealt with already.
Michael Connarty: Thank you, Mr Crausby. I was about to apologise for arriving late. I was on the 13.05 BA flight from Edinburgh airport, which sat on the tarmac for most of the time either at Edinburgh or Heathrow waiting to get off or on to a stand. As people know, particularly those who have looked at what the European Scrutiny Committee does, I am probably one of the most diligent Members on EU business in the House. I would not miss a Committee or any part of a Committee if I was put on to one, apart from as a result of the failures of British Airways—that notorious ragamuffin of an airline that serves Scotland so badly. I will once again return to BMI, Mr Crausby, I can assure you.
My question is simple. Today, it was announced that Credit Suisse, which has been caught out giving bonuses and so will be penalised, has now decided to give substantial additional remuneration to the tune of £2 billion to its staff. Surely, that shows that we need to work together across the EU, rather than individual countries doing their own thing. The need for discipline in remuneration and payments, and in the taxation of those payments, is highlighted by today’s announcement.
Mr Hoban: The Swiss, by virtue of the fact that they are outside the European economic area, are outside CRD3 and the rules apply differently to them in London. The hon. Gentleman makes an important point. The
Of course, Credit Suisse’s operations in the UK are covered by the code; but obviously, its operations outside the EU are not covered by it. That is why it is really important that, when we are seeking to influence reforms to financial regulation at global level, we try where possible to seek consistent application on a global basis to prevent regulatory arbitrage.
Michael Connarty: I hope you have no objection to this question, Mr Crausby. It says in paragraph 19.15 of the explanatory memorandum that came to the Committee which issues should be debated. At the bottom of that paragraph, it quite clearly says that the consistent effect of EU action should address
Does the Minister think that an organisation such as RBS—about 87% of which is held by the public purse and which was saved by the public purse, as indeed were Lloyds Banking Group and HBOS—should in fact be more disciplined by the Government, who actually own those shares through their agency, in the way that they give out bonuses and substantial remuneration for key players in their trading rooms?
Mr Hoban: The Government’s shareholding in RBS and Lloyds Banking Group is managed by United Kingdom Financial Investments Ltd, which exercises its duties as a shareholder. I have made this point elsewhere, but it is important that we get right pay and remuneration, and CRD3 is very helpful in doing that. There is a continued debate to be had about the right structures that should be in place. However, we expect state-owned banks to show restraint and prudence in their remuneration policies, and they should be exemplary in providing prime best practice. Nevertheless, it is the responsibility of UKFI to manage that relationship.
Michael Connarty: What role does the Minister play in this? Is any report made to the British Government, and if there is one, will it be made public, as all documents about how people are handling substantial amounts of Government investments—the people’s investments—should be made public?
Mr Hoban: Clearly, there is a range of ways in which the activities of RBS and Lloyds are reported to the public. The principal measures are their reported accounts and half-yearly and quarterly statements. Those are the prime vehicles for those organisations to report what they are up to. I am not quite sure what the hon. Gentleman is trying to get at and what he thinks we ought to see published.
The Chair: Order. If no other Members wish to ask questions, we will now proceed to the debate on the motion. For the benefit of new Members, I am about to call the Minister to move the motion on the paper. After that, the Opposition spokesman will be called to respond, if he so wishes, and then the debate will ensue.
That the Committee takes note of European Union Document No. 10823/10 and Addendum 1 relating to a Green Paper on corporate governance in financial institutions and remuneration policies; and supports the Government’s approach to work closely with the European Commission to deliver a strong, principles-based framework for financial sector corporate governance.—(Mr Hoban.)
Chris Leslie: I was hoping that the Minister would give us slightly stronger grounds for the assertion in the motion that we should be supporting the Government’s approach. I do not think that I misunderstand the Government’s wanting subsidiarity where appropriate—of course, that is correct. In many ways, we also believe that where appropriate, UK agencies, Government and regulators ought to take the relevant steps, but this European Union Green Paper gives us an opportunity to test whether the British Government are rising to the challenge set.
As all our constituents know from the credit crunch, the deficit that resulted from the banking failures is now, even as we speak, leading to massive cuts in local public services. Therefore, I was hoping that the Government would respond to the EU Green Paper by showing that they are not complacent about the causes of the credit crunch and that they want the British financial services industry to move into a phase where it is strong, sustainable and diverse for the long term. Sadly, from listening the Minister’s answers—charmingly phrased though they were—he seems to be taking a default laissez-faire approach to many of the cases where there is good cause for at least a debate on strengthening the regulatory arrangements on corporate governance. That might be something that the Liberal Democrats ought to wake up to and understand.
