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Lord Fraser of Carmyllie: My Lords, I rise briefly to support my noble friend in his Amendment No. 12. This is a matter that we raised in Committee. I am still baffled as to why the Government do not understand the impossibility of the situation in which we fear the FSA might be placed.
Under the provisions in paragraph 2 of Schedule 1, the Treasury is given the absolute and exclusive power both to appoint and remove directors of the FSA. If it were to exercise that power--it may be for the best of reasons--and remove a number of non-executive directors and fail to reappoint them, as my noble friend has pointed out, in such circumstances there would be only one route available to the FSA; namely, to ensure that among the majority of the non-executives on the governing body some who held executive functions would have to be removed from it. That is simply a nonsense. My noble friend has put together an elegant and simple solution which avoids any risk of the FSA being put in a position of having to attempt the impossible.
Lord Stewartby: My Lords, I support my noble friend Lord Kingsland. There is a curiosity in paragraph 3 on page 228, as he has pointed out. The authority is not in a position to secure that the majority of the members of its governing body are non-executive members if it does not have powers to compel the Treasury to make appointments of that kind. If all the non-executive members are to be members of the non-executive committee, which is the proposal in the Bill under headings (a) and (b) of paragraph 3(1), I cannot see why the members of the non-executive committee are to be appointed by the authority. If it is a requirement of the Bill that they should all be members of the non-executive committee, it would be sensible to include that provision, in terms, in the Bill. I hope that the Minister is able to reassure us that this is not a constitutional problem, or that if it is, as I suspect, he will be receptive to a solution along the lines put forward by my noble friend.
Lord Elton: My Lords, in seeking to allay my fears in this matter the Minister was kind enough to write to me pointing out that the authority had power under the schedule to secure a majority of independent non-executive directors by its command over its own constitution. Surely, if the Treasury has the superior power of dismissal it must also have the same responsibility to maintain the balance which we all seek. I hope that the Minister will find this a suitable solution.
Lord McIntosh of Haringey: My Lords, these four amendments, and the one which was not moved but spoken to, all concern the role of the non-executive
directors of the FSA. In our view--I understand from the speeches so far that it is shared by all noble Lords--the non-executive directors have a key role to play in the FSA in line with best practice in corporate governance. While I do not believe that I need refer again to the Cadbury report on this matter, perhaps I may quote with approval the noble Lord, Lord Saatchi, who in Committee on 16th March (at col. 1743) himself referred to the FSA's consultation paper. That consultation paper defines the non-executive role as normally including,
- "Assisting their executive colleagues with the firm's governing body in setting, and monitoring, the firm's strategy; providing an independent perspective to the overall running of the business, scrutinising the approach of executive management, the firm's performance and standards of conduct; and carrying out other responsibilities as assigned by the firm, for example as a member of the board committee, such as an audit or remuneration committee".
Perhaps there has been a misunderstanding, since we have specified in paragraph 4 of Schedule 1 certain functions to be carried out only by the non-executive committee. These were described disparagingly as housekeeping functions. It is important that these functions are carried out by the non-executive committee since they include issues which it would be invidious for the executive members of the board to decide, such as determining the remuneration of the chairman and executive members.
As the noble and learned Lord, Lord Donaldson, pointed out in Committee, the confusion may have arisen in part from the use of the term "the non-executive functions" which is defined in paragraph 4(2) of Schedule 1. This is a drafting device to clarify the operation of the paragraph and does not in any sense limit the role of the non-executive members of the board. The noble and learned Lord suggested in Committee that the term should be placed in quotation marks. This would not change its legal effect, but it might help Members of the House to think of the term as if it were in quotation marks. Parliamentary Counsel is considering that suggestion. I do not believe that it would require an amendment; it would be regarded as purely grammatical.
The important point is that the role of the non-executive members is in no way restricted to the functions of the non-executive committee. As the annual report states (at page 107),
- "all directors are equally accountable under the law for the proper stewardship of the FSA's affairs".
The question is raised whether it is possible under paragraph 3 of the schedule for the authority to secure that the majority of the members of its governing body
are non-executive members, since the schedule requires that the members are appointed by the Treasury. I believe that any problem here is more apparent than real. If the Treasury, for example, used its power of removal in such a way that there was no longer a non-executive majority, it is likely that it would have great difficulty in avoiding an adverse outcome from judicial review. We are confident that that would not be the case. In those circumstances, I believe that the provisions of the schedule in relation to non-executive directors are fully consistent with any standard of best corporate governance. I am, therefore, unable to accept the amendments.4.45 p.m.
