New clause (Hansard, 5 June 2000)

§ Mr. David Heathcoat-Amory (Wells)
I beg to move an amendment to the Lords amendment, in line 2, leave out from 'to' to end of the Lords Amendment and insert all relevant generally accepted principles of good corporate governance and in discharging its functions the Authority must act in a way which is fair, reasonable, open and proportionate'. We shall have to be highly selective in speaking to the groups of amendments given the shortage of time, but the House should pause on amendment No. 3 on corporate governance because it raises important issues about how the FSA is run and how we can improve its accountability.
We have debated that matter previously, but the Government have always been reluctant to ensure that the FSA respects the principles of good governance, even though they urge everyone else to abide by them. For instance, there is general agreement that companies—especially large public companies—should have split chief executive and chairman functions.
Many other observations have been made under several chairmen. Cadbury, Hampel and Greenbury successively produced codes on good governance, which have been summarised in a combined code of corporate governance. That should also be binding on the FSA. The obvious rejoinder is that, unlike a public company, the FSA does not have shareholders. However, that does not dispose of the matter. The same issues of checks and balances and of accountability apply to the FSA—perhaps with additional force because of the authority's power. The FSA enjoys a high degree of statutory immunity; it will be a rule-making and thus a law-making body. It will be charged with enforcing its own rules, as well as investigating wrongdoing and fining those who transgress those rules. The concentration of executive power in the FSA means that it should abide by those basic rules of good governance.
41 That view was taken by several Members in another place. They persuaded the Government to table an amendment to introduce the concept of good governance. However, we believe that it does not go far enough. In relation to the split between the chairman and the chief executive, we should recall the conclusions and recommendations of the Joint Committee chaired by Lord Burns. Paragraph 113 stated that in the longer term we recommend that the posts of Chief Executive and Chairman should be separated and that a non-executive Chairman should be appointed. We see advantages in this of limiting the power of and focus on a single individual; enhancing the power of non-executive directors; and ensuring that control of the agenda does not lie exclusively with the executive. I agree with those recommendations, although that is not a criticism of the present incumbent at the FSA. That Committee and I have a high regard for the talents of Mr. Davies. We are looking to the future structure—on the ground that Bills are for ever, while incumbents come and go. We want to lay down a structure for the future administration of the FSA.
We especially want to disperse power within the authority. There is already a sufficient concentration of executive power in the body, which is, after all, only a private company with statutory functions. Power should be dispersed within that company. There is also considerable merit in having one person running the FSA from within, while someone else acts as the public outward face and speaks for the authority in the outside world—a time-consuming job in itself.
A separate non-executive chairman and chief executive would enhance the role of the latter and would give confidence in the regulating community that complaints would be considered at some remove from the chief executive and his office. Of course, other aspects of the Bill deal with complaints and we shall debate those later. However, splitting those roles would improve and increase confidence in the way that the FSA carries out its statutory functions. The Government have, in principle, adopted the concept of corporate governance, but they have not been persuaded of the merits of splitting the roles.
Slightly alarmingly, the notes on the Government amendment passed in another place say only that the principles referred to in the amendment might include those contained in the Combined Code of the Committee on Corporate Governance. Therefore, it is not even clear that the FSA would adopt that combined code. The Government amendment is a watered-down proposal, which our amendment would strengthen. It would also ensure that good governance includes the concept of the authority acting in a way that is fair, reasonable, open and proportionate. I do not see how the Government could object to that. Indeed, other amendments would insert the concept of reasonableness into the Bill, so our amendment should be unobjectionable.
The principle of openness should also be more clearly stated in the Bill. The Government do not have a good record on openness. We have already discovered from our consideration in Committee of the Finance Bill that there is a report on tobacco smuggling. The report is familiar to Ministers, but the Government regard it as secret and have failed to publish it, even thought it deals with a matter of public interest. They talk much about transparency 42 and openness, but they have delivered little in practice. We want to ensure that the FSA, at least, operates openly when it consults on making or changing rules and across the whole range of its operations.
Our amendment would strengthen the commitment in the proposed new clause to good governance in the way that I have described. It would provide a stronger steer towards splitting the role of chairman and chief executive and it would ensure that the authority operates in a fair, reasonable, open and proportionate manner. Those are two modest concepts to tack on to the proposed new clause. I commend our amendment to the House.