I know the Secretary of State for Business, Innovation and Skills is slightly trapped in his new enfeebled approach in Government, but there is at least one brave and impressive Liberal Democrat Member with us today, who takes great care over the detail of corporate governance issues. I genuinely appeal to him, in the new spirit of cross-party appeal, to join us today in simply asking the Minister why he is being consistently so weak over the changes that ought to be considered in the regulatory structures for our banks and financial services institutions. The Minister gave four answers that I want to reiterate.
First, should there be a directors’ duty of care on deposits? The Minister says, “Oh well, it wouldn’t be proportionate. We must take a common-sense view, not one-size-fits-all. We have to be cautious in these things”. “Think very carefully”, was a phrase that came from the Minister time and time again. That is not good enough.
Secondly, should boards approve new financial products? The Minister says that there are 2,000 ISA products, so it would be ridiculous for a board of directors to have to approve them, but not all companies have 2,000 ISA products of their own. There are ways and means that a board can structure its arrangements to ensure that
Thirdly, should we disclose how institutional investors are voting? Personally, I think that there is a strong case for that. Notwithstanding the debate about whether shareholders express their view by selling, surely we want to encourage a longer-term culture of ownership and responsibility in shareholding in the corporate governance arrangements in this country. More transparency from those exercising their rights to vote on behalf of all of us—as pension fund holders—would be one way to kick-start a better relationship between shareholders and managers. That is the cultural reform that this type of change may kick-start, but again the Minister falls short of the mark. It is not good enough.
Finally, I come to the Minister’s rather acrobatic description of how the British Government are dealing with the disclosure of high pay and our bankers, and not only who is being paid, but the numbers. The supreme irony of the Chancellor saying that he wants the issue dealt with at European level, and that it is not appropriate to be dealt with by the British regulatory authority, seems to go entirely against his principles of subsidiarity and how decisions should be made by member states. It is a completely incredible position and entirely in contradiction to the point that he made earlier in the document. That is certainly not good enough. The Minister is not doing enough to improve the corporate governance of our financial institutions, and he needs to do better.
Jacob Rees-Mogg: The Government must be incredibly careful about agreeing to more European regulation in financial services. I reiterate my interest as someone who is involved in financial services, with an office both in London and Singapore. If we get into a situation where part of British business that earns a great deal of money for this country is burdened with regulations from Europe that are much less of a problem in most European capitals because they have less of a financial services industry, we risk losing out not only to Singapore and Hong Kong but, as has been mentioned, to Switzerland. I am relieved that Her Majesty’s Government will be cautious about that.
The hon. Member for Nottingham East referred to voting shares. As an investment manager with long-term investment time horizons, I support the businesses that I am investing in and thus do not find it necessary to vote, but to sell the shares if they go wrong. That is a
Nic Dakin (Scunthorpe) (Lab): I have listened carefully to what has been said, having come to the debate with an open mind. The Minister seems somewhat complacent in his approach. Everything that has been raised has, in a sense, been batted back into the longer grass. Although I recognise the points made by the hon. Member for North East Somerset about the need for caution and for acting globally, there is also a need for action. After all, the reason why this country is in such difficulties today is the failure of the financial sector. Heavy prices are being paid; as my hon. Friend the Member for Nottingham East said, only today local government is hearing the price that it will have to pay. Young people are paying a particularly heavy price with the trebling of tuition fees, the cutting of the education maintenance allowance, the disappearance of the future jobs fund and the taking away of the child trust fund. The list is endless. Those are the consequences of something that has gone wrong.
When something has gone wrong, the complacency that I have been listening to this afternoon is not the way in which to deal with it. There is a need for a more rigorous, self-challenging approach to ensure that we do not find ourselves in that position again. I have listened carefully to what has been said, and most of the Minister’s answers relate to reassuring shareholders. That is right and proper. Shareholders need to be reassured, but behind the shareholders—the people who have suffered and have interests—are those who purchase goods and services. Sadly, since I have been a Member of Parliament, hardly a month has gone by when I have not been confronted by groups of people who felt let down by being wrongly sold goods or services that have proven to be unsatisfactory.
