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The noble Baroness’s amendment seeks to specify that a share transfer instrument or order may not make provision in relation to the terms of existing contracts relating to directors. However, the Government consider that this is an important power to have. Let us suppose that the Treasury takes a failing bank into temporary public ownership. It may be appropriate to amend the provisions of a director’s contract—for example, by changing the length of his tenure or remuneration arrangements—or, to provide another example, to amend the notice period for a director’s dismissal. Such measures may be necessary to put appropriate management arrangements in place.

The breadth of the powers under the clause was noted in the other place. While I acknowledge that this is a broad power, I repeat the reassurances offered by the Economic Secretary. As he noted in the other place in Committee when this clause was debated, the terms under which former directors were employed are a matter for the previous board. He also stated that those terms would be governed by normal contract law. This is the case because they would have been determined before the bank needed to be resolved: hence there would be no property transfer instrument. He went on to say that any amendment to a director’s service contract would be governed by contract law. This is also the case.

While the clause provides a power for the Bank or the Treasury to alter a director’s service contract as part of the resolution of a failing bank, any modification made using the powers would be treated as part of the contractual arrangements between the director and the bank and would be governed by normal contract law. Moreover, of course, any power under the clause could be used only once the general and specific conditions were met, and would have to be exercised in a way that is compatible with the European Convention on Human Rights and with Article 1 to the first protocol in particular.

In answer to the noble Baroness’s question, the intention of the clause is to allow the authorities to have the ability, should they believe it to be appropriate, to terminate a contract without compensation, to modify a contract without compensation and to remove any entitlement to bonuses that have not been paid. Those are right and proper powers to have in place in the circumstances which this Bill contemplates. Therefore, I ask the noble Baroness to withdraw her amendment.

Baroness Noakes: To clarify, the Minister says that the Government want the power to terminate without notice. Does that mean that the director concerned would be denied access to the employment tribunal to

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argue his case, or indeed to the courts generally—access which he has under existing rights? I understand how the Government might want to do this as a technical act, but does that mean that they can in effect write out rights that already exist? That is the important distinction that I am trying to tease out. I have not objected to the clause per se; I seek to see whether the clause in effect denies individuals rights of recourse to law that would otherwise exist. In another failing organisation where a chief executive is taken out at no notice, it is up to him whether he tries to pursue a case for wrongful dismissal or for payment of contractual rights. Are we taking ourselves out of the normal situation and creating wholly new sorts of rights or denying rights to people?

Lord Myners: The clause as worded does not mean that directors could not take legal action in pursuit of their contractual rights, but the authorities would rely on the clause to say that, in the particular circumstances of directors of banks, the clause overrode any contractual rights and entitlements that they had. We want to be absolutely clear that we are talking about people who are responsible for failed banks. The failure of a bank is associated with the need to put a bank into a special resolution regime, which should not be taken lightly. That said, a claim to the European Court of Human Rights for compensation may exist if a European Court of Human Rights right has been interfered with, but, other than that, the clause specifies quite clearly that the authorities have the power seriously to amend and revise contracts.

Baroness Noakes: I find this rather depressing, because although I have no problem with the action being taken, it appears that the Treasury’s judgment is now being imposed—the only right of recourse being to the European courts, which is a rather difficult right for individuals to take. I had feared that this is what the Government intended by the clause. The Treasury might well judge that an individual was responsible for failure, as happens in other business situations, but it is not right then to say that the Treasury’s judgment means that it can completely wipe out virtually all rights of recourse to the normal avenues available in this country. That gives the Treasury, or indeed the Bank of England, a power that is disproportionate to the situation, because it is a question of the Bank’s or the Treasury’s judgment of that individual and not of the court establishing the correct position. However, the Minister is clear that that is the intention. I see that he is being passed another note. Does he want to add anything?

Lord Myners: The note that I have been handed was not relevant to what I was going to say. Nor will it lead me to deviate from what I was going to say.

Anyone who assumes the position of a director of a bank should do so with due and careful consideration of their public responsibilities. The nature of banks, their critical importance to the economy and the fact that a failed bank can place burdens on society should require particular focus and application by a director to rise to the very highest standards. Abject failure by bank directors is not a circumstance in which compensation is necessarily appropriate.

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The noble Baroness uses the term “disproportionate”, and I envisage that the authorities, when looking to these clauses, will have regard to proportionality, as indeed we have in some of our discussions with banks in circumstances where we have intervened. A number of directors have left those banks, and in one or two cases the directors volunteered to surrender certain rights that they had under their contract, for which I commend them. In the circumstances, that was an honourable and good thing for them to have done. Proportionality is important.

