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The new liability clauses were originally in symmetry but, following an amendment introduced by Margaret Hodge in Committee in the other place on 6 July, that symmetry was lost. The upshot of this appears to be to confer compensation rights on non-shareholders who acquire shares on the basis of untrue and misleading transparency disclosures and at the same time to take away whatever rights existing shareholders may have in respect of such untrue misleading statements. We argue that this is surely a counter intuitive outcome. In any case, the Government should ensure that the common law rights of existing shareholders, which will be eliminated by the new regime, should be within the remit of the forthcoming review of the liability compensation regime by Professor Paul Davies to which the Minister referred.
Lord Sainsbury of Turville: My Lords, I rise to resist Amendment No. 984A. Clause 899, as amended by government Amendment No. 984, applies only in respect of reports or statements published in response to provisions implementing the obligations in the transparency directive. It cannot therefore apply to anything that is published before FSA rules come into force. FSA rules will not be able to come into force until the Bill achieves Royal Assent. The regime will then apply to all publications that are made in association with those rules. There is no question of this provision affecting any right of action that will have accrued before the Act achieves Royal Assent or before the provision itself comes into force. Therefore, I ask the noble Lord not to press his amendment.
On Question, Motion agreed to.
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 969 to 983.
Moved accordingly and, on Question, Motion agreed to.
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 984.
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Moved, That the House do agree with the Commons in their Amendment No. 984.—(Lord Sainsbury of Turville.)
[Amendment No. 984A not moved.]
On Question, Motion agreed to.
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 985 to 987. I have already spoken to these amendments.
Moved accordingly and, on Question, Motion agreed to.
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 988 to 991.
These clauses would confer a power on the Secretary of State and the Treasury to make regulations requiring certain categories of institutional investor to provide information about the exercise, or non-exercise, of their voting rights.
We welcome the valuable debate which this policy has attracted during the passage of the Bill, not least the detailed and thoughtful contributions from noble Lords opposite. I argue that two strong themes have emerged from this debate. The first is the near disappearance of those who oppose transparency of voting on principle. This is welcome: the case for transparency is a good one. It opens the way to a discussion of how best to achieve appropriate and cost-effective disclosures. It links also to the second theme: the strong support for an industry-led solution. This too I welcome. It is fully consistent with the Government’s intentions in promoting this power. As I made clear, the Government intend to see how market practice evolves before considering a mandatory regime. This power is a reserve power, a back-up to be used if the voluntary approach does not deliver.
As I mentioned earlier, this debate has been marked by increased recognition that transparency of voting is right in principle. I think that this reflects more than just a belief that there is an entitlement to this information—it recognises the benefits of disclosure. First, greater transparency of voting can only increase the confidence of savers in the governance being exercised on their behalf by institutional investors. Secondly, disclosure will make institutional investors more accountable for the governance decisions they make on behalf of savers, providing stronger incentives to cast thoughtful votes.
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It has been said that disclosures will distort voting decisions, either encouraging mindless voting or discouraging informed voting. It is hard to see how both can be right. If an institution is prepared to tell the company how it votes, as it should under the industry’s best practice guidelines, I am not sure why wider disclosure would provoke such irrational behaviour. It is not obvious that the voting system in America has deteriorated in the years since it mandated disclosure. Thirdly, greater transparency
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Fourthly, greater transparency will enhance shareholder engagement between institutions and investee companies. More accountability and stronger incentives to cast thoughtful votes promote more focused dialogue between companies and their owners’ representatives. Again, some say that disclosure will actually harm engagement. If that is so, why are so many institutions—a dozen of the 35 largest at the last count, including major firms such as Standard Life and the Pru—moving to make voluntary disclosures? It is not just the voluntary trend. Major jurisdictions such as the US and Canada have adopted public disclosure rules, and other countries are thinking about it. Public support seems healthy; a recent survey among pension fund trustees found nine out of 10 agreeing that fund managers should publicly disclose their votes.
It seems to me that the case in principle for disclosure and for taking a power to make sure it happens has clearly been made. However, I am equally clear that the case for using the power is still to be made. Any disclosure regime must be workable and practicable, and it must be cost-effective. Accordingly, we have ensured that the power is so framed as to mitigate important concerns raised in these debates. The clauses that this House is now considering are not the same as those which were taken out of the Bill by this House at Third Reading. The amended provisions make clear that the Government have the power to include the following requirements in any mandatory disclosure regime—first, they can ensure disclosure of voting instructions, as opposed to disclosure of votes cast. Secondly, they can permit parties to meet their disclosure obligations by reference to other parties’ disclosures in respect of the same investments. Finally, they can permit disclosures to be made at an aggregate level, for example, by a fund manager, where this does not conceal relevant decision-making at the level of the individual institutional investor. I agree that all those aspects may be elements of a proportionate and cost-effective disclosure regime, and they will need to be properly considered as it is being developed.