All of us who are pension holders—in a sense, the main stakeholders in many such things—and the great British public who bailed out the financial sector when it went tops up are the people who need reassurance, not just the shareholders. Some of the things raised in the documentation are about giving greater assurance through greater transparency, greater disclosure and greater accountability to those constituencies. That is dreadfully important if we are to have security going forward.
The number of directors was mentioned. The report draws attention to the lack of diversity and range in directors who are used, and identifies that as one of the symptoms that has led to problems in the past. Reducing the number of directors would help to address the issue around diversity, because when one runs out of people, one is forced to work harder. I speak as someone who has experience in my former existence as a principal of a college. I had to run and support search committees. When there is a problem, one finds the solution. Restricting the number of directorships would encourage a greater search for diversity. We are more likely to find that by creating that challenge.
All in all, I am somewhat disappointed with what I have heard this afternoon. It was rather too complacent and it could have been more energetic. Having heard the Minister on a number of occasions, I know that he is usually far more energetic. I am more surprised than I expected to be.
John Cryer: I agreed with a lot of what my hon. Friend the Member for Nottingham East said. This document is vague, meaningless and fairly empty. A number of interpretations can be placed on its contents. That is common with a lot of the documents that come out of Brussels—it has always been a case of “Leave it open; leave it vague.” The Minister says that we need a “series of overarching principles”, yet the document has no legal basis and no real impact on how the financial services industry works, so what is the point in doing it?
Those words have an echo of times past. I have heard Ministers say again and again that pieces of European legislation are completely empty and vacuous and have no legal basis. Usually, it happens in three stages. At the first, the Minister says, “It will never happen.” At the second stage—where we are now—they say, “It will happen, but it will not really mean anything.” At the third stage, they say, “It has happened and it will have a statutory basis. By the way, we have agreed it without telling anyone.” That happens with Government after Government. It happens with large and small measures. It effectively happened with the Single European Act—we were told that that was meaningless and empty, but it turned out to have a powerful statutory basis. It happened with the constitution and Lisbon, and it happened with the Maastricht treaty, the single currency and the growth and stability pact.
Time and time again, Ministers are in the same position as the Financial Secretary is today. I promise hon. Members that, at some point, something far more detailed will emerge. Whether I agree with it is not the point; the point is that the hon. Gentleman is saying that it is meaningless and empty. I imagine that when most of the Conservative members of the Committee, many of whom are new—I am a retread, myself—appeared before the selection panels of their Conservative associations, the issue of Europe would have came up. They would have given the expected answer: “I want to bomb Brussels and shoot everyone that survives”—I am exaggerating but hon. Members know what I mean. Now those Conservative Members will have to go back and explain why they have supported something that clearly could extend Brussels’ powers. I can promise members of the Committee that that will happen again and again, because it always does.
It might surprise Conservative Members that their leadership, when in power, does the opposite to what it promised in opposition. That has always been the history of Conservative Governments. Conservatives are the most Eurosceptic people on the planet when in opposition, but once they are in government, they go along with any old rubbish that flies out of Brussels and implement it with gusto. They never back down. We have already seen the Chancellor and the Prime Minister losing their wallets and their trousers in Brussels and bringing back documents that they did not tell the full truth about. Those documents have handed over budgetary powers
As I am sure the hon. Member for North East Somerset explained, the European Scrutiny Committee sent the green paper for debate in this Committee because it is very important. As my hon. Friend the Member for Leyton and Wanstead rightly indicated, it is also quite clear that the Commission will propose a directive. This process will not just end at a green paper; that is part of a journey that will lead eventually to a proper directive. That directive will come to the Council, where it will be agreed or disputed and amended in the normal way. It will then come to the European Scrutiny Committee, and I hope that it will then be debated on the Floor of the House, because it is an important item.
I do not take the same view as my hon. Friend the Member for Leyton and Wanstead about whether such things should be done at European level. It was clear from what we saw in the debacle following the meltdown of the banking system that the UK and the US were the biggest culprits and had a complete lack of proper governance. The meltdown happened on the Labour party’s watch, so none of us is free of guilt in this matter. Those of us who were concerned obviously did not fight hard enough. Even those Liberal Members—particularly the Business Secretary—who claimed to have seen the meltdown in their crystal balls never made their case loud enough to be heard.