Lord Kingsland: My Lords, my understanding of the Minister's response is that he agrees with every amendment that we have tabled but does not believe that they are necessary because that is in effect what the Bill says; or would say following a successful judicial review. If so, why is the Minister unwilling to amend the Bill to make clear what is clearly unclear to everyone else? Where greater clarity can be achieved, surely less trouble will be generated in future. For the City it would at least be one element of the Bill which was mercifully clear. Is the noble Lord unwilling to make these changes because of amour propre, as the French would say; or does he truly believe that a copy of his speech in Hansard will always accompany the Bill in every boardroom in future so that executives can ensure they are on the right track? I reserve discretion to return to this matter at Third Reading. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 13 to 16 not moved.]
Lord Kingsland moved Amendment No. 17:
- Page 230, line 6, leave out ("Authority") and insert ("Treasury").
The noble Lord said: My Lords, in moving Amendment No. 17 I should like to speak also to Amendments Nos. 18 to 22. The proper investigation of complaints against the authority is one of the most important checks and balances in the Bill. It will restrain the improper or oppressive use of the authority's powers. It is vital, therefore, that the investigator should not only be independent of the authority but should be seen to be independent. It is also crucial that the investigator should carry with his or her office real, not imaginary, authority.
Amendments Nos. 16 and 17 concern the issue of the independence of the investigator from the Financial Services Authority. At present, paragraph 7(4) provides that it is the authority which decides whether the terms and conditions on which the investigator is appointed are designed to secure that he will be free to act independently of the authority. It appears, at least to the Opposition, to be wholly inappropriate for the authority itself to make this decision. The authority will have an obvious and clear conflict of interest. Amendment No. 16 requires the Treasury, rather than
the authority, to exercise its judgment on the independence of the investigator. We believe that that is an infinitely better solution.The other amendments would require, first, that all complaints received by the authority should be passed to the investigator; and, secondly, that where the investigator reported that a complaint was well founded, or criticised the authority in his report, the investigator should include in that report a recommendation to the authority that it take steps to remedy the matter complained of including, where appropriate, the making of an ex gratia payment.
The latter provision will not entitle the investigator to require the authority to make compensatory payments to persons whose complaints have been shown to be well founded. If the FSA is to enjoy the statutory immunity in paragraph 19 of Schedule 1, much more should be done to apply pressure on the authority to take steps to provide remedies where it has been found to have been negligent, oppressive or unreasonable.
Many noble Lords will recall the long debate in Committee over whether all complaints should go directly to the investigator or whether they should go to the authority first for an initial review. It remains our view that complainants would prefer to deal with an independent investigator rather than the person against whom the complaint is being made.
Many complainants will be authorised persons. The investigation of a complaint by the investigator would not affect so directly the relationship between the authority and the complainant. It is also our view that the investigator might begin to take on trust the authority's views; and would not accordingly approach the investigation of complaints with the necessary independence of mind. We believe that our proposals would strengthen the current investigation arrangements without in any way prejudicing the position of the FSA.
Let us consider the relationship between the authority and the financial community. It is clear that complainants would feel hampered by a complaints procedure that was not handled in an independent fashion. Concern has been expressed--admittedly much of it in private--by many leading participants in the financial services market that a complaint might antagonise the authority, and that the relationship between the investigator, working from within the authority's headquarters, and the organisation that was the subject of his queries would be too incestuous. That is why we propose a properly independent investigator whose position would be maintained, not on the basis of the authority's own discretion, as is currently the case, but on an independent statutory basis.
The authority has the power to cause significant disruption to a company's business. It can demand documents and interviews. A firm which has come under scrutiny is likely to be put to a great deal of trouble helping the authority with its inquiries. That is all well and good if it transpires that the authority has
identified correctly a breach of the law. However, in cases where the authority is unable to produce the necessary evidence, a law-abiding firm which has been investigated would be unable to seek compensation for the inconvenience and the effect on its reputation resulting from such an investigation.
In this amendment we seek to redress the balance so that where a company believes its reputation and business to have been damaged by an investigation, the complaints investigator can provide compensation. I beg to move.
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