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Director and Auditor Liability
Lord Sainsbury of Turville: The House will be aware that, between December 2003 and March 2004, the Government consulted widely on the case for reform of the law on director and auditor liability. Over 120 responses to the consultation were received from investors; companies, both large and small; auditors; legal advisers; industry bodies; academia; and the general public. I am grateful to all those who took the time and trouble to contribute.
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In the light of the consultation responses the Office of Fair Trading was asked to undertake a study of the potential impact on competition in the audit market of a cap on auditor liability. I am grateful to it for completing and publishing this so quickly.
It is essential for British competitiveness that we have a diverse pool of high-quality individuals willing to become directors, and that directors are willing to take informed and rational risks. But it is also important that directors act in accordance with their duties, and that negligent directors can be held to account by their companies. The courts have in recent years imposed a much more demanding standard of care, skill and diligence on directors. This has been a very welcome development.
The consultation built on the recommendations both of the Company Law Review and of Sir Derek Higgs's study on non-executive directors. It identified two particular concerns:
exposure to liabilities arising from legal action against directors by third parties. The sharp rise in the number of class actions by groups of shareholders in the US has made this a particular concern for directors of British companies with a US listing;
the cost of lengthy court proceedings. Companies are currently permitted to indemnify a director against the cost of defending legal proceedings, but only when judgment has been given in the director's favour or he has been acquitted. For many directors, such indemnification comes too late and the prospect provides cold comfort.
The consultation indicated these issues are affecting the recruitment and behaviour of directors. I therefore intend to introduce a balanced and proportionate package of reforms, by tabling amendments to the Companies (Audit, Investigations and Community Enterprise) Bill at its Commons Committee stage. The proposals will in particular introduce two important relaxations of the current prohibition on companies exempting their directors from, or indemnifying them against, liability:
they will permit, but not require, companies to indemnify directors in respect of proceedings brought by third parties (covering both legal costs and the financial costs of any adverse judgment, except for the legal costs of unsuccessful defence of criminal proceedings, fines imposed in criminal proceedings and penalties imposed by regulatory bodies such as the Financial Services Authority);
they will permit, but not require, companies to pay directors' defence costs as they are incurred, even if the action is brought by the company itself. The director would still be liable to pay any damages awarded to the company and to repay his defence costs to the company if his defence were unsuccessful (except where the company chooses to indemnify the director in respect of his legal costs in civil proceedings brought by third parties).
The government amendments will also remove an arguable loophole under which a company in the same group may currently provide an indemnity to a director that would be unlawful if it was provided directly by the company of which the individual was a director.
The amendments will also require disclosure in the directors' report by companies that indemnify directors. Shareholders will also have the right to inspect any indemnification agreement. Companies that do not indemnify directors will not have to make any disclosure.
The consultation also covered the position of auditors.
The Government wish to see a competitive and high-quality market for audit services, shareholders using high quality and reliable information, and an adequate system of redress for when things go wrong. There must also be an appropriate degree of transparency and accountability for the audit process.
The Government are actively pursuing this agenda. The Bill already extends the powers of auditors to obtain information, and contains new provisions for each director to confirm that there is no relevant audit information of which he is aware but the company's auditors are unaware.
There are also a number of initiatives to improve the quality of the audit and other information provided to shareholders. For example:
the recommendations of the review chaired by Sir Robert Smith mean that in listed companies there will shortly be enhanced audit committee reporting to shareholders, including better information on key audit judgements;
the Auditing Practices Board, a subsidiary of the Financial Reporting Council, has published for comment draft new ethical standards relating to the independence of auditors which are expected to be finalised this autumn;
the Financial Reporting Council has established an Audit Inspection Unit which has begun independent reviews of the effectiveness of the audit procedures of the four largest audit firms;
the audit regulatory activities of the professional accountancy bodies are now subject to independent oversight by the Professional Oversight Board for Accountancy, a subsidiary of the Financial Reporting Council;
a new Accountancy Investigation and Discipline Board has been established, as a subsidiary of the Financial Reporting Council, in order to investigate public interest cases of alleged breaches of professional standards by auditors and it has commenced its first investigation;
the Financial Reporting Council has recently set up a group under Douglas Flint to review the current guidance on internal risk control;
we are also considering carefully the responses to our recent consultation on the Operating and Financial Review.