We were all guilty of basically taking the excessive, very greedy returns that came—not just to us personally, but to the bankers—during that period. We therefore need governance, and it has to be worldwide. It also has to be focused. We have agreed, whether we like it or not, to be a member of the single market. It is likely that this measure will come forward as a single market proposal on which we will not have the right to veto—let us be quite clear about that and accept it. I am sure that the hon. Member for North East Somerset is not happy about that, but it is a fact. We can get a qualified majority to block the proposal, but if we get a qualified majority against our position, we will have to be bound
The document contains some very important matters, which we could have had under our control, had we shown some discipline. The first document came on 19 July, and there is a recommendation on the deferral of bonuses and the potential to claw back bonuses when there has subsequently been poor performance. Would not Fred “the Shred” Goodwin be a poorer man now if that had been the case? As the man who followed policies that destroyed one of the greatest banks in the UK, as he is recognised in Scotland, he walked off with a barrel-load of money in bonuses and a substantial pension—even with his decision not to take it all, it is about £500,000 a year. The deferral of bonuses would therefore have been a good thing. If they had been based on the performance of the banks, we might not have had this terrible embarrassment.
There is also the anger of the public. Let us be frank: if anybody wants a subject to get people interested in EU business, they should talk to people about this. People have no confidence in the Government of the day, and they had none in the previous Government, because there was not proper governance and we did not control the banks. We allowed the banks to do frightening things with derivatives.
I was taught by a Conservative. My professor, Andrew Bain, was a gold medallist from Cambridge and the youngest professor of a department in the UK. In his view of good governance, he was very strict about what banks should be doing and how they should be controlled. If those rules had been applied, we would not be in the situation that we are in at the moment. For example, it is interesting that the proposal on the proportion of capital to be held in reserves is similar to that proposed back in the 1960s and the early ’70s by a disciplined professor of economics. The situation has got out of control, however. The risk analysis people in Lloyds, even today, do not know the value of their derivatives in the HBOS package, so they are writing them off bit by bit and making their customers pay for them.
We should be looking at discipline in governance, and we have to do that across the EU. It is not good enough to leave it to one Government, or we will have another example of this happening again in the UK. We have heard the plea that we should not be hobbling our investment bankers. I just want to keep them somewhere nearer the ground than the flights of fancy they were into when they started to create derivatives, and then lever them 300 times, so that people knew not the value of the junk. These junk bonds were attached to people who used to live in caravan parks in America and could not afford to pay the mortgages on the houses they had bought with lashings of money that was, in fact, just borrowed debt. Some Conservative Members look sceptical. Perhaps they think that that is the ideal world—it certainly makes the investment bankers lots of money—but it has created a lot of tragedy, so we have to address the problem.
The paper deals with addressing such things as stock options, asserting the role of the shareholders, and, particularly, remuneration, which is one of my great concerns. We have to stop the idea that bankers deserve a bonus of £1 million at Christmas for being in the banking sector because there is a thought that they will go to elsewhere. We need a European agreement about what is reasonable. If someone makes a substantial amount of money for the country that they are in, through the banking that they carry out, I have no problem with them getting £1 million. What I am concerned about is that they get the £1 million despite impoverishing the countries they live in and destroying the banks which they are supposed to be representing. It is the people’s money at the end of the day—it is not their money. There is very little difference between a rogue trader and someone who is getting £1 million for flights of fancy in putting together derivatives that make them and their bank a lot of money, but destroy the economy of the people who go out there and sweat hard, and who put their money into those banks and investment packages in the first place.
I might say that the original recommendation drew heavily on Labour Government experience—the things that we decided were needed after the whole thing melted down. That is the reality. We already had practice in this field, and hopefully we will see more of it across the EU. Hopefully, we will sign up to that directive for discipline across the EU, as well as in the UK.
As the Minister said, it is worth looking at the review by Sir David Walker. That review is ongoing and makes similar recommendations to the EU, so hopefully there will not be the great divergence feared by the hon. Member for North East Somerset, and people will not be going off to the bourse or to some other part of the EU. I do not think that they will go off to Hong Kong. Hong Kong is not as stable as the UK. The UK is inherently attractive for trading to people in the investment field, and it will not, in any way, be destroyed by this.
The G20 negotiations will probably be more influential on that than the EU discussions. I hope that they will influence the UK and the EU to ensure that what we see coming out of the green paper is a directive that sticks consistently with that and to which our Government sign up.
