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(". In managing its affairs, the Authority must have regard to such generally accepted principles of good corporate governance as it is reasonable to regard as applicable to it.").

The noble Lord said: My Lords, in moving the amendment, I speak also to opposition Amendment No. 5. Since Amendment No. 4, which is not in my name, is so similar to Amendment No. 5 I wonder whether noble Lords opposite will allow me to speak to the two together. It would be slightly artificial not to do so.

Amendment No. 3 reflects the commitment I gave at Report stage to look again at four amendments tabled by noble Lords opposite and, if necessary, to return at Third Reading with government amendments needed to achieve the effects which the noble Lords opposite sought.

The impact of the amendment will be to impose a duty on the FSA to have regard to certain generally accepted principles of good corporate governance in managing its affairs. My speaking note gives the lower case for those words but I think that it is generally understood that they could equally well be upper and lower case.

The corporate governance principles in question are those which it would be reasonable to regard as applicable to the FSA. Although I understand those who may prefer the FSA to be required to have regard to all principles, such a wide duty could give rise to a

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risk that, given its unique role, the FSA would be attacked for not applying principles which are unsuitable or undesirable.

For that reason, we are not able to accept Amendment No. 5, which would require the authority's constitution to reflect all generally accepted principles. For example, Section 1C of the combined code deals with relations with shareholders. Clearly we should not expect, nor legislate for, the FSA to adhere to those principles in code provisions when it has no shareholders. On the other hand, the top management element is clearly applicable. Therefore, while principles such as those in Section 1C cannot apply, it is equally obvious that several current principles, including, for example, those relating to the chairman and chief executive officer, and board balance could reasonably be applied.

There is no incompatibility between the current principle relating to chairman and chief executive and our belief that the best governance structure for the FSA is to combine the roles of chairman and chief executive. As I have said on a number of occasions, we believe that combining the roles provides the best means of meeting the FSA's objectives and of ensuring clear accountability to Treasury Ministers and speed of decision-making. We recognise that other noble Lords hold a different view.

In particular, there is no incompatibility between combining the role of chairman and chief executive and provision A.2.1 of the combined code. Provision A.2.1 states in its entirety:

    "A decision to combine the posts of chairman and chief executive officer in one person should be publicly justified. Whether the posts are held by different people or by the same person, there should be a strong and independent non-executive element on the board, with a recognised senior member other than the chairman to whom concerns can be conveyed. The chairman, chief executive and senior independent director should be identified in the annual report".

The FSA complies with all those requirements. Public justification appears at page 107 of the FSA's annual report. A strong and independent non-executive element on the board is provided for by statute. There is a recognised senior member other than the chairman: that is, the deputy chairman, Stewart Boyd QC. We have made clear in earlier debates the important role that we expect him to play on the board.

Finally, the chairman, chief executive and senior independent director are identified in the FSA's annual report. In other words, the FSA complies with all the safeguards recommended by the combined code for companies which combine the role of chairman and chief executive.

Another feature of the Government's amendment is that the principles of corporate governance which should apply to the FSA are not to be determined by the FSA itself but by reference to what it is reasonable to regard as applicable. That is also a feature of Amendment No. 4, tabled by the main opposition parties. We have no overriding objection to that amendment. It is not dissimilar to our own; indeed, we believe that it is already catered for by the

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Government's amendment, which speaks of the authority having regard to generally accepted principles "in managing its affairs".

Amendment No. 4 refers to the constitution of the authority. The terms which the FSA includes in its constitution are part and parcel of its affairs; indeed, the terms of the FSA's constitution are central to the management of its affairs. It follows that the FSA would not comply with the duty imposed on it by the Government's amendment if it failed to frame its constitution in a manner which enabled its affairs to be managed in a way which had regard to such generally accepted principles of good corporate governance as may reasonably be considered to be applicable to it.

On the basis that it does not add to our amendment, I hope that noble Lords will withdraw Amendment No. 4. I beg to move Amendment No. 3.

Lord Newby: My Lords, we are grateful to the Government for having put forward a new clause which attempts to deal with the concerns that we have raised at every stage of the Bill with regard to the corporate governance of the FSA. Noble Lords who have been with us through those debates will remember that two principal concerns were raised in this respect. One related to the role of the non-executive directors. We felt that in the Bill as originally drafted their role was inadequately broad and was not as broad as that of the non-executive directors in a company.

The second issue to which the noble Lord, Lord McIntosh, referred at some length relates to the question of the split between the roles of chairman and chief executive. I believe it is fair to say that there has not been a complete meeting of minds between ourselves and the Government on the substance of that point. However, we felt that the key issue required on the face of the Bill was a recognition that the principle of corporate governance--namely, the top end structure--and the question as to whether there should be a chairman and chief executive, with its presumption in the code that there would be such a split, should fall within such areas of good corporate governance as the FSA would be required to have regard to in conducting its business.

With the passage of this amendment, our view is that it will be presumed that when the current incumbent moves on there will be a separate chairman and chief executive. That will be determined at the time. However, if that does not happen, the key point of the amendment is that it will require the Government and the FSA to justify it in the way that the noble Lord mentioned. Therefore, given that the amendment encompasses the principles of top end structure--the principle of separation of powers at the top end of the FSA--we are pleased to accept the amendment.

Lord Saatchi: My Lords, I am grateful that even at this late stage the Government have seen the merit of what was proposed at earlier stages of this process by the Liberal Democrat and our Benches. I am glad also that the wording of the proposed new government

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amendment has been addressed more specifically in the words expressed by the Minister this afternoon. The words of the proposed new clause are a little vague. I believe that I am right in saying that the Minister confirmed this afternoon that it is reasonable to regard the principle that there should be a separate chairman and chief executive as applicable to the FSA. Certainly I have taken it that that was his meaning.

Lord Boardman: I accept the principle of good corporate governance in the amendment, and I find it difficult to reconcile that to what the Minister said with regard to the role of chairman and chief executive. It has been held strongly by successive governments and by those involved in the business world that separation of the role of chairman and chief executive is a matter of importance. I know that on previous occasions the noble Lord said that that applied to commercial concerns and that it did not apply in this particular game. I believe that it applies more strongly in this game. If everyone is quite honest with themselves, the dominant factor is the presence of the current incumbent and his saying that he does not intend to accept a chief executive under him or a chairman above him. The Government have departed from the rules of good governance in endorsing that request. I like the amendment; I dislike the way in which it is proposed that it should be applied.

Lord McIntosh of Haringey: My Lords, I am grateful to both noble Lords and, indeed, even to the noble Lord, Lord Boardman, for their response to the amendment. To be absolutely precise in answering the noble Lord, Lord Saatchi, I did not say that I accepted that the split between chairman and chief executive was appropriate; I said that in this respect the combined code of good corporate governance is applicable to the FSA. I read out in its entirety provision A.2.1, which sets out what should happen if it is judged that the roles of chairman and chief executive should be combined. But I accept--and it will always be the case--that we disagree about what should happen now. We may disagree in the future about what should happen, but at least we appear to be in agreement--I am grateful for that--that the code of conduct of good corporate governance should apply.

On Question, amendment agreed to.

[Amendments Nos. 4 and 5 not moved.]

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