The note that I have received advises me that it is possible to litigate the convention rights in UK courts under the Human Rights Act. They do not have to be taken to a court outside the boundaries of this country. On that basis, I invite the noble Baroness to withdraw her amendment.

Baroness Noakes: I accept the clarification that on European rights we can use the Act to litigate in the UK, but I am not sure what effect that would have. The Minister refers to abject failure, but not all cases will be abject failure and not all individuals will abjectly fail. The point is that they are being denied the normal route of asserting their rights or of having them not accepted, with the Treasury or the Bank of England just saying their opinion. That causes me huge concern. I was minded to divide the Committee on this issue, but I shall reflect further on the availability of remedies under the Human Rights Act. I accept that ultimately it is an issue of whether the Treasury and the Bank of England act reasonably or proportionately.

I am deeply concerned that it is found necessary to have this little warfare against directors of banks. In most ordinary circumstances the law would allow them to achieve effectively what they want in the bad cases and by agreement as may have been reached. This seems to be a bit of public posturing against directors. I am not here to defend all bank directors because many of them have not behaved responsibly or honourably in all cases. But I believe that, given these very wide powers which would allow on the basis of Clause 7 the triggering of the special resolution regime on not necessarily serious grounds and certainly not transparent grounds, we might be into using Clause 20 in circumstances that the ordinary law would not approve or support, but which the Treasury could use for its own purposes. I shall think about this again before Report and I beg leave to withdraw the amendment.

Amendment 37 withdrawn.

Amendment 38

Moved by Baroness Turner of Camden

38: Clause 20, page 9, line 37, at end insert—

“(5) An appointment under subsection (1)(d) or (2)(d) may be made in connection with an appointment under section 164A (Remuneration committee).”

Baroness Turner of Camden: First, I should like to pass on the apologies of my noble friend Lord Wedderburn to the Committee. Unfortunately, he is ill and cannot be here, although he was looking forward

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to our debate on this issue. Amendment 38 is a paving amendment for Amendment 145, to which I shall also speak. The aim of new Clause 164A, which is proposed under Amendment 145, is to enable the Treasury, with the agreement of the FSA and the Bank, to have a limited power in order to intervene and prevent irresponsible remuneration being paid to the executive directors of a bank. The order would normally be made where public funds have been provided for a bank. The huge remuneration paid even to a failing bank’s top executives has been much criticised in the past.

The proposed new clause adopts a mechanism to which responsible bankers can hardly object; that is, a voice on the remuneration committee which sets the levels of such rewards. The Companies Act 2006 requires a report to the shareholders’ meeting on directors’ remuneration only in the case of quoted companies. That shareholders’ vote is only advisory. The clause would enable parallel provisions to apply also to all banks, quoted or unquoted. The mechanism adopted is to enable the Treasury to appoint a member to the remuneration committee or any parallel body with suitable immunity under the Bill, but subject to the ordinary general fiduciary duties of a director—for example, to act in good faith in the interests of the bank and the community—so that the voice of the public interest can be heard in its deliberations. It may be doubted whether a responsible bank would defy that voice by paying enormous and irresponsible remuneration where that was contrary to the public interest and the interests of shareholders. The established City principle “comply or explain” would clearly be applicable.

The new clause would enable the Treasury, with the FSA and the Bank, to act generally in this manner, but it would be expected to make clear its intention to adopt this mechanism in cases where public funds had been provided to a bank as part of the deal. The provisions of Part 1 and Part 3 are relevant to such cases.

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If banks are to be supported by taxpayers’ money, it is important in the current climate that there should be some sort of accountability with regard to the salaries and bonuses paid to senior executives. It is common knowledge that very large sums have been paid, even in situations when the decisions for which such executives have been responsible have resulted in catastrophe. Many ordinary employees who have been completely innocent of the decisions at senior level are now facing redundancy, often in areas where alternative work is not readily available. One can understand what resentment will arise should the senior executives who share a substantial part of the responsibility for the present crisis walk away with large sums.