My hon. Friend the Member for Scunthorpe said that the Minister is usually more aggressive, but that is because he is usually standing up to defend the indefensible: the slashing and the cuts that he is bringing to the budgets of this country. On this issue, I am glad that he is showing a bit of balance. Hopefully, we will get a balanced directive to which all parties can sign up, and perhaps the people of this country will start to have some confidence that we are looking after them and not after our friends and our parties’ future votes. We are not here to play games and feed our friends, although
Mr Hoban: We have had an interesting debate, however short. I want to reflect on some of the comments that have been made. The hon. Member for Linlithgow and East Falkirk started his remarks by saying that we were on a journey, but two journeys are being made—the hon. Member for Nottingham East should think about this carefully when he reflects on his earlier remarks—because the UK has been on a journey around corporate governance for far longer than many of our European partners. There has been a long tradition of work on corporate governance.
Many of the issues that are raised in the Commission’s green paper were considered by Sir David Walker, who was asked to do that work not by this Government, but by the previous Government. He spent a great deal of time taking evidence and reflecting on the issues to see where corporate governance could be improved in this country. We have not just sat in the Treasury, put a finger on something and said, “What shall we say about this?” It is the product of detailed work, much of which has been done by Sir David Walker, which is why we can reflect on that experience when responding to some of the questions raised in the EU green paper.
It is easy when in opposition—we have been there—to say, “You should do this”, and get the board to approve every single product, without thinking through the costs and benefits of those policies. I am not entirely sure that directors want to spend their time reading through the small print of an insurance policy or ISA produced by Barclays. They will use their time productively to ensure that the risk controls are in place in that bank to deal with issues such as the more complex and exotic derivatives. The hon. Member for Nottingham East exposed the weakness of his argument by talking about the range of products in a bank. That is why being proportionate and thinking carefully about how those principles are applied is absolutely the right thing to do.
Chris Leslie: The Minister is trying to characterise my argument as though I am asking directors to spend all their time reading through small print and looking at the micro-issues, rather than the macro-issues, but—as he well knows—there are ways to construct an approval mechanism by boards of directors so that they can take upon their shoulders clearer and more formal responsibility. Surely the Minister must acknowledge that there was a failing, which is yet to be addressed, that was brought about by a lack of awareness by boards of directors of some of the products that they were selling. Surely he must acknowledge that that is an ongoing problem.
Mr Hoban: The hon. Gentleman has moved his position. He is absolutely right that there should be a process and confidence that actions are being taken in the institutions for which those directors are responsible to—
Mr Hoban: The hon. Gentleman says that, but he is again going back to signing off each individual product. There should be a process in place so that they understand the risks attached to particular products, the consequences for their institutions and the right steps that should be taken to mitigate those risks. That is part of a broader process. It is not just a matter of corporate governance. We have seen a whole raft of initiatives on that, such as the requirement that banks hold more capital against some of those products. We are looking for a much more interventionist regulatory regime in the UK to look at some of those issues. The Financial Services Authority is looking at much more work on product intervention as part of its regulatory strategy, for example.
There needs to be a proper process in place. The hon. Gentleman may have become aware of the issues only recently, but people such as Sir David Walker, who is well respected for his work, have gone through them. He was appointed by the previous Government to look at the issues and has done, in most people’s minds, an effective job. That is why the UK is in a much stronger position to influence the argument, and why we have taken time to address the green paper in detail. We have marched ahead. One of the reasons why the UK is such a popular place not only for UK businesses, but for businesses around the world to raise capital is the strength of our protection of shareholder interests. Shareholders in UK-listed companies have much greater protection than those in companies listed elsewhere. They can, therefore, approve significant shareholder transactions and so on.
The hon. Member for Scunthorpe says that we talk about shareholders too much, but who are the shareholders? They are people in his constituency and mine who have their money locked up in pension funds. They are the people who benefit from better corporate governance, better returns and better financial stability. Too often, we think about this debate in the context of people in Canary Wharf and people sitting in dealing rooms in the City. The reality is that the people who benefit are the shareholders in his constituency and mine who have put their money into equity ISAs and pension funds. They want to know that, when they invest their money, it will be well looked after and will get good returns. Improved corporate governance is part of that.