In line with the Company Law Review's recommendations, and as supported in the consultation, I have decided not to bring forward amendments to the current Bill to extend an auditor's duty of care.
The consultation showed a wide variety of views both as to whether reform of the law on liability of auditors was needed, and if so what form it should take. Some investors also had concerns about whether the audit process was serving them sufficiently well. It was also a matter of concern that the leaders of some of our largest companies were worried their choice of auditor was limited.
I have considered carefully whether there is a case for a change in the law on auditor liability. I am grateful to the Office of Fair Trading for looking at the competition implications of enabling shareholders to agree in advance a maximum amount for which the auditor would be liable. In the light of the consultation responses, and the OFT's advice that introducing a cap would not significantly enhance competition, I have concluded against proposing changes to the law on this.
The Government remain committed to improving the operation of the audit market and will continue to consider any proposals, including the possibility of limiting liability on a proportionate basis by contract, which can be demonstrated significantly to enhance competition, and to improve quality, in the audit market. The Government intends to look closely at this option and actively calls upon auditors, business, and investors to work together to examine whether proposals for a system of proportionate liability via contract are practical and/or desirable.
However no change to the law on financial liability could protect one of an auditor's greatest assets—its reputation. That responsibility rests with the professionalism of auditors themselves.
Retail Pharmacy Services: OFT Report
The Parliamentary Under-Secretary of State, Department of Health (Lord Warner): My honourable friend the Minister of State, Department of Health has made the following Written Ministerial Statement today.
On 17 January 2003, the Office of Fair Trading (OFT) published its report The control of entry regulations and retail pharmacy services in the UK. It recommended abolition of the current restrictions on National Health Service pharmacy applications known as "control of entry".
On 17 July 2003 the Government published their response to the report for England, in which we announced our intention to move cautiously in the direction recommended by the OFT.
In summary, the package of measures proposed first the introduction of new criteria of "competition and choice" to the current regulatory test. Secondly, they would exempt completely four types of pharmacy
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applications from that test. These four exemptions would apply to applications in respect of large shopping developments over 15,000 square metres (though we will not now include town centre developments); to pharmacies intending to open more than 100 hours per week; to pharmacies which are part of consortia developing new one-stop primary care centres; and to pharmacies which would be wholly Internet or mail-order based. Finally, we would further reform and modernise the current regulatory system.
We issued a consultation document on 29 August 2003, Proposals to reform and modernise the NHS (Pharmaceutical Services) Regulations 1992, which explained these proposals in more detail and sought views on how best to implement the package of measures. 270 responses were received. A summary of those responses is available on the department's website at www.dh.gov.uk/mpi.
We also set up an expert advisory group (the advisory group on the reform of the NHS (Pharmaceutical Services) Regulations 1992) under the chairmanship of Mrs Anne Galbraith, Chair of the Prescription Pricing Authority. Its role was to advise how best to implement the proposals, taking account of the OFT report and responses subsequently received, and to offer further advice. We received the group's report in January this year. We published the executive summary of the report in March. This is available on the department's website at http://www.advisorybodies.doh.gov.uk/pharmacyrequlationconsultation/Execum.htm. We will publish the group's full report later this year when we bring forward the necessary regulatory changes.
We took careful account of the advisory group's report and recommendations and the responses to the consultation in drawing up our plans for implementation. Stakeholders from a wide range of key interests were represented on the group. These included patients and consumers, the NHS, pharmacists and health professions as well as those with experience of competition and regulatory reform. The group provided constructive and valuable advice. In order to end any uncertainty for patients, for the NHS and for community pharmacies, I announced on 18 August that the Government had accepted the great majority of their recommendations in relation to the proposals set out in the consultation document and would now proceed to implement them, but with some amendments.