One issue that will need to be considered is public versus private disclosure. Some argue that there is a fundamental distinction between disclosure to members and disclosure to the wider public. However, I presume noble Lords opposite would support public disclosure where it was in the interests of the members, for example, if there were cost advantages in maintaining a public website, rather than writing to individual members; or through the greater scrutiny of potential conflicts of interest which might arise. Those will need to be weighed against any disadvantages of wider disclosure. However, in the absence of any further arguments, we should not prejudge this issue at this stage.
Another issue that will need to be considered is the risk of misuse of disclosures. In line with our approach elsewhere in the Bill, I make it clear that we
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Let me turn now to the development of a proportionate and cost-effective regime. The Government are in no rush to regulate. This is not a concession to noble Lords opposite; it is a point of agreement on principle. There are good reasons why a voluntary industry-led regime may be the first best option to meet the Government’s objectives. First, there is the evidence, ably brought out by noble Lords opposite, that a voluntary regime may be the lower cost option. A voluntary regime provides scope to build on the different mechanisms that already exist, drawing on the industry’s best practice guidelines. Effort can be put into ensuring transparency, rather than box-ticking and rules-driven compliance. Secondly, it would be more flexible. Different organisations can adapt disclosure patterns to meet the needs of their constituencies. Good faith and transparency of practice will be key to making this credible. Thirdly, a voluntary regime is a chance for the industry to show ownership and commitment, as opposed to the Government imposing the requirements.
This ownership and commitment will be vital if a voluntary regime is to deliver the meaningful levels of disclosure needed to make this work. So I am greatly encouraged by the first steps that the industry is taking to put together a voluntary code. We support this and will want to talk to the industry.
Industry must have a fair time to deliver a workable solution and I repeat our earlier assurances: if the decision were to be made to exercise the power, the Government will ensure that there is full consultation and a cost-benefit analysis to make sure that any final regime was proportionate and properly targeted. Any final decision would, of course, be subject to this House’s agreement through the affirmative resolution procedure, providing a further check on any precipitate rush to regulate.
The case for disclosure of voting is clear. The case of doing it in a way that maximises the benefit to investors in these collective enterprises and the public at large is equally clear. Noble Lords have our commitment that we will give the industry every opportunity to adopt a voluntary approach before we consider producing regulations. I beg to move.
Moved, that the House do agree with the Commons in their Amendment No. 988.—(Lord Sainsbury of Turville.)
Lord Hodgson of Astley Abbotts: My Lords, I beg to move, as an amendment to the Motion that the House do agree with the Commons in their Amendment No. 988, leave out “agree” and insert “disagree”.
I shall speak also to Amendments Nos. 989A to 991A. We return to familiar ground and the case has been summarised by the Government that a reserve power is needed to compel financial institutions to disclose to the world at large, not their clients, how they have voted their shares. On these Benches, we argue that not only is this power unnecessary, it is
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We debated this issue at some length in Grand Committee and it came to a head on Third Reading on 23 May, when the House decided to strike out this provision from Clause 865. The provision has now been reinstated with four clauses, rather than one. To be fair to the Government, Amendments Nos. 989, 990 and 991 attempt to provide clarity on some of the technical aspects of the proposal. We are grateful for that.
We note that financial institutions can now have the necessary information disclosed on their behalf by their agents and that disclosure can now be of voting intentions given. Finally, under Amendment No. 991 at subsection (5)(b), an institution will have to disclose only an aggregate of all its voting in respect of an individual company. But that destroys the value of the whole exercise.
Consider the position of a major fund manager who manages a series of unit trusts, investment trusts and pension funds for some of which he has responsibility in deciding how to vote and for others where the client has retained that right but has delegated the disclosure to the manager. We could then have a ludicrous situation where, for a major company, say, Marks and Spencer, a fund manager would have to report that in respect of a particular resolution at an AGM it voted, say, W shares in favour, X shares against, abstained on Y shares, while Z shares were not voted on at all. The fund manager would not even have taken the decision in respect of some of those shares.
In practice, this remains a valueless exercise but is also likely to give rise to our old friend the law of unintended consequences as outsiders and third parties seek to draw unwarranted conclusions from the figures disclosed. The House should be aware that there is already a trend towards greater public disclosure. The Investment Management Association, whose 35 members look after 62 per cent of all UK equities, reports a steady increase in the number of their members reporting publicly—three years ago it was seven, last year it was 10 and now it is 12. Hermes, which manages the huge British Telecom and Post Office pension funds is about to join, making 13 in all.
If the Government proceed with this clause, that momentum may well be stalled. Why spend money and resources on developing disclosure procedures that may well not fit with the regulations that are produced? It may be better to sit on one’s hands and see what will be required by statute.
Disclosures, as, I think, the Minister accepts, are complex and do not fit with a one-size-fits-all requirement. The IMA’s 2005 annual survey of fund managers’ engagement analysed voting details that had been published on websites. The 12 managers that currently disclose publicly used a wide variety of ways of disclosing.