We are in a better place to influence the debate. On EU action and what should happen to improve financial sector corporate governance, we think that the governance regime needs to be strengthened in a number of areas. We want to see high-level governance principles for firms and comparable stewardship principles for shareholders that are established at an EU level and reflected in consistent national provisions of, where appropriate, best practice codes. We want to see a stronger role for supervisors to specify the steps to be taken by firms and investors to comply with the measures and codes. We want a framework for board risk management, including board ownership of bank recovery plans. We want a requirement for open, independent appointments to publicly owned financial institutions, so that there is a clear, meritocratic process that applies not only to publicly owned financial institutions, but to other bodies to include the new supervisory bodies in Europe.
We want to see more detailed risk disclosures, particularly by significant banks, as well as more detailed disclosure in relation to remuneration and consideration of the
We have not stopped building on the previous Government’s work. My right hon. Friend the Secretary of State for Business, Innovation and Skills has launched a consultation on introducing the operating and financial review—a measure that the previous Government dropped—and has called for evidence on a long-term focus for corporate Britain. We are using those measures to take this country’s corporate governance framework further forward. We are able to demonstrate not just what happened before, but what is happening now to strengthen the corporate governance arrangements, and will be able to play a significant role in shaping the work in Brussels.
I say to the hon. Member for Leyton and Wanstead that a lot of the work on company law and governance is dealt with on a European level. We have directives in relation to company law and accounting, a transparency directive and a prospectus directive. We also have the markets in financial instruments directive and the investment fund manager directive. There is already a great deal of competence, but he is right that we need to make sure that, when those matters are debated at a European level, we engage in the debate. One of this Government’s characteristics is our willingness to get stuck in and engaged in the debate in Brussels. That is why we took the consultation so seriously, and why we have highlighted the areas in which we have made progress. We will work closely with the Commission and member states so that we get a directive that recognises the differences between each member state and that does not assume that we have the same model.
Let me pick up on a couple of other points that have been raised today about the diversity of directors. The hon. Member for Nottingham East will be pleased to know that my right hon. Friend the Secretary of State for Business, Innovation and Skills has asked Lord Davies to look at diversity in the boardroom, which again demonstrates our willingness to take forward some of these issues. It is important that there is a diverse range of backgrounds and experiences on boards. It is also vital that we have people in boardrooms who are able to challenge and really put the executives through their paces. So, diversity is important but so are the experience and the skills that are needed to probe the executives on how they implement some of their strategies.
The hon. Member for Linlithgow and East Falkirk talked about the deferral of shares. Again, that is an important part of the remuneration structure. We have been very clear that there should be deferral of some part of bonuses and indeed that there should be a claw back where performance is poor. That is something that we raised with the FSA at the time of the Budget and it will publish its code shortly. We will see how far it has taken that. However, the hon. Gentleman is absolutely right. In too many instances, the remuneration packages and the structures of remuneration in individual institutions created an incentive to take short-term risks where the
Of course, it is not just a European debate, as the hon. Gentleman also mentioned. It is right that there should be an international response to this issue. The issues of bank governance and risk management are being worked on in the FSB and also in Basel. I think that that international framework will be, as he said, of growing importance to ensure that there is consistency across jurisdictions. That consistency is something that we need to work towards. However, we have to strike the right balance. We have to do what we think is in the interests of strengthening financial stability in our own jurisdiction as well as achieving an international consensus. Sometimes that is a very difficult balance to strike.
So I think that this has been a very helpful debate. I am pleased that the European Scrutiny Committee scheduled it, as we do not have that many opportunities to talk about corporate governance in this place. It is an important issue. However, let me just reassure the Committee that we are clear about our objectives; I set those out earlier. The UK is a world leader on shareholder engagement and our priority is to protect and preserve that status.
We welcome the opportunity for the UK to help improve financial sector governance across the EU. Picking up on the point made by my hon. Friend the Member for North East Somerset, I believe that these principles must be high-level so that they can be applied fairly and proportionately in national codes. The EU is a very diverse place and there is a danger that we implement one-size-fits-all solutions that do not meet the needs of individual jurisdictions. We will continue to push our principles during the weeks and months ahead, as this document moves from a green paper to further legislative proposals from the Commission.
That the Committee takes note of European Union Document No. 10823/10 and Addendum 1 relating to a Green Paper on corporate governance in financial institutions and remuneration policies; and supports the Government’s approach to work closely with the European Commission to deliver a strong, principles-based framework for financial sector corporate governance.
|©Parliamentary copyright||Prepared 14th December 2010|