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Lord Hodgson of Astley Abbotts: Will the Minister give way?
Lord McIntosh of Haringey: My Lords, I shall do so now, but I shall not give way again.
Lord Hodgson of Astley Abbotts: My Lords, the question is whether other markets charge the same. If not, there is a competitive disadvantage. If the Minister deals in shares, he will see that there is £5 compliance charge on each of his contract notes. That is a considerable sum.
Lord McIntosh of Haringey: My Lords, that is not the question. The question is what is necessary to make this country a safe and successful financial market. I shall not give way to any other interventions; I simply do not have the time.
What has been done in the past 10 years? We have improved accounting and auditing requirements. The Companies Act 1989 paved the way for the creation of the Financial Reporting Council and the Accounting Standards Board. There is a stronger requirement to consolidate special purpose vehicles. There is the use of substance over form to determine the extent of consolidated accounts, which makes it more difficult than it may be in some other countries to keep liabilities off the balance sheet. That was certainly the issue at Enron. The Financial Reporting Review Panel, chaired until a couple of years ago by the present Attorney-General, has played a role in this.
As my noble friend Lord Brennan pointed out, of course it is important that the United Kingdom and the United States should reach agreement on accounting standards. However, as we move towards international accounting standards by 2005, it is also important to ensure that we should move to the best accounting standards and not sacrifice any of the virtues that we have now.
Financial services regulation has been addressed with the establishment of the Financial Services Authority, which took on its full powers last December. We now enjoy the benefits of a single regulator which sees the importance of market confidence at its core. Furthermore, we now have an opportunity, if not to eliminate the risk of failure—that cannot be done—at least to probe more fully and penalise more harshly any contraventions of the standards now being put into place by the FSA.
Improvements have been made in corporate governance, perhaps less dramatic than in some other areas. The combined code has proved a valuable account of best practice. Its influence has been recognised outside this country. We have also had the Turnbull report which addressed the subject of risk assessment. As I shall make clear, there is still a great deal more to be done on corporate governance and, indeed, on the issue of audit committee responsibilities, a matter raised by my noble friend Lord Brennan. However, we have not been entirely idle in this area.
In terms of accounting regulation, a commitment was made in 1997 in our business manifesto that new arrangements should be introduced for oversight of the self-regulatory functions of leading accountancy bodies. The new Accountancy Foundation, chaired by my noble friend Lord Borrie, and the various bodies related to it, are now active and are asking many of the questions which have been put in our debate this afternoon.
I turn now to what is being done and what will be done in the future to address these concerns. I refer first to the Company Law Review, whose final report after a three-year exercise was published in an enormous volume last July. The review looked at the whole framework of company law and corporate governance and made wide-ranging recommendations. However, it did not go as far as some of the views that have been expressed in our debate. It recommended that there should be a statutory statement of directors' general duties, to provide greater clarity about the rules governing directors' decision-making. It also made recommendations about transparency, including a statutory operating and financial review for large companies, and improved arrangements for company disclosure and shareholder voting.
Many of those recommendations will require legislation. We are consulting on that now and we are actively preparing major draft legislation in response. It will be published for consultation purposes. We are determined that our company law should be fit for the demands of the 21st century.
Questions were asked about what is being done about concerns raised by the accountancy profession and the role of the Accountancy Foundation. In this area, too, progress is being made. The Ethics Standards Board is looking at the professional rules on auditor independence, while the Auditing Practices Board is considering the relationship between auditors, audit committees, company management and shareholders. We shall have to see whether the role of the audit committee should be strengthened, as well as enhanced independence for that committee.
The noble Lords, Lord Sharman and Lord Newby, have suggested that the Government should fund the Accountancy Foundation. In due course we shall be carrying out a review, probably after five years. Certainly the question of government funding has not been ruled out, although as far as I am aware, it has not particularly been asked for.
Both the noble Lord, Lord Griffiths, and my noble friend Lord Barnett referred to the issue of auditors and non-audit work. I think that there is a distinction to be made with regard to non-audit work which falls naturally to auditors and thus does not raise any issues of auditor independence. However, over the years there has certainly been a history of non-audit work presently undertaken by auditors which could raise reasonable concerns about independence. In particular, it raises concerns about whether the profitability of non-audit work can affect the independence of the audit work itself. That, after all, is what we are concerned with here; this is a debate about corporate governance rather than consultancy.
I shall interrupt myself to say a few words about offshore financial centres, a point raised by the noble Lord, Lord Newby. This is an ongoing problem and has been so for many years. However, we are working closely with the Crown dependencies and the overseas territories, putting considerable pressure on them with regard to the issue of money laundering. All the UK dependent territories have sent letters of commitment to the OECD Harmful Tax Competition Initiative and we are continuing to hold talks on that.
Perhaps I may turn to the developing role of the Financial Services Authority. An issue which has been raised is that of the review of the listing rules, which will give an opportunity to consult on the issues raised by the collapse of Enron as they affect listed companies. However, I do not think that we should prejudge the outcome of that review. It may be sensible for the FSA to take the opportunity to address the issue of auditor rotation or the employment by major companies of senior staff from their auditors before a form of "cooling off" period has elapsed. That suggestion received a mixed response this afternoon.