I am sure the Minister is aware that many completely innocent people will suffer in the crisis we face—not only are former employees facing unemployment and impoverishment, interest rates are the lowest ever and are likely to go down still further, perhaps to zero. Effectively, prudent people will have to pay for the imprudent. This is a transfer of money from savers to

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borrowers. Many elderly people will see their income diminished at an age when they have no chance to make good their loss. That also is bound to cause resentment if at the same time the people deemed to bear a major responsibility for the crisis are still able to secure large sums of money for themselves. The principle involved in these two amendments is simple: public money involves public accountability. I hope that that is accepted. I beg to move.

Lord Borrie: My noble friend Lady Turner of Camden has spoken with some eloquence on this matter. It is of considerable interest to the Committee that she has raised the whole subject. In the course of the debate on the previous amendment, the Minister spoke with some eloquence too on the responsibility of those who are directors of banks. I hope that I have not misunderstood him when I say that the impression he gave me was that in his view the responsibility of the directors of banks is of a somewhat higher grade than the responsibility of company directors generally. It seems to me that my noble friend Lady Turner of Camden has made a very strong point in talking about the value of having a public interest voice in the discussion of the remuneration of executive directors.

We all have experience, whether with banks or other companies, of the way in which remuneration is dealt with whereby even the independent, non-executive directors who are supposed to keep a special eye on the remuneration of executive directors are themselves executive directors of other companies and therefore are somewhat disinclined to vote down the proposed executive directors’ remuneration in those companies where they are merely non-executives.

This detail of this amendment would ensure that, in circumstances that the Treasury thought appropriate, and having consulted the Financial Services Authority and so on, an appointment could be made of a non-executive director who would have the special role of keeping an eye on the remuneration of executive directors and of trying to ensure that remuneration packages were not as excessive as some have been in the past. Because of being involved in the debates on this Bill today and yesterday, it strikes me that the Government’s ground for opposing this amendment may be that, even when they have part ownership of a bank, they wish to keep at arm’s length and not get involved with detail, certainly not the detail of the remuneration of executive directors. That may be the basis for an objection to the amendment.

There is tremendous public interest in remuneration. There has been much public sentiment on this issue in the past six to 12 months when the directors and boards of so many banks have failed in the kind of responsibilities that the Minister was talking about in the debate on the previous amendment. There is a much clearer view now among the general public that the public interest should be maintained at a high level. When other Ministers were in charge, not so very long ago but before the crisis in banking, I recall Questions being asked in this House of the noble Lord, Lord Jones of Birmingham, whom we were delighted to see earlier this afternoon. His present role seems much more suited to him than being a Minister

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in Her Majesty’s Government. When he was a Minister, he stated that any questioning of unduly high remuneration in banks or other companies was quite wrong, that this was a matter for the companies alone and that any suggestion that it should be otherwise was a bad idea. I hope that that view is not so commonly held in government circles today.

I also hope that the Minister will support this modest amendment, which allows the Treasury so much flexibility in addressing the particular circumstances of any bank. The amendment proposes a remuneration committee in exceptional circumstances. I hope that Ministers will realise that it is a valuable change to the Bill.

Lord Newby: I congratulate the noble Baroness on introducing a debate on this subject. It is a matter of significant public concern that directors have paid themselves excessively in the past, and that this payment has not been linked to the success of the enterprise and in many cases has gone on at excessive levels when the enterprise has underperformed. We are not talking just about banks: this is a general problem. One reason for it, given by the noble Lord, Lord Borrie, is that you have a charmed circle of executive and non-executive directors, all of whom are setting each other’s pay. Thus very often the incentive for downward pressure towards realistic levels of pay is missing.

The question raised by the noble Baroness is one aspect of the more general debate we have had on the Government’s role as regards their stake in largely or wholly owned public banks. The answer that the Minister has given is that it will be an arm’s length relationship. We talked earlier about the role of directors, who will be independent. If you go down that route which the Government clearly are going down the outcome that the noble Baroness seeks is achieved by ensuring that the independent directors, as I argued earlier, are a diverse lot and do not come with a vested interest in keeping salaries and bonuses high. If some of the directors do not come from a traditional bank—bank directors, as it were—that will be a good way to keep the pressure on.

This is an important issue, but no more important an aspect of the management of the bank than other things that we have discussed in this and other debates, such as the way in which the bank lends to small businesses and the attitude that it takes towards repossessions if it is conducting mortgage business. Therefore, while this is important, it does not warrant separate legislative provision. We will have to rely on directors appointed by the Government to exercise their judgment and wisdom in reflecting a wide range of views about how banks should be governed, and that must include executive pay.