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Some give narrative reasons as to how they voted in a contentious situation; some give narrative reasons for voting against, or consciously withholding their vote; some give no explanation at all. This wide variation in the matters reported indicates the complexity of the area and the difficulty of introducing a one-size-fits-all legislative requirement, which would only serve to undermine the progress made to date.
Furthermore, those that analyse the issues give narrative reasons to do so, in order to provide a clear picture to users. By contrast, legislative requirements would be likely to result in mechanistic, meaningless reporting. If regulations are made to require voting disclosure, there is a risk that managers could be discouraged from voting. Far from engaging with shareholders, as the Minister thought, the reverse could happen. That could in turn lead to some managers choosing to get round the disclosure requirement by not voting, which cannot be what the Government seek to achieve.
The killer blow to these amendments comes not from the City or, indeed, from the Opposition Benches. It comes from the Minister’s colleague, the Chancellor of the Exchequer. He wrote in the FT on 18 October that his aim is to reduce the regulatory burdens by 25 per cent; he has subsequently met a group of leading City figures to discuss that objective. The Economic Secretary to the Treasury, Ed Balls MP, in a speech to the City of London on 25 October, said:
“And it is this commitment to openness and internationalism, our light-touch and risk-based regulatory approach—combined with the great pool of talent gathered from across the planet—that underpins London’s success as a modern international financial centre”.
Clearly, the left hand of the Treasury has no idea what the right hand of the DTI is doing. We on the Opposition Benches are happy both to be the messenger between the two departments and—on this occasion, at least—to help the Chancellor of the Exchequer achieve his objective. I beg to move.
Moved, as an amendment to the Motion that the House do agree with the Commons in their Amendment No. 988, leave out “agree” and insert “disagree”.—(Lord Hodgson of Astley Abbotts.)
Lord Razzall: My Lords, this amendment provides one of the rare occasions in a Bill of this complexity—and, indeed, a quite rare occasion in this House—when how we would vote, were the House to be divided, would depend much on the quality both of the response from the Minister and of the speech by the noble Lord moving the amendment. That is because, as both the Minister and the noble Lord, Lord Hodgson, have indicated, this was debated strongly both in Committee and at Third Reading.
The noble Lord, Lord Hodgson, made an extremely powerful speech. I would have agreed with almost every word, had it been a speech on the regulations that the Government have announced they were about to implement. The real concern when we debated this, particularly at Third Reading, was
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The first undertaking stated at some length by the Minister, with which I am sure the House agrees, is that it is primarily desirable to have a voluntary system here, if we can. If he was not going so far as to make this an undertaking, then I invite him to do so when he has the opportunity. However, I understood him to say that the Government will not exercise the power that they are taking under this section if they, and the City, are satisfied that an appropriate voluntary system has been put in place, and that the Government do not regard the existence of this power as providing any disincentive that would choke off the plans that many institutions already have in place to have a voluntary system. If he can firm up that undertaking, it will go a long way in persuading us to support the Government’s taking this power.
The second point is extremely important, although the noble Lord, Lord Hodgson, did not touch on it. I understood the Minister to say that were he regretfully to have to exercise this power and bring in regulations, those regulations would not be implemented without extensive consultation with those who would be affected.
If I may say so, that would be the appropriate place for many of the points raised by the noble Lord, Lord Hodgson, to be reflected in the consultation. First, can the Minister confirm that this power will not be used unless, in extremis, the Government take the view that a voluntary system has not worked; and, secondly, can he repeat the undertaking that, were he to have to exercise the power, adequate consultation would take place to ensure that the points made by the noble Lord, Lord Hodgson, were taken into account in framing the regulations? If he can give those assurances, I am sure that he will be supported by these Benches.
Lord Sainsbury of Turville: My Lords, I shall respond to the two requests for reassurance from the noble Lord, Lord Razzall. First, I said at the end of my speech that we will give industry every opportunity to adopt a voluntary approach before we even consider producing regulations. That is absolutely clear. We will not impose a mandatory regime if industry comes up with an acceptable voluntary scheme.
I think that, in this case, we all agree what the objective is: we want to see more information about the exercise of institutions’ voting rights. There is only one thing on which there seems to be any doubt. The noble Lord is arguing that the idea that there might be regulations in due course will totally turn industry off doing anything in this regard. I find that argument implausible and rather bizarre because it seems to me that the prospect of regulations would give industry every incentive to introduce a voluntary scheme. I think that the institutions will take a very sensible and mature view and get on with introducing further information about the exercise of their voting rights.
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Lord Hodgson of Astley Abbotts: My Lords, I am grateful for the Minister’s further words. They may have comforted the noble Lord, Lord Razzall, but we have the following problems. The first is that there is a difference between the general public and members. Members are clearly entitled to know what is being done with their money on their behalf. The position of the general public being told is somewhat different. We do not like the idea of reserved powers.
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