Two issues which are the responsibility of the Financial Services Authority are ones of which I have become aware only by reading the press today. The first is the news of what I believe is called the "Plumber" case, concerning the use of spread betting in flotations, which clearly raises issues of market abuse. Since the provisions covering market abuse came into effect only last December, it will be interesting to see how they work out in practice.
The second issue is that of split level investment trusts, raised by the noble Lord, Lord Newby. I have to say that I think that this is a matter for the FSA rather than for company law reform. Even if the business vehicle used is corporate, it would still come within the remit of the FSA. However, if having concluded its investigations the FSA was to make recommendations to the Government, we would take those recommendations very seriously indeed.
The noble Lord, Lord Hodgson of Astley Abbotts, was right to say that insider dealing, which undoubtedly is still going on, is not a victimless crime. That is why the Financial Services and Markets Act 2000 introduced the civil market abuse regime, to which I have already referred. That regime complements existing insider dealing and other criminal legislation, so that the market abuse offences of misuse of inside information, giving false or misleading impressions or market distortion can now be tackled in ways that were not possible in the past. The FSA can also investigate and prosecute insider dealing offences under the Criminal Justice Act 1993.
Questions were asked about what is being done about corporate governance and non-executive directors. A number of speakers, including the noble Lords, Lord Freeman and Lord Clement-Jones, and even the noble Baroness, Lady Noakes, have welcomed the announcement of a review of the role and effectiveness of non-executive directors. Clearly they have an enormously important part to play.
I am afraid that I do not agree with the noble Lord, Lord Freeman, who suggested that what had been a comfortable perk in the past is in many cases not a comfortable perk now.
I am not saying that it ought to be a comfortable perk—I agree with the noble Lord, Lord Clement-Jones, that being a non-executive director and doing the job properly can be, in many ways, an impossible task—but if you look at the lists which have been published, with mugshots and all, in the Sunday press recently, you realise that all the old abuses are still going on. There are still far too many people who are serving on 10, 12, 15 boards, to which they clearly cannot do justice; there are still far too many people serving on each other's remuneration committees, and no doubt helping each other out when they get into difficulty; and there are far too many examples of what is far less than best practice in the appointment of non-executive directors. The review will look at best practice and ask whether best practice works—because if best practice does not work, something more serious will have to be done.
The noble Lord, Lord Barnett, among others, raised the issue of the role of institutional shareholders. The Myners review, on which we are still consulting, was enormously helpful in that regard. But there is still a good way to go in establishing the role of non-executive directors. We should be cautious about thinking that non-executive directors—even if much more effective than they are at present—are a simple way of reducing corporate failure.
Over the past 10 years I have found great difficulty in debating these matters. The difficulty I find is that whenever something goes badly wrong, the business community—particularly, the financial services community—says, "Oh well, this was a one-off. It will not happen again. Surely we have procedures in place to make sure that this kind of thing cannot go wrong. You cannot find a way to deal with fraud". People said it about Maxwell; they said it about Barings; they have said it about so many examples. No doubt there are people who are starting to say it about Enron—although they are being a little more cautious now than they were.
On the other hand, it is true that much of what I have said about government action to deal with corporate failure is, to an extent, shutting the stable door after the horse has escaped. You have to attack the abuses that you see—the ones which have identified themselves. It is difficult to find a pattern of failure behind them and to attack that pattern.
That is the value of Patricia Hewitt's recent announcement about the setting up of the group within government which will be chaired by Melanie Johnson and Ruth Kelly. The group will ensure that the relevant questions are being addressed in a coherent and considered way and that the overall response is adequate.
Some of the things that have happened before will happen again, and some things that have not yet happened will happen for the first time. Reading articles in this morning's papers about split capital investment trusts and the use of spread betting in flotations made me think that we shall have to run very fast to keep up with those who are determined to distort markets.
I should love to agree with the noble Lord, Lord Griffiths, that what we need is simplicity of rules. I wish I thought it were true. But the combination of the many important measures I have described in the course of the previous 19 minutes are relevant and will be helpful in dealing with the problem. I am grateful to all those who have taken part in the debate.
5.34 p.m.
Lord Brennan: My Lords, there are three short messages. The first is that we must maintain public confidence in business and accountancy. I am sure that the honest-to-goodness businessmen and accountants, who are the vast majority, will seek to do that. The public want just profit, not profit mania, which I carefully define as a disease first diagnosed during the "South Sea bubble" episode—that is, the expectation of ever-increasing profits wholly unrelated to reality.
The second message is that values instilled into corporate life will support the public confidence that we think is so important. I thank the right reverend Prelate for emphasising that.
The last message is that the objective of all this is to make people in our society feel that the financial system is safe in so far as it can reasonably be made to be so.
I thank all noble Lords—in particular the noble Lord, Lord Clement-Jones, for encouraging me to hone my forensic skills so as to make the unpalatable appear anything other than bleak—for their diverse and informed contributions, which I hope have produced a worthwhile debate. I beg leave to withdraw the Motion for papers.
Motion for Papers, by leave, withdrawn.
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