We will work to introduce the new criteria of competition and choice to the current regulatory test through secondary rather than primary legislation. We also intend to develop criteria for primary care trusts (PCTs) to reject administratively any application which does not undertake to provide the required "essential" pharmaceutical services under the proposed new contractual framework for community pharmacy. Similar arrangements will be made for appliance contractors. We intend these criteria to be rolled out to all PCTs later this year subject to our ongoing discussions with the Pharmaceutical Services
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Negotiating Committee (PSNC) and NHS Confederation to finalise the details of that framework.
We will proceed with our plans to exempt four types of pharmacy application from the "control of entry" test.
However, we will not exempt pharmacy applications for town centre shopping developments over 15,000 square metres. The exemption would still apply to out-of-centre and out-of-town developments as we originally proposed. Such exempted developments will be included in a published list and a provisional list is now available on the department's website at www.dh.gov.uk/mpi. We are considering further how the list is to be updated and will provide more information when we bring forward the draft changes to the regulations. Pharmacies, which have hitherto found difficulty in gaining an NHS pharmacy contract in shopping developments in town centres, will none the less be able to apply to their local PCT for admission to the pharmaceutical list under the reformed regulatory test, when it is introduced, or to make use of the exemption to open more than 100 hours per week.
For pharmacies which intend to open for more than 100 hours per week, we will include a requirement for PCTs to remove from their pharmaceutical list any pharmacy that consistently fails to meet the terms of the exemption unless there is good cause—for example, a fire causing temporary closure.
Applications from members of a consortium establishing a new one-stop primary care centre will also be exempted, provided the centre provides a regular, comprehensive range of services and serves a substantial population of 18,000 to 20,000 patients. The exemption will apply only to centres which are part of the local PCT's strategic service development plan or equivalent written service development strategy. Such centres will, in addition to usual general practitioner services, offer a wide range of primary and community-based services, such as dentistry, optometry, podiatry, or other social or community services. The regulations will define a "consortium" and specify governance arrangements. Guidance for PCTs will cover situations where a service provider withdraws from a centre so that this does not require the closure of the exempted pharmacy.
Applications for wholly mail order or Internet-based pharmacy services will similarly be exempted and we will apply a number of measures to ensure such pharmacies provide a fully professional service within the provisions of the new contractual framework. Internet pharmacies, as with all retail pharmacies in England, Wales and Scotland, must be registered with the Royal Pharmaceutical Society of Great Britain (RPSGB). All pharmacies, whether or not they provide online services, are subject to the same statutory requirements and to the RPSGB's requirements, including standards, inspection arrangements and code of professional ethics.
We will also introduce regulatory safeguards to protect against manipulation or abuse of the new
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freedoms. For example, the four exemptions will require applicants to provide a full and prescribed range of services. These would be for local determination by the PCT in relation to the first three exemptions, or nationally determined by the department in discussion with the NHS in relation to the exemption for wholly Internet or mail order-based pharmacies. Apart from dispensing prescriptions, such services might include managing a patient's repeat medication, helping patients to get the best from the medicines they are taking and promoting healthier lifestyles. For example, pharmacies are well placed to provide support for people at risk of coronary heart disease, giving advice on stopping smoking, or how to improve nutrition or physical activity.
Key elements of our proposals, including the four exemptions, are either implicitly or explicitly linked to the delivery of pharmaceutical services under the new contractual framework. Our plan is to implement these reforms in tandem with that framework. The department has held tripartite negotiations on the framework with the PSNC and the NHS Confederation for the past 18 months. On 24 August, the PSNC accepted our offer of funding subject to final agreement on a number of detailed issues which we are discussing with it and the NHS Confederation. We aim to conclude these as soon as possible. We will prepare and consult on the necessary regulatory changes and aim to implement the reformed regime as soon as is practicable thereafter.
