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Lord Phillips of Sudbury: Before the Minister replies, perhaps I may add in response to the last point made by the noble Lord, Lord Glentoran, that the advantage of putting this in Clause 27 is that it gives discretion to the regulator to act on this matter if there is abuse which is causing problems. It gives that flexibility.

7 p.m.

Lord Sainsbury of Turville: These three amendments would provide the power to make regulations setting limits on what CICs could pay to their directors. Some of the amendments go even further by providing for regulations to limit the remuneration that could be paid to people who are members of the company, or any other benefits that the members or directors could receive from the company.

We debated the principles underlying these amendments at Second Reading, at which I explained the reasoning behind the Government's approach. In short, we recognise the need for transparency on the level of remuneration paid to the directors of CICs, particularly given the long tradition of voluntary service in some parts of the social enterprise sector. It is for that reason that we propose to require the annual community interest company report to provide information on this subject, which will be made available to the public via the companies register. So, there is already a mechanism for making that information available. It does not provide information just to the members; it provides information generally. The draft regulations published in February contain a provision which deals with this in draft Regulation 24.

Where there are concerns that the scale of payment is inappropriate, the regulator will be able to investigate. If the concerns are well founded, for instance, because directors have colluded to pay themselves deliberately excessive remuneration, the regulator may have a number of courses of action open to him. What he does will depend on the circumstances of the case. For instance, that kind of behaviour by directors will be a breach of their duties to the company, which could leave the company with a claim against the directors. The regulator will have powers under Clause 41 to take action to enforce that claim.

Alternatively, if the regulator concludes that there has been misconduct in the CIC, abuse of the company's property or failure to satisfy the community interest test, sufficient to trigger the conditions for the use of the supervisory powers under Clause 38, he will be able to use those powers to address the problem. For instance, he could remove the directors concerned. Those directors would still be able to enforce their contractual rights against the company but only if the exercising of those rights was consistent with their duties to the company.

The amendments clearly envisage a more prescriptive approach in which the Government would lay down in regulations what it is appropriate for CICs

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to pay their directors. As I said at Second Reading, the Government do not think that that is the right approach. CICs will be companies, not arms of the state. They will be in competition with commercial companies, and that will include competing for the best staff. It is not for government to dictate to companies in general what they should pay their directors. That is the position we take uniformly whenever the issue of directors' salaries is raised. If you depart from that principle, you get into very difficult and dangerous waters. Of course, if we were to try, and got it wrong, we could hamstring the ability of CICs to grow, thrive and compete. That is a matter of principle.

There is also the practical matter of how limits might be set. The range of activities of potential CICs is very wide indeed, and so, therefore, is the range of abilities that their directors may require. How will any government be in a position to draw up meaningful limits?

I do not mean to dismiss the concerns that underlie these amendments. As I have said, the Government take the risk of abuse of the asset lock through directors' pay and benefits seriously, and are open to ideas about how best to address that risk within the framework we have proposed.

As I have said, some of the amendments would also impose limits on the remuneration of people who are members of the company, even though they are not directors. We consider that this is a matter best left for the directors of the company to determine. Clause 27 already contains a power to limit the distribution of assets to members. The payment of remuneration is a different matter, and where an employee happens also to be a member of the company, we do not think that he should be singled out for different treatment from all the other employees of the company.

Some of the amendments provide for limits to be imposed on the benefits that may be paid to directors or members of the company. We consider that directors and members of the company should be able to be beneficiaries of the CIC as well. Sometimes it might be coincidental that a director or member also derives a benefit from the community interest activities of the CIC, and we see no problem with this. But it is also possible that a CIC might be set up to benefit its members, which may include its directors. This is acceptable provided that a reasonable person would consider that the activities of the CIC are being carried on for the benefit of the community.

The draft regulations published in February make some additional provision in this area by providing that where the benefits are restricted to the members or employees of the CIC, the activities of the CIC must not be carried on solely for reasons of private gain. We have indicated that this is a particular area where we are seeking the views of the social enterprise sector. However, we think it is right that, for example, a company set up to provide employment for the disabled or a company set up to provide social housing or care for its members should be able to become a CIC. Therefore, it is not appropriate to impose limits

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on the benefits that may be paid to members or directors. This is a matter for the CICs themselves, provided they continue to satisfy the community interest test.

I hope I have reassured the Committee that we also perceive a potential gap but that we have taken action to enable the regulator to deal with such a situation without getting into the very dangerous area of trying to set a limit on salaries.

Lord Phillips of Sudbury: I am grateful to the Minister for that careful consideration of these amendments. These are difficult matters; let us make no bones about it. On the other hand, it is a red herring to talk of problems with housing charities or charities for the disabled where a member is also a beneficiary. Plainly, under my amendment the regulator would not begin to interfere with bona fide arrangements of that kind. I drafted the amendment in terms of exceptional circumstances where the regulator would need to take action to reassure the public and to maintain the integrity of the sector.

I refer to a second matter that I am not convinced about although I shall obviously study carefully what the Minister said. He referred to Clause 41 as a potential weapon that the regulator could utilise to bring civil proceedings in the name of, and on behalf of, the community interest company. I just do not see that. On what basis would the regulator do that? As the Minister said, the issue of remuneration is extremely contentious in the private sector. He went on to say that, in that respect, he wants CICs to be no different from the private sector and that he wants them to be able to operate on the same basis as the private sector. I put it to him that I do not consider that to be a real remedy.

Lord Sainsbury of Turville: I hoped that I had explained that there were exceptions where a breach of the duties of the company was involved. In extreme cases where that occurs, the regulator can take action. I agree that that is different from saying that if a certain level is breached, by definition, the regulator should take action. However, I believe that the only way that it makes sense is if, in terms, the directors of a company have a very general responsibility. Otherwise, the regulator and, indeed, the state will determine precisely what level of salaries should be paid to which directors.

Lord Phillips of Sudbury: Again, I thank the Minister for that. In the view of an old lawyer like me who has seen the way that the world works in reality, it is improbable that the remedies referred to by the Minister would be activated because of the huge difficulties of a regulator—who, as has been indicated, will have a tiny staff—managing an action which is based on highly speculative grounds with no rock or foundation to it but only grounds of excess.

I was merely trying to give some practical leverage to the regulator so that he could go to a company that was, so far as any normal person was concerned, paying over the odds and say, "Look, either you give me an explanation that is acceptable or I may be forced

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to use the powers that I have to set remuneration levels in a specific case". That is what the clause currently allows. I am looking at this matter from a practical standpoint. I want this regime to succeed. However, if there is to be—as there will be, as is the case now with charities—a coterminous board and membership, the membership will cease to be constrained by the board and, because the members are the same as the board, the only interest in the functioning of the company will be destroyed in terms of public accountability.

I believe that, by relying on these vague remedies in appointing a manager or civil proceedings, the Government are undermining their own case. I emphasise that the powers given by the first of my amendments would be discretionary. The nature of regulation is such that there are so many other things to do that one will not act unless there is a strong and sound case. I shall leave it at that and ask the Minister kindly to give the matter further consideration.

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