§ Mr. Howard Flight (Arundel and South Downs)
I merely wish to ask the Government what they intend by the words that they have used. In the other place, the Opposition's objective was to shift the presumption that the FSA was not required to have a separate chairman and chief executive to the presumption that it would separate the roles. The current arrangements exist essentially because of Mr. Howard Davies.
The proposed new clause contains the phrase as it is reasonable to regard as applicable to it and will operate in the context of the rather strange animal that is a private company with a particular statutory function. Given those words, our legal advice is that the presumption would not necessarily be for a proper corporate structure with a separate chairman and chief executive. What is the Government's intention and what do they believe the presumption in the proposed new clause will be?
It has become clear that, in an increasing number of cases—particularly phase two inspections—FSA teams have acted in a way that has not been reasonable or open. Why should the Government not accept the requirement that the body should act in a way that is fair, reasonable, open and proportionate? If they cannot accept those broad terms, we should assume that they are happy for it to act in a way that is unfair, unreasonable, closed and disproportionate. As the Minister will be aware, this is not the first time that we have raised the issue of trying to get the corporate governance right. The Government have yet to give a satisfactory explanation of why they are unwilling to accept the general requirement on the regulator's conduct.

§ Miss Melanie Johnson
I shall first deal with why the Opposition amendment to Lords amendment No. 3 is unacceptable. The Opposition amendment would require the FSA to act in a fair, reasonable, open and proportionate way in discharging its functions. The Opposition tabled a similar amendment when the Bill was in Committee, and on 8 July my predecessor, now the Minister for Small Business and E-Commerce, explained why it was unnecessary. She said that the FSA must act in a fair, reasonable and proportionate way, discharging its functions in a proper manner. As a body exercising public functions, it is bound to operate in accordance with administrative law and, if it fails to do so, it runs the risk of judicial review. Moreover, as a public authority for the purposes of the Human Rights Act 1998, it will be subject to constraints imposed by that Act.
43 Opposition Members may therefore ask why we are rejecting their amendment if, in any event, the FSA is required to act in accordance with it. Accepting the amendment would risk throwing into doubt whether every other public body whose governing legislation did not specify such requirements would be required to act in accordance with those principles. I assume that Opposition Members do not seek such an outcome.
On openness, we have already put in place a variety of accountability measures and it may be worth while going through some of them quickly. In contrast with the current two-tier system, the FSA will be a single institutional regulator with clear objectives, regulatory principles and governance. However, in relation to procedures, the it will be required to consult, and to give the results of consultation, when making policy or changing rules and guidance. It will publish an annual report and have an open annual meeting. It will be required to provide a cost-benefit analysis of changes to its rules.
The FSA is also required to set up consumer and practitioner panels as part of its commitment to consult and must consider representations by them. If it disagrees with them, it must give them a written statement of its reasons for doing so. There will be an independent investigator of complaints, who will report publicly, and an independent tribunal to which the FSA's decisions can be referred. I took exception to the remarks of the right hon. Member for Wells (Mr. Heathcoat—Amory) about this Government and openness, as our track record on that is extremely good. Indeed, the track record of the previous Government compares unfavourably with ours. The measures on openness and accountability that I have just outlined speak volumes for our achievements in taking those issues forward.

§ Mr. Heathcoat-Amory
If the hon. Lady wishes to live up to her rhetoric, will she explain why the Government are suppressing the report on tobacco smuggling by Mr. Martin Taylor? That report was drawn up at public expense, so why does she not publish it?

§ Miss Johnson
I am puzzled, because earlier we heard that there was not enough time to discuss the Bill. The matter raised by the right hon. Gentleman is being discussed at considerable length by members of the Committee considering the Finance Bill. However, he has returned to it, even though it has nothing to do with the issue that we are considering.
The hon. Member for Arundel and South Downs (Mr. Flight) asked for clarification of the way in which the provision measures up to the principles of corporate governance. Principle A.2 of the combined code on corporate governance states: There should be a clear division of responsibilities at the head of the company which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. There is no incompatibility between combining the roles of chairman and chief executive and adherence to that principle of corporate governance. The objective, as the principle makes clear, is to ensure a balance of power and authority, such that no one individual has unfettered powers of decision. 44 Code provision A.2.1 states: 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 is on page 107 of the FSA's annual report. There is a strong and independent non-executive element on the board. Indeed, paragraph 3(1)(a) of schedule 1 specifies that the majority of members of the governing body must be non-executive. Moreover, there is a recognised senior member other than the chairman: the non-executive deputy chairman of the FSA—Stewart Boyd QC. We have repeatedly made clear the important role that we expect him to play on the board.
The chairman, chief executive and senior independent director are identified in the FSA's annual report. On the latter, page 108 states: Stewart Boyd QC acts as the company's lead non-Executive Director". In other words, the FSA complies fully with the requirements recommended by the combined code for companies, which combine the role of chairman and chief executive.
I therefore stress that there is no incompatibility. The proposed structure is the best means of meeting the FSA's objectives of securing clear accountability and of ensuring speed of decision making. I therefore urge the House to agree with the Lords amendment and to oppose the Opposition amendment to it.