Guidance for the NHS on how to implement the regulations was last drawn up in 1992. An overhaul is long overdue. So we will amend this information to bring it fully up to date to assist PCTs in implementation. This would include developing supplementary questions to inform PCT assessments of pharmacy applications. We will also propose enhanced data collection from PCTs, subject to approval by the body overseeing NHS data requirements, to inform assessment of progress on our package of reforms and evaluate the impact of these exemptions in 2006.
We will also take additional steps as proposed to further modernise and reform the current system through a combination of regulatory and administrative changes.
PCTs will be able to invite applications from contractors. We will revise the application forms to reflect the criteria that PCTs use in assessing applications. We will require PCTs to reach a decision on an application within four months of the due date for receipt, unless there is good cause. We will also require them to consult widely with patient, consumer and local community groups that have a direct interest in local pharmaceutical provision, and set an administrative minimum consultation period of 45 days.
We will introduce an automatic exemption for all minor relocations under 500 metres, but retain the discretion for PCTs, to override this where there is good cause. An example of this would be where geographical obstacles or transport difficulties would
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affect continued access to pharmaceutical services. Similarly there will be a minimum 12-month trading period requirement before a further application for a minor relocation can be accepted, unless, again, the applicant shows there is good cause.
We will remove the current restriction, which prevents cross-PCT boundary minor relocations, but ensure there are means to remove the contractor from the list of the PCT he is leaving and the receiving PCT agrees to the relocation.
We will retain the concept of preliminary consent for a pharmacy application, but will limit the maximum period for grant of such consent to six months.
Similarly, we will provide for a maximum period of grant of full consent of nine months. We will also enable PCTs to have the discretion to require an applicant to commence pharmaceutical services within a given period not exceeding three months unless there is good cause.
In addition, we will introduce two measures proposed to us by the advisory group. We will allow PCTs to set a fixed date every month for the receipt of applications. And we will require PCTs to deal with applications that do not require local consultation within a maximum of 30 days. However, we will retain in guidance the long-stop discretion which enables PCTs to decide competing applications of equal merit on the basis of "the first past the post". We will also reform the appeals system. We will allow appeals for change of ownership to be combined with appeals concerning minor relocations.
Certain of our proposals would require primary legislation. When parliamentary time permits, we will consider introducing new legislation to enable reasonable charges, but not full cost recovery, for pharmacy applications to be introduced. We will also consider enabling PCTs to take into account, when assessing applications, the improvements they would bring to the provision of, or access to, over the counter medicines and other healthcare products. We do not intend, however, to introduce legislation to enable charges to be levied for appeals. We would consult further on such legislation.
We also plan to introduce, subject to further discussions, measures developed by the Pharmaceutical Services Negotiating Committee and the General Practitioners Committee of the British Medical Association and the Dispensing Doctors' Association to reform the rules governing NHS rural dispensing. These bodies reviewed their proposals in the light of the government response to the OFT report and presented their findings to the advisory group, which in turn recommended that they should proceed. Officials from the department have met these organisations recently to hold further discussions on how best the reforms should be introduced to the current legislation. We aim to implement these in tandem with the other reforms I am announcing today.
The measures I have announced represent an important step forward for community pharmacy services and our ambition to deliver a balanced
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package of reform measures. They will raise standards for patients and encourage innovation and excellence in service provision while at the same time supporting community pharmacies, many of which are small businesses. Community pharmacies provide a highly valued service and we are committed to their ongoing development and integration in the NHS. We also want to ensure that our reforms do not mean that services to more vulnerable groups of patients or those in deprived or rural areas suffer.
We are determined to improve access to, and the choice of, pharmacy services so that community pharmacy is recognised as a key player in the provision of NHS services. These reforms will provide an environment in which community pharmacy services can thrive.
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