Baroness Ford: I associate myself with many sentiments that the noble Baroness, Lady Turner, has articulated through this amendment. However, I cannot support it, for a couple of reasons. I draw attention to my interests in the Register: I work in a bank and sit on remuneration committees. The way that the noble Lord, Lord Newby, characterised remuneration committees is not one that I recognise. On both the

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remuneration committees on which I sit, there are no serving executive directors from other companies, for precisely the reason that he stated. The people are all entirely independent and there is no charmed or magic circle. I suspect that most professionally run companies these days take the same view.

The principal reason that I resist this amendment is because I think that to interpose a separate individual on a remuneration committee, outwith the normal governance that we would expect through the Companies Act, would be quite wrong. An individual on a remuneration committee who is not a member of the audit committee or of the company’s board, and who somehow has a completely separate set of objectives, would be in an invidious and difficult position, and it would be simply wrong. For all the reasons articulated yesterday by the Minister, we cannot put government-appointed directors on boards and expect them somehow to operate independently of their responsibility to the shareholders of a bank. If that argument is right for the board as a whole, it is doubly right in the case of remuneration committees. It must be right that members of remuneration committees are also independently appointed members of the whole board and take part in all the governance of a bank, and not just part of it.

I do not believe that the amendment, as drafted, would achieve the ends that the noble Baroness wishes, laudable though they are. Although I have sympathy with them, we must rely on the independent members appointed to the boards to discharge all of their governance functions, including remuneration, rather than distinctly as members of a remuneration committee.

Baroness Noakes: I associate myself with almost everything that the noble Baroness, Lady Ford, said. She articulated very clearly the right approach to remuneration. My only doubt is whether all remuneration committees have complete independence from other remuneration committees. There may be some travelling still to be done by some remuneration committees. There are problems in the working of remuneration committees, in particular the ramping up that comes from pay consultants who are good at keeping the machine going. In my experience of remuneration committees, independent directors take their responsibilities very seriously and find it a hugely difficult task. That is not to say that it has worked well, and not to say that it has worked well in banks. However, the approach that the noble Baroness espouses is the right one.

Lord Myners: I wish the noble Lord, Lord Wedderburn, a swift recovery to full health. I too lend my support to the sentiments expressed by my noble friend Lady Ford, as endorsed by the noble Baroness, Lady Noakes, subject to one or two qualifications that I will mention in a moment.

The amendments are not clear about whether the Treasury’s power should be available with respect to any bank, or only with respect to a bank once the stabilising options that are the subject of Part 1 of the Bill have been exercised. I shall take it that they are to apply only once stabilisation has taken place; I invite my noble friend Lady Turner to correct me if I am wrong.

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I shall start by summarising the stabilisation and the degree of governance which the authorities will be able to exercise in each. The temporary public ownership stabilisation option gives the Treasury the power to take control and ownership of a failing bank through transfer of shares to a nominee of the Treasury or a company wholly owned by it.

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As set out in the published draft code of practice, the articles of association for a bank in temporary public ownership will provide for the relationship between the Treasury, in its capacity as shareholder, and the directors of the company. The Treasury, through its nominee or wholly owned company, will be able to exercise normal shareholder rights. Immediately following the transfer of securities, the Treasury may need to take a hands-on role in managing the affairs of the bank in order to address the immediate problems causing the bank to be at risk of failure. However, once the bank has been stabilised, the Treasury will seek to introduce corporate governance arrangements in line with best practice as soon as is reasonably practicable.

In practice, of course, a bank may be in public ownership for only a very short period. In such a case, it is clearly unnecessary to appoint a new board or make other changes to corporate governance arrangements. However, if a bank is likely to remain in temporary public ownership for a longer period, the draft code of practice makes it clear that the Treasury will set out the directors’ objectives for how the bank should be operated. I argue, therefore, that the Treasury already has sufficient powers in relation to a bank in temporary public ownership; it is not necessary to have an explicit provision in the Bill empowering the Treasury to appoint members to a remuneration or analogous committee.

To draw a comparison with Northern Rock, which was taken into temporary public ownership under the Banking (Special Provisions) Act 2008, the shareholder relationship framework sets out the structure of how the day-to-day governance and shareholder relationship between Northern Rock and the Government will work in practice. Under that arrangement, the Treasury has appointed a chairman of the board and two independent non-executive directors, in consultation with the chairman, who must also give consent for the appointment of any other board members. Directors’ remuneration is determined by the remuneration committee of the board of the company, but under the shareholder relationship framework document, the Government have a right to approve